Private Client Services Newsletter (Fall 2007)
- Sharing A Family Retreat: The Five Essential Elements of a Family Property Agreement

By Thomas A. Larsen and Ellen Kaye Fleishhacker

Sharing a treasured family retreat can be a traumatic and divisive issue unless handled with great care. For example, who decides which family members can use the property during optimal times such as July or over the holidays? Who decides when it is time to replace the pool or build a new guest house, and how these capital costs are to be paid? What is the annual budget? What if one owner won't pay his or her share? Who decides to hire or fire the groundskeeper, a gardener or the cook? What if some, but not all, of the owners want to sell the property? What if one owner dies and faces significant inheritance taxes? What are the rights of any divorced non-lineal spouse?

FAMILY PROPERTY AGREEMENT.

Families can resolve these and other related issues in advance by preparing an agreement (signed by each owner) governing the family retreat that takes into account at least five key elements: (1) ownership structure; (2) sharing protocols; (3) property management; (4) transfer of interests and (5) exit options.

OWNERSHIP STRUCTURE.

Owning the family retreat in a legal entity such as a limited liability company can provide privacy, liability protection, the opportunity to discount ownership interests for gift or estate tax purposes and more effective management. However, particularly in California, when transferring ownership of the property from individuals to an entity, care must be taken not to inadvertently trigger a property tax reassessment.

SHARING PROTOCOLS.

It is important to develop a system for sharing the property that is fair, transparent and allows owners to plan their schedules in advance. This sharing protocol should be described in detail in the family property agreement.

PROPERTY MANAGEMENT.

There are many different ways to delegate management of the property. Some families designate one family member as the day-to-day manager of the property for an indefinite period. Other families delegate day-to-day decisions to one family member on a rotating basis. Sometimes a third party is hired to manage the property. In all cases, major decisions such as capital improvements, annual operating budgets, major staffing decisions, borrowings, litigation and sale decisions should be made by a majority or super-majority of the owners on an orderly and open basis. Management also must be responsible for enforcing the provisions of the governing agreement. Whatever management system the family determines is best for it should be laid out in the family property agreement.

TRANSFERS.

Over time, family members will transfer their interests in the property- certainly by death and potentially by gift, sale, foreclosure or divorce. Usually the family property agreement will impose restrictions on transfers either to prevent transfers outside of the lineal family or to allow lineal family members a right of first refusal to purchase the interest sought to be transferred. Care should also be taken to minimize the property tax risk of transfer, particularly in California.

EXIT OPTIONS.

Good things can come to an end at different times for different family members. While it is generally advisable for the family property agreement to prohibit judicial partition sales, families should consider means to allow members to sell their interests to other family members on a fair basis or for a majority or even a minority to force a sale of the property under specified circumstances. Borrowing to fund capital improvements also can be a means to reduce financial pressure on the current generation of owners while maintaining the property and more fairly spreading the burden to future generations who will benefit from the capital improvements.

While maintaining a family retreat can be a source of great happiness for a family, prudent planning is imperative in order to avoid disputes that can undermine that happiness.

For more information please contact:

Thomas A. Larsen
415 677 6250
tlarsen@howardrice.com

Ellen Kaye Fleishhacker
415 677 6420
efleishhacker@howardrice.com