Anticipating and Addressing Family Co-Ownership Issues:...

Anticipating and Addressing Family Co-Ownership Issues:
The Role of the Attorney in Resolving Family Property Conflicts, PART II
By Frederick Hertz & Judy Barber
Frederick Hertz, Oakland, represents clients and serves as a mediator in matters involving co-ownership of property and assets by families, siblings, cohabitants and domestic partners. More information on his practice can be found at www.FrederickHertz.com
Judy Barber is a mediator, consultant and licensed family therapist. More information on her work can be found at www.FamilyMoneyConsultants.com

Introduction
This article explores the below the surface legal and psychological dimensions of family property conflicts by identifying recurring patterns of discord, explaining the interaction between the substantive issues and family concerns that cause tension, and presenting various non-traditional methods that attorneys can use to resolve conflict.

The first part of this article ran in CEB Topics, vol 24.

This second and final part of this article covers:
What other non-property factors should be anticipated?
What are the likely substantive asset and property issues that will arise?
What are most effective solutions and strategies?

What other non-property factors should be anticipated?
If these core problems were not complicated enough, a variety of tangential factors can further complicate the co-ownership relationships.

The role of spouses/partners may be fuzzy but ever-present, and even if spouses/partners are not directly included in the decision-making, they can influence the outcome. Sometimes, the spouse observes and then “exposes” the family tensions in a way the family member is unable to do, and thus the spouse can alternately be a troubling accelerator of the conflict as well as a vital contributor to its solution.

Although deciding who should or should not be included may be divisive, spouses/partners typically should be included in a meeting with the sibling-owners about the intended decisions, particularly when it involves succession planning and timing of distributions. Doing this prevents misinformation and provides an opportunity for the spouses to express their views about the potential impact on their children and when their children will begin to receive income. Even in families that have long-standing prenuptial agreements that clarify that the real estate is separate property, to exclude spouses/partners is a disservice to them that can create rifts in the family consensus if their views are not heard and respected.

In addition to the concerns of spouses and partners, the relationship of step-siblings and a surviving step-parent also can be important, even if such parties do not have legal authority. Each one of these “non-parties” may have his or her own expertise – or believed expertise – and each one also will have his or her own financial challenges and emotional issues.

The varying levels of experience and skill of each co-owner is not a problem if there is a leader in the sibling group who is interested in consensus building. If, however, a sibling believes her perspective and decision-making prowess should overshadow the others, there will be great difficulty. Those with less skill and experience may not trust their sibling and may thus choose to hire their own counsel. This decision can work – but only if the attorneys involved work constructively to resolve conflicts and do not contribute to a potentially adversarial situation.

Each owner needs to balance his or her personal financial goals and desires with those of other siblings. One owner may say, “I need all the income I can get right now and I don’t care about capital improvements or further acquisitions,” and the other one may assert “I don’t need the money now, I’m interested in a financially secure future.” This dissonance creates difficulties unless each sibling can understand the other siblings’ needs – even when they don’t agree.

A further challenge for each owner is assessing the benefits of income earned from the property or business versus income earned elsewhere. This complex decision-making process has many factors that must be considered: personal earning capacity, desire and motivation to earn, emotional and financial needs of own nuclear family, and views of other siblings. Individual situations and family pressures can make this difficult. A 45-year-old professor who is saving for college educations for two children graduating from high school in the next five years is in a different position than her 38-year-old investment banker sister who is pregnant for the first time and has her own income-producing portfolio. The “income now” scenario versus “increased investment value and acquisition” scenario requires give and take and leadership in the family as well as an approach that integrates the concerns of all.

What are the likely substantive asset and property issues that will arise?
Overlapping emotional family and business dynamics arise in all three phases of the relationship, but conflicts are most keenly felt when making major decisions. These decisions include whether or not to keep the asset/property or sell it, and if so, when; if the asset is real property, whether to rent it out, keep it empty, or allow a family member to occupy it; whether to maintain the property as is, renovate, or improve it; and whether to undertake significant new financial or contractual obligations.

There are different tax impacts based upon the differently situated owners, as well as long-term tax issues, the allocation of basis amounts, future tax characterization, and possible §1031 exchanges.

The attorney needs to consider not just the legal and tax consequences, but how these issues might trigger emotional concerns. A sale decision can arise after a parent’s death unless a parent has ordered the sale at his/her death because sibling decision-making is not seen as viable. A decision to sell also can result if siblings realize that their individual emotional/financial needs are too diverse, or they don’t want to own and/or manage property together as it might ruin their personal relationships.

The attorney may be able to facilitate discussion which can lead to some number crunching to create an investment policy that meets some of the differing needs of everyone. This can be done by defining objectives that balance distribution and growth over an agreed upon period, with a defined level of growth, rate of amortization and debt-to-equity leverage, and a general plan regarding how potential transactions will be evaluated – with some consensus about what will be sold and what remains in the family.

Decisions regarding property housing a family business can raise questions about fair rent which can come up soon after the parent’s death or during the parent’s final illness. Siblings may have been thinking about these decisions for a long time and forming arguments to support their positions. The lawyer may be focused primarily on the legal dimensions of the decision-making process, but the lawyer must also be conscious of the deeper issues at play, such as the personal/financial needs related to the balance of income versus growth in value of property for each particular owner. If these deeper issues are ignored, the advice will not be relevant, effective or heeded.

Once the larger issues are acknowledged, in most cases finding solutions becomes possible. For example, a family in conflict and with different experience and skill levels in estate planning would be well-advised to sit down with the parent’s attorney and/or accountant to discuss the pros and cons of different tax strategies in advance. This way, rushed decisions made soon after parent’s death won’t later haunt siblings.

Finding resolution is indeed difficult, but not impossible. If pushed to give up or change what is in a parent’s will, a step-mom, for example, may seek her own legal counsel. How do step-siblings balance their own feelings and financial desires and needs with the wishes of their father? Can they work together to offer a proposal to their step-mother that would meet enough of her needs and some of their needs to prevent litigation? Stepping into her shoes may seem difficult, but it may prevent step-siblings discord and save on legal fees that could otherwise provide income.

What are most effective solutions and strategies?
Lest the attorney feel completely overwhelmed and frustrated by this litany of concerns, there are real solutions to most of these problems. However, it is essential that the attorney is realistic about the particular property or asset issues involved, and then, try to understand these problems in terms of the larger dynamic of the family. Rather than focusing just on the legal issues, the lawyer advising the family must be cognizant of issues involving financing, occupancy, and maintenance, as well as long-term ownership questions and value and investment factors – and know that none of these issues can be viewed in a vacuum separate from family relationships. Family dynamics must be viewed as a core element of the legal concerns, not as irrelevant obstacles.

The attorney involved in the formation of the relationship, either in a bequest or a purchase, thus needs to be realistic about the non-legal issues that will likely arise when the family members are asked to manage the property together. Depending the attorney’s comfort level, it can be helpful to share concerns regarding tension within the sibling group. Ask them if they see ways to reduce the tension as they move through the difficult process of closing their parent’s estate. Successful moving through the family-related obstacles requires the siblings to take some responsibility for managing their differences. An attorney can use the position of trusted advisor to highlight and legitimize the need to address these issues, as a group issue that is not any one particular person’s “fault.”

The attorney’s willingness to share stories and examples of similar situations can be sobering and educational for the group. Often siblings are not thinking about what might happen down the line, but rather focus on what they believe is the “right” thing to do based on their own immediate individual needs.

It is critical to be realistic about each party’s housing needs, financial capacity, interpersonal dynamics, styles of decision-making, involvement of spouses/partners, and the range of skills and education. You may also need to persuade your clients that it is appropriate for you, as their attorney, to address these concerns. If you don’t deal with these concerns, your legal plan is less likely to be realistic or effective. Keep in mind the goal is to move the planning process along by providing a forum for family members to talk about their feelings and be acknowledged by you and hopefully by their siblings so they be less emotional and more capable of rational problem solving.

Ask the right questions of your client by moving the conversation beyond the tax consequences or detailed legal provisions, to address the broader implications for the siblings of joint ownership of properties or a business.

For example, does a family limited partnership and/or an LLC make sense given the relationship of the siblings or step-siblings? Are there any obstacles to their working well together? If the parent acknowledges tensions but hopes co-owning property will bring them closer together, caution your client that may not be a realistic expectation. Then ask, “How would you feel if they end up litigating to divide the properties?”

Also ask how will individual siblings feel about owning assets together? Go down the list, asking “How will Jack feel since, from what you’ve said he knows little about the business and feels intimidated by Ted?” “How would Mary feel since she lives on the East Coast and refuses to come to California?”

In estate planning, be sure to also ask a testator “How do you feel about the response siblings might have when they learn they will own the property jointly? What are your thoughts about bringing them together to discuss your estate plan? What are the pros and cons of such a discussion with your children?”

If the problems appear more complex and troubling than you initially thought, consider a family meeting or family mediation, or a series of private meetings with various individuals. If the issues are mostly interpersonal rather than legal, consider inviting a therapist or family counselor or perhaps a family religious advisor to address these non-legal issues. Remember, you are not the only “professional” in town, and in many instances hiring a counselor can be timely and useful. It may be wise for you to participate in these discussions, so that the “emotional” work is integrated into the practical tasks.

You may also consider involving an “outsider” trustee, either another relative or a non-family professional trustee who has the experience and skill to deal with the different emotional/financial needs of sibling groups. Most importantly, design an appropriate strategy in consideration of the emotional realities. Is the sibling group motivated to address their issues so they can take advantage of the potential financial rewards? What can the client and the siblings do now to prevent future conflict after the parent (who may be holding the family together) is gone?

Most importantly, be constantly aware that these are not “business” deals. Rather, they are an outgrowth of a family relationship – with all the strengths, weakness, and complexities inherent in any extended family relationship. Only by acknowledging these dynamics, which lie within the framework of the family relationship, can the solution to these conflicts be found.