Family Ownership Top 10 Issues
Keys To Making Family Property Ownership Stress-Free
Secrets to a successful family co-ownership relationship
More and more groups of siblings and extended families now share ownership of vacation property. Often, children inherit the family vacation home from parents, but increasingly relatives pool resources to acquire a second home that would be impossible or impractical for any of them to buy on their own.
Family vacation home sharing can be rewarding on both economic and personal levels. But without adequate preparation and organization, these arrangements can strain the often-complex relationships among family members in unexpected ways. The most common mistake of family co-owners is to assume that their close bonds and intimate familiarity will enable them to more-easily work through any problems that arise during the course of their co-ownership. In fact, the opposite is more generally true: the personal relationships make it more difficult to resolve issues, and the associated tension can infect and even poison family ties.
Fortunately, formulating a plan in advance for handling the most important family ownership issues, and agreeing to stick to the plan unless everyone wants to change it, dramatically lowers the risk of tension and disputes. This article will guide you through the key issues for families sharing vacation homes.
Family Ownership Issue #1: Exit Strategy
It is naïve to assume that all the family members, including subsequent generations, will want to continue their shared ownership forever, or that everyone will want to sell at once. Also keep in mind that all family members suffer when someone is forced to remain in the family partnership against his/her will. A reluctant co-owner is never a good partner, and his/her resistance to contributing enthusiastically to the family co-ownership, and desire to create conditions that will lead to an exit opportunity, will inevitably interfere with the enjoyment and benefits of shared ownership for the others.
The key exit strategy questions for family vacation home partnerships are:
- Can a family member sell his/her share of the family property to an outsider? Would the family wish to include a non-family member in the shared ownership group? If such a sale is allowed, is it subject any conditions, such as a preemptive purchase right by the other family members, or approval of the buyer?
- Under what circumstances will the family home be sold? How many family members must agree to a sale? Do the approval requirements change over time, so that, for example, the number of owners who must support a sale diminishes? Is there a point in time when the family property will be sold unless all the family members want to keep it?
- In a situation where the family home will be sold, what procedure will be followed? If one relative is more anxious to sell than another (a situation which is almost inevitable), how will pricing and price reductions be determined? Will one family member have the right to stop the sale by buying out the other(s)?
- Should the “right of partition” be limited or waived? The right of partition allows any co-owner to force a physical division of the shared property, or its sale (if a fair physical division is impossible or prohibited by law) at any time. If the partition right is not waived, it will undercut the agreed exist strategy by giving a disgruntled family member a “lever” to use against the others.
Answer the key exit strategy questions as early as possible, before someone wants to sell, and express the arrangements in a written agreement to minimize the possibility that they will be forgotten or disputed when needed.
Family Ownership Issue #2: Expense Allocation
There is no inherent advantage to sharing costs equally. In the age of calculators, equal allocation is no simpler than any other type. Nor is equal allocation necessarily fair. Family or not, expenses should be shared in light of the benefits each family member is receiving from the shared property in both the short and the long run. When considering how to allocate expenses, focus on past contributions of funds, the obligation to contribute funds in the future, the allocation of usage rights, the allocation of future profits from resale, and the risk of loss from property deterioration or damage.
Also keep in mind that expense allocation need not determine current payment obligations. It is possible to charge an expense to one family member, but have another pay it because the first does not have adequate means at the time payment is required. In this situation, the paying relative is deemed to have made a loan to the receiving one, creating a future obligation for repayment, with or without interest, or perhaps as an additional share of property appreciation. This type of arrangement allows family members to have a fair allocation of expenses even when one relative cannot fully support his/her share.
Family Ownership Issue #3: Management
Even where the whole family plans to pitch in to help manage the family vacation home, someone should bear ultimate responsibility for each task at any particular time. Otherwise, there is risk that an important task will go undone or, worse, that a relative will become frustrated because he/she is doing most of the work or carrying the burden of reminding others family members to do their fair share. Make a list of the management responsibilities (both financial and physical) and assign each duty to either a family member or outside manager. Build in a method for reassigning tasks periodically, because not all relatives have the same skill set, and the motivation that a family member has to do a task may vary over time.
Family Ownership Issue #4: Paying The Bills
Having the family contribute funds “as needed” presents significant problems in communication, expectations and enforcement. Will it always be easy to tell your relatives what is needed? How will you ensure the message gets through on time? What if the relative is not prepared to make the required contribution? How can you establish that an obligation has not been fulfilled when so many different kinds of arguments can be made about the notice and payment process?
The answer to all these problems is an annual budget, made in advance, including all the anticipated expenses and income (if any), coupled with a pre-set schedule of regular contributions. Although this system is based on estimates that may turn out to be inaccurate, it will generally tell each family member what payments are due when, and provide a clear determinant of when a payment obligation has not been fulfilled.
The budget and payments should include a reserve component so that funds are reliably available to pay for major repair and replacement. Any reserve is better than none, but basing the reserve amount on a wild guess is only slightly better than having no reserve. The wise approach is to make a list of the items and elements with a useful life of 15 years or less, calculate the cost of replacement or refurbishment, then spread that cost equally over the useful life.
Family Ownership Issue #5: Making Decisions And Resolving Disputes
Making decisions in a family ownership arrangement is only problematic when relatives disagree, and it is important to assume future disagreement when creating rules and procedures for decision-making. Completely reasonable and friendly people who happen to be related can reach different conclusions as to the best course of action, and believe so vehemently in their respective viewpoints that they are unwilling to compromise.
A “majority rules” approach is not always best. To illustrate, imagine the situation where two of three family members vote to prevent the third from using the share family vacation home. Perhaps such a decision would be justified under certain circumstances, but would you would want to leave such an important and fundamental ownership right entirely in the hands of others (family or not)? Protecting the rights of all the co-owners requires some form of “tiered voting”, under which some decisions require a vote of all the co-owners.
Another important issue to consider is meeting procedure. A frequent situation in family shared ownership that is not working out is one relative refusing to communicate with the others. If this circumstance is not addressed in the family agreement, the group can be paralyzed and unable to pay the bills and handle basic upkeep. The solution is a formal meeting and agenda process to fall back on if informality stops working. That way, a family member can call a meeting with a written notice that includes and agenda, and make the decisions described on the agenda at the meeting even if a family member chooses not to participate.
Family Ownership Issue #6: Usage
Although usage is usually the most important right associated with shared vacation homes, many family groups never consider this issue when planning their shared ownership. Make usage rules even if your intention is to try to handle usage arrangements informally. The rules will give the family something to fall back on if the informal approach fails at some point. Don’t assume that the whole family will always want to vacation together, since the freedom to invite guests is a significant element of ownership. Stay away from arrangements that require one co-owner to contact the other(s) prior to usage, as this prevents advance planning and becomes inconvenient.
To avoid unfairness, usage rights should be related to economics. If a relative has made or is making greater economic contributions to the shared vacation home, he/she should have greater usage rights. Conversely, a relative who has more usage rights should have made, or be making, greater economic contributions. While ignoring this general principal may seem palatable at first, the family member getting less than he/she is paying for will eventually resent being taken advantage of, and likely try to extract his/her “ounce of flesh”, either directly or indirectly.
Family Ownership Issue #7: Sweat Equity
Many family ownership arrangements involve a relative providing construction work or construction management. But what if the relative, despite the best of intentions, does poor work, is inefficient (resulting in additional material costs or waste), or is slow in completing the job? Many awkward situations and disputes can be avoided by treating the service relationship as if it were arms-length. The construction obligation should be described in a written agreement, including scope of work, time period for performance, how and when compensation is payable, and what will happen if one or more family members are dissatisfied with the results. Try to avoid any arrangement where the scope of work will be decided on a day-to-day basis, or where compensation is based on time spent.
Family Ownership Issue #8: Death
Although it is difficult to contemplate the death of a relative, considering this eventuality can avoid making an already horrible passage worse. In general, it is legally impossible to control who inherits a deceased owner’s share, and if you are advised otherwise you should get a second opinion. More important, controlling how a family member’s share passes is highly intrusive, and resentment is a common result. The best approach is to assume the family has no control over who inherits, and focus on the aftermath of the inheritance. Consider these questions:
- Following a death, should the surviving family members have the right to buy out the inheritor(s) and, if so, on what terms and for how long? Should the rules for buyout be different depending on who inherits?
- Should the rights of an inheriting owner be different than the rights of the other co-owner(s)? For example, if the deceased family member had the right to force a sale at the time he/she died, should someone who inherits the share also be able to force a sale immediately?
Family Ownership Issue #9: Title And Ownership Structure
Whether the family buys or inherits the shared vacation home, consider how title should be held. Remember that even inherited property can be re-titled, often without triggering transfer tax or increasing the assessed value of the home for property tax purposes. Title can be held either directly, meaning the family members’ names show on the land registry or deed, or indirectly, meaning a company, trust or other entity is shown on title and the family members share ownership of the entity. The form of ownership impacts numerous family ownership issues, including:
- Disputes and Defaults: How family property disputes are resolved and the consequences when a family does not fulfill his/her obligations
- Death: How the death will affect the surviving owners, and what will happen to the deceased relative’s share
- Liability: Whether the family members are protected against claims that can be made against them in connection with the property, such as when someone is injured on the property
- Protection From Creditors: Whether the property and/or family members are protected from creditors
- Taxes: Whether the family members will be able to deduct expenses such as mortgage interest, property tax, and depreciation; Whether deductions can be offset against income not derived from the property such as wages; and How family members will be taxed on money they make from operating the property (if any) as well as profits they make when it is sold
But while the manner of holding title is important, it is not always the final determinant of how the property is owned. An owner’s behavior (and that of his/her co-owner) can sometimes override what the deed says, and that is one of the many reasons a written agreement is critical.
Family Ownership Issue #10: Contributions Of Funds To Purchase
In situations where the family is buying a vacation home to share, it is important to relate each family member’s contributions to his/her future rights in areas like usage, tax benefits, income allocation, decision-making power, and appreciation. When analyzing contributions to the purchase price, look beyond the cash deposits, and consider additional factors such as obligation to service and repay a mortgage loan, qualification strength on a loan application, finding the property, and putting the family group together. There are many ways to treat disparities in the family members’ contributions to the purchase of shared property, such as basing the allocation of usage or income rights on the contribution, considering the excess contribution of one relative to be a loan to another, or giving one relative a greater share of the appreciation.
About SirkinLaw APC
SirkinLaw APC has focused on real estate co-ownership since 1985, and has been involved in the creation of more than 5,000 co-ownership arrangements throughout the United States and the world. This breadth of experience allows us to draw on a huge library of fractional project documentation as well as extensive knowledge of marketing and registration requirements for virtually any location where a project might be located or potentially marketed. We pride ourselves on our ability to write legal documents in plain English, develop simple and elegant usage and organizational structures, and offer efficient, reliable and cost-effective services for fractional projects ranging in size from a single house or condominium up to hundreds of factional interests. Our firm currently has attorneys spread among our offices in San Francisco California and Paris France.
D. Andrew Sirkin is a recognized expert in fractional real estate ownership, residence and destination clubs, and other shared vacation home arrangements. Although his practice includes some large fractional real estate projects, he frequently advises and prepares contracts for small groups of families and friends who buy and share vacation homes as partners, and for fractional sales of individual vacation homes and condominiums. He has worked on homes all over the world, including most U.S. States, as well as Italy, France, Spain, Portugal, Ireland, Argentina, Nicaragua, Costa Rica, Panama, Dominican Republic, Nicaragua, Belize and Mexico. He is an accredited instructor with the California Department of Real Estate, the author of The Condominium Bluebook, published annually by Piedmont Press, and The Equity Sharing Manual, first published by John Wiley and Sons in November 1994. Andy can be contacted via our contact form.