For many people, a substantial portion of their wealth is tied up in real property – land, homes, ranches, or mineral rights. As such, gifts of real property are often at the heart of a well assembled Estate Plan. However, it is important to think carefully and plan for the circumstances surrounding these significant gifts.
What could possibly go wrong? Who could be unhappy receiving a large gift of real property? While almost no one is going to turn down a gift of real estate, issues may arise when one piece of property is gifted to several children or other beneficiaries. For example, take a common gift, “I gift my beloved children the family home.” This sounds great on paper, but what are the realities of the two or more children owning the home together?
EXAMPLE ONE – The Family Home
In Texas, when two non-spouses are co-owners, it is presumed that they are “tenants-in-common.” This means that each and every tenant-in-common has the right to use the all of the property. So how does this scenario play out? Child A lives in town and moves into the home – Child B has no intention of moving home and so doesn’t get any use out of the home. Yet, Child B is still an owner and could be legally liable as an owner in a lawsuit related to the property, still needs to ensure maintenance is done, taxes are paid, and insurance obtained. Moreover, under Texas law, Child B generally has no right to receive rent from Child A while Child A lives in the home. This would be true even if Child A inherited only 1% of the total ownership and Child B has 99% ownership as they are tenants-in-common – they are both owners with equal rights to possess the home and use it.
EXAMPLE TWO – The Ranch
Another example – this time with a Texas flavor, “I gift my beloved children the Ranch.” A gift of rural or ranching property is certainly not uncommon here in Texas. Looking at how this could play out – let’s say Child A is a successful doctor living across the country – Child B lives and runs the Ranch as an ongoing business. To Child B this ranch is their livelihood and their home – but to Child A, it may seem unfair that they have such a large portion of their inheritance tied up in a property that they get little or no benefit from. Child A, therefore, may want to break up or sell the property. This can quickly lead to discord even between loving and well-intentioned children, especially when coupled with disagreements as to management of the property.
“THEY CAN WORK IT OUT…”
A common response – “they will just work it out” – sounds good in theory but often does not work in practice. Even if the co-owners attempt to work it out, it is not a simple question to reach an agreement. Take our first example, what if Child A, wanting to stay in the home, offers to buy out their sibling’s interest – but what is the value of ½ of the home?, can the co-owner afford the full market value of the 1/2?, what will the terms of sale be?, should Child B be required to carry the note if Child A has a hard time getting financing? Alternatively, taking the second example, surely the heirs can survey out and physically divide “The Ranch.” Again, easier said than done, as to get parcels of equal value the actual size may differ greatly, and conflict can arise over who gets the lake, who gets the road access? Who gets the home or other structures? It is a messy project and again an lengthy and expensive one to undertake.
A tenant-in-common can theoretically sell their interest in the property – but in reality, if they can find a buyer the purchase price would likely be a fraction of what the same percentage owned of the total value of the property would be. One tenant-in-common cannot just put the whole property up for sale. Instead, if the other owners do not agree to sell the property as a whole, the only way to move forward is with a partition action, which is a specialized lawsuit which asks a court to physically divide up a property; if possible, or alternatively, to sell the property and divide the proceeds. In either case, like all litigation, the partition action can be expensive, lengthy, and frustrating to most concerned.
SOME SOLUTIONS TO CONSIDER?
1 – If you know that one child or heir intends to live in the family home or continue to run the family ranch; consider whether it might be possible to gift this property to just the child who intends to utilize it. This gift might be balanced out by gifts to the rest of the beneficiaries of other assets. Alternatively, it might be possible to purchase a life insurance policy to the heirs not receiving the real property.
2 – It also may be possible to place the real property into business entity and then gift ownership of the business entity. While not a perfect solution, for income producing property this may help resolve management of business issues by granting a more detailed rulebook for how the owners should vote and manage the property.
3 – Give one or more children the right to buy a piece of real property based on set reasonable terms. A plan could be put in place to give one or more heir the right to buy out the whole property from others for a set price or set method of calculating price and a set timetable to close the deal.
4 – Instruct that a trustee or executor sell the property at the time of death and distribute the proceeds to the heirs in certain shares.
These are just a few suggestions or the type of planning that might be considered. In the real world, perfect planning may not always be possible. However, as always, with good planning and good advice hopefully from a good attorney and other professionals, a plan can be put together to cause the least amount of stress to everyone involved and satisfy the intent to make a generous gift. Who would want to leave their heirs a gift that ends up frustrating and dividing them?
Redding Law, PLLC intends this educational article to be an overview of a legal document, idea, or theory. The reader should note that this overview is specific to Texas and Texas laws and is not intended to be legal advice for any person or situation. To receive additional copies of this newsletter or permission to reprint any portion please contact Redding Law, PLLC.