Introduction
Whether one is an estate planner, real estate attorney or business counsel,
dealing with the interpersonal dynamics of family members who co-own real
property can be extremely challenging. All too often, attorneys focus only
on the legal and tax aspects of co-ownership, paying little attention to the
family relationships and how they affect the legal issues. Such challenges
arise when estate planners plan for future co-ownership arrangements or where
siblings jointly manage assets upon the death of the family patriarch or
matriarch, as well as when attorneys are dealing with inherited or jointly
purchased assets.
Many attorneys are uncomfortable exploring this “non-legal” territory. For
some, there is concern about their lack of expertise; for others it may
trigger uncomfortable memories of their own family experiences. Many clients
– even those in open conflict – avoid family discussions about assets, fearing
further deterioration in the relationships and feeling pessimism about the
group’s capacity to agree. It is, however, extremely difficult to complete
effective estate planning or resolve ongoing co-ownership conflicts without
addressing these dynamics.
This article — which will run in two parts in
CEB Topics — 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 such conflicts.
Part I addresses the following issues:
What is the problem?
What are the “relationships” each owner has to the asset?
Will the owners experience conflicts in their decision-making styles?
What are the likely non-legal family issues that are connected to – and are revealed by – these conflicts?
What is the problem?
Co-ownership conflicts arise in three contexts: the formation, the duration,
or the termination of the relationship, either through death or dissolution.
Like any union between romantic or business partners, a successful co-ownership
relationship demands a nuanced integration of the practical dimensions of asset
management with the emotional needs and individual goals of each owner.
These relationships usually are formed via an estate plan that bequeaths an asset
to family members. Developing the plan is often not simple -- most parents focus
on the economic benefits to their family and often ignore the complex tasks of
management they also are bequeathing to their heirs. Such bequests, in effect,
impose a business partnership on relatives who probably have never worked together
in this way. The heirs may also feel very uncomfortable or unskilled in taking on
this challenge.
Purchases of property are often motivated by financial or practical concerns,
without consideration of the individual personalities of each of the co-owners
or the group chemistry. There may also be little thought to the disparate personal
needs of each owner and how that will affect decision-making. In many instances
there is a great disparity of knowledge, wealth, experience, and patience, resulting
in an amplification of otherwise small disputes into painful rifts – with significant
impacts on the management of the asset.
What are the “relationships” each owner has to the asset?
The first step in analyzing any co-ownership situation is to determine how the
particular asset fits into the individual lives of each owner. Real estate, for
example, can be a place to live, a source of rental income, a location for a
family business (often at below market rents), a place to employ children, or
a resource to borrow against for other investments. It can also be viewed as
a source of long-term financial security or a property ripe for a §1031 exchange.
For others, real estate is a sentimental tie to a childhood home, or a source of
identity or status. For some families, the business or the property can be a way
to stay connected to relatives. Depending on the situation of each owner and his
or her spouse or partner, even a low-revenue business can take on enormous personal importance.
As a result, one of the owners may feel a deeper sense of “ownership,” and may view
the others as peripheral or uninvolved. These differences can become acute over time,
as various siblings pursue new careers or relocate, leaving others to manage the asset.
But unlike relationships adhering to more conventional business models, the allocation
of tasks in family co-ownerships tends to develop more organically, even unconsciously,
with little thought to formalizing the decision-making procedures or the authority hierarchies.
Will the owners experience conflicts in their decision-making styles?
One of the biggest sources of conflict is incompatible decision-making styles.
Lawyers may be unaware of these stylistic differences which may be the result
of long-simmering resentments and conflicts.
Some owners are quick and decisive; others are deliberate and cautious. One
owner’s caution may due to insecurity or ignorance, and in other situations,
it may arise from an unconscious “resistance” to the perceived dominance of
another sibling. Owners have different tolerance for risk, and some owners
focus on “big picture” concerns and have little patience for details. Some
owners tend to rely on trusted advisors and skip the particulars, whereas
others require reams of back-up documents.
Decision-making styles also depend on each party’s business expertise. The
most experienced and knowledgeable one may be a quick decision-maker who
thinks: “I have the expertise here, why doesn’t my brother trust me to make
decisions. It is so frustrating, he procrastinates and doesn’t get back to me.
We’ve lost a few good deals.” By contrast, the less skilled owner may not want
to admit to not understanding the complexity of the deal. In his mind, he’s
thinking, “Just because my sister is the oldest, she thinks I should rubber-stamp
her decisions. I want to talk to my own advisors and she doesn’t want to give me
more time to do that.”
There are a variety of ways to address these differences in decision-making styles.
For some families allocating decisions by category makes the most sense. One person
handles practical issues (building renovation, business expansion), another handles
“human” issues (personnel, tenant management, expert retention), and yet another
manages the financial affairs. For other families, responsibilities might be allocated
based on the amount of time each owner can devote due to health, family pressures or
demanding careers.
Time demands on each party may create tension, and this may lead to one or two family
members dealing with most of the details. Who makes the decisions regarding acquisitions,
exchanges, sale, debt, and distributions? Family members may be appreciative of the hard
work of others until requests for payment begin to surface. One owner may ask: “Why
should we pay you a salary; or “What do you mean, you want a commission for the sale of
the property?” Ultimately the attorney needs to provide guidance and direction which
often causes tensions to surface.
Leadership is a difficult and challenging dimension of family co-ownership decision-making.
In some families leadership is based upon age, experience, or personality. In others there
is patience with the needs of the dependent family members, and in still others, there is
resentment and competition.
What are the likely non-legal family issues that are connected to – and are revealed by – these conflicts?
In successful family partnerships, owners come to consensus and each of the members values
the differing perspectives. However, if siblings were raised in a competitive family
environment they may each find it hard to relinquish their individual positions. Thus,
in many instances a stalemate may arise. While hiring an attorney can aid in such conflicts,
the lawyer should be aware that the decision to engage an attorney could itself be a source
of conflict, especially if one owner questions the attorney’s neutrality. If one party wants
to control the flow of information and resist new input, hiring an expert can jeopardize the
trust of other family members.
Siblings raised in a relentlessly competitive environment in which children were played off
against each other are ripe for conflict. Talking about the impact of competition on their
relationships can help them understand the need to compromise so that all siblings can gain
from the decision-making process, rather than “winner take all.” Facilitating these kinds of
family conversations can help some siblings to move from emotionality to rational problem solving.
An attorney with a willingness to understand that sibling relationships in business have their
roots in childhood can move the process along dramatically. Trust in the attorney is often
enhanced when siblings are able to express feelings about fairness in the family; older siblings
might feel deprived because younger siblings lived in a more affluent household. By contrast,
younger siblings may feel that the older sibling acted like a parent and had too much power,
because parents were pre-occupied with things other than parenting.
Varying degrees of financial success in families can create unspoken envy. As much as attorneys
would love to avoid these “messy” issues, in some instances, it is not be possible to resolve the
business matters unless these deeper issues are directly addressed.
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