The Problem

Looking back, Sam, Jane and Nick'south childhood seemed almost perfect. They grew up in a loving extended family, played sports year-circular and traveled. A highlight for the three siblings was their summers spent at Manor Grove, their family manor on the Outer Banks bought by their grandparents in the early 1900's. When their grandparents died, the manor passed to their father, James, and his sis, Clara. Every bit the years rolled by, Manor Grove remained important to the family equally James, Clara and their children spent weeks together there. As Sam, Jane, Nick and their cousins married and had children, sharing the holding became more of a problem. Family disputes among James and Clara over employ and budget of Manor Grove became regular occurrences. The disputes spread to the rest of the family unit, as Sam, Jane and Nick began to encounter their cousins less often. A few years agone, after an especially nasty dispute over the need for and funding of various capital letter improvements, James bought Clara and her family out of Manor Grove, and they ceased all communication.

When James died last yr, ownership of Manor Grove passed to Sam, Jane and Nick. While the siblings remain close and are juggling shared ownership and the enjoyment of Estate Grove, they can feel the toll the property is taking on their relationships. For instance, Jane had new curtains ordered and installed in the house, just her brothers aghast about sharing the $40,000 expense. Further, Sam and his family alive on the west coast, so they spend the least corporeality of fourth dimension at Estate Grove. Due to this, he chafes at having to pay one-3rd of all expenses. Even so, in a higher place all, the three siblings want to preserve their relationships and practise not desire this special property to create problems among the next generation. The above fact design is a common 1. Shared family unit properties tin enhance family relationships, but over time as families abound, those same properties that engendered closeness can create dispute and discord.

This paper addresses problems that arise from shared ownership of a holding.* It will begin with (1) a short primer on the forms of buying of real estate, move into (ii) a primer on LLC structure, hash out (3) various governance issues and possible means to accost them, provide (4) a checklist of items to decide when creating an LLC, and conclude with (5) a give-and-take of the complexities specific to family ownership of real estate. This paper will not touch the manor planning and tax challenges of passing holding down through generations. While a very of import topic for valuable shared holding, manor planning is a complex topic that is outside the scope of this paper.

1. Forms of Ownership

Real Estate can be owned in a number of forms:

Sole Buying – First and simplest is outright ownership by a single person. This is referred to every bit sole ownership. James' buying of Manor Grove after he bought out Clara's share of the property is an example. Problems with sole ownership occur at death of the owner. First, sole buying belongings typically passes through probate which can be fourth dimension-consuming and expensive. Second, unless the property is existence conveyed to only i person, the succeeding buying will be articulation ownership; issues with joint ownership are discussed next.

Joint Ownership – Joint buying is outright buying by one or more than persons (or entities). There are two main types: (1) tenants in common and (ii) joint ownership with right of survivorship.  With tenants in mutual, each owner holds an undivided fractional involvement of the entire belongings. For example: afterwards James' death, Sam, Jane and Nick own Manor Grove as tenants in common. Each of them is allowed to transfer, gift or heritance their respective 1/3 shares equally they meet fit. Thus, Sam could gift his share to his children, and Jane and Nick would then jointly ain the property with their niece and nephew.

Tenants in common require that all property decisions be decided unanimously. The requirement of unanimity applies to both small decisions, such as the hiring of landscapers, and big decisions, such as whether major capital letter improvements volition be made, or the property will be sold. As the number of co-tenants increases, the difficulty of decision-making also increases.  To remedy a co-tenant disagreement, one or more of the tenants could bring a partition action – a court proceeding to force the division of the holding amid the owners.  As most properties cannot be physically divided, partition usually means sale of the property. In that result, one or more family unit members can buy the holding from public auction. This selection typically results in strained familial relationships.

Articulation tenancy with right of survivorship is very similar to tenants in mutual, except upon the death of a co-tenant, the decedent's rights in the property disappear. This class of buying is typically reserved for ownership betwixt spouses and occasionally between a parent and a child.

Trust Ownership – Buying of property in trust tin alleviate many issues plant in sole buying and joint ownership of property. Use of a trust tin can help avoid probate and use of a professional or independent trustee tin mitigate some of the disagreements arising from of sharing property. However, use of a trust does non completely solve the problems of sole or joint ownership equally trusts typically dissever at some point amidst beneficiaries, and those resulting trusts presume ownership as tenants in common. Additionally, a trust document is not conducive to providing evolving governance provisions.

Entity Ownership – Usually, the best solution is for shared belongings to exist placed into an entity such as a Limited Liability Company (LLC), corporation or partnership. An LLC is frequently the best entity to employ for property buying. Therefore, this paper will focus on that form of legal ownership.

LLCs are like to partnerships in that they are pass-through entities for taxation purposes, meaning that LLCs pay no entity-level taxation. A key aspect of LLCs is that the ownership and day-to-day management can be separated. The LLC operating agreement can provide detailed provisions related to decision-making.

2. LLCs: Structure and Key Concepts

An LLC is a legal entity similar to a corporation. While a corporation's master governing document is its bylaws, an LLC'due south governing document is called an Operating Agreement. The owners of an LLC are called "members" – analogous to a corporation'southward "shareholders." While corporations are managed by "officers" such as a president, vice president, treasurer, etc., LLCs are managed by "managers."  Corporations are required to have a board of directors while most LLCs only have members and managers and no board of directors.  Thus, the members tend to office both as shareholders and equally the board.

A member'southward ownership interest is normally expressed as a fraction based on his/her/its capital contributions to the LLC equally a fraction of the total LLC value. A member'due south interest volition rise or autumn if non-pro rata contributions or distributions are made to the LLC. For case, if Tim owns 25% of an LLC worth $i million and some other member contributes $250,000 to the LLC without Tim also making a contribution, he will now ain virtually 20% of the LLC. The dollar value of his interest will be the same ($250,000), simply he will ain a smaller percentage of a more valuable LLC.

As mentioned higher up, typically one or more "managers" is given authority over various aspects of the daily operations of the LLC while the "members" – who are the owners – have the power to counterbalance in on various decisions. The common distinctions betwixt managers and members are listed below:

Managers

The Operating Understanding designates i or more managers to manage the day-to-solar day affairs of the belongings endemic past the LLC. Typically, managers have the power to:

  • Pay bills in the ordinary course of business concern (often upward to a certain dollar amount)
  • Hire and fire contractors, such every bit landscapers, handymen, housekeepers and the similar
  • Arrange for normal maintenance and upkeep (often upwardly to a sure dollar amount)
  • Handle scheduling and usage of the property by members and other family members co-ordinate to procedures/rules canonical past the members

Members

Members are the owners of the LLC. The members retain ultimate power over the LLC, including the power to remove and replace the manager(s) and to appoint successor managers. The Operating Agreement lays out what decisions require a simple majority, a supermajority or unanimity. Decisions requiring the approval of the members usually include:

  • Alteration the Operating Understanding
  • Electing a new manager or naming a successor manager
  • Removing a manager
  • Selling property or assets over a certain dollar value
  • Purchasing belongings or assets over a certain dollar value
  • Approving annual budget
  • Approving uppercase expenditures over a certain dollar value
  • Blessing maintenance and upkeep or any other expenses over a certain dollar value
  • Borrowing money
  • Requiring additional fellow member contributions
  • Approval new members and approving transfers of interests (other than those expressly permitted in Operating Agreement)
  • Dissolving and terminating the LLC
  • Approval/ratifying procedures for scheduling of property usage and rules for usage of holding
  • Approving any lease agreements or other business agreements relating to the property

Transfers of Interests

Crucial provisions of the Operating Agreement concern the transfer and redemption of membership interests. Typically, the agreements provide for (a) permissible transfers which do not require approving or give rising to purchase rights in the other members or LLC and (b) all other transfers which give rise to diverse purchase rights in the other members or LLC.
Permitted Transfers – Operating Agreements typically let a member to make transfers for estate planning purposes without need for approving from the other members. For example, transfers to a trust for the primary benefit of the member's spouse and descendants might exist a permitted transfer which does non requite ascension to a purchase right for the other members or LLC.
Other Transfers – Transfers other than permitted transfers normally give ascent to some sort of choice for the remaining members or the LLC to buy the involvement that is beingness transferred. This buy right is frequently structured as a first right of refusal or correct of first offer.
For instance, presume that Sam, Jane and Nick own Estate Grove as ane/three owners in an LLC. Sam decides to sell his 1/3 interest to a third political party. If the LLC provides for a right of showtime refusal, either Jane or Nick (or maybe the LLC itself) could buy Sam's interest at the price and terms equivalent to the terms agreed to between Sam and the 3rd party. A correct of first offer is similar, simply before exploring the auction to a tertiary party, Sam must first offer to sell his involvement to Jane, Nick and the LLC.  If they refuse to practice their right, Sam is gratis to sell the interest for an amount equal to or greater than the offer to the members/LLC.

Valuation

The Operating Agreement often provides different values for purchase rights depending on dissimilar circumstances. For example, a right to buy upon a transfer pursuant to divorce or bankruptcy may be at a discount to the interest's market value.

Disagreements and Deadlocks

If there are an even number of members with equal ownership interests, deadlock may upshot. It is all-time to programme alee for handling deadlock every bit the judicial solution is often dissolution of the LLC. Potential solutions include:

  • Require a supermajority for of import decisions (for example requiring a 75% vote would avoid the possibility of deadlock where there are four equal partners)Appoint a neutral political party as
  • Appoint a neutral party equally tiebreaker or requite a pocket-sized amount of equity to a fifth person. It is all-time to name this person in advance of any deadlock
  • Designate 1 fellow member as the member with tiebreaking authorisation
  • Incorporate a mediation/arbitration requirement in the Operating Agreement in the case of deadlock
  • Incorporate provisions in the Operating Understanding that allow a dissenting partner to exist bought out on terms amusing to both sides; it is all-time to have these provisions in the understanding prior to any dispute

3. Governance Considerations

Governance is an important topic for shared holding regardless of the form of legal buying. Many governance bug are addressed in the Operating Agreement. Having a procedure for making decisions (some by the managers, some past the members), as well every bit processes and procedures relating to transfers of interests and deadlocks will convalesce many problems mutual to shared ownership of belongings.
In that location are other governance issues that as well should be decided by the family that are addressed outside the operating understanding. These governance issues include:

Care and Maintenance

  • Who opens and closes the business firm at the get-go and end of the flavor (if there is a season)?
  • Will at that place be compensation for family members who perform work on the property (opening/closing, paying bills, etc.)?
  • Who oversees maintenance and takes responsibleness for completion of repairs?
  • Who will receive mail for the belongings, and who volition pay the bills (amid the managers)?
  • Who volition choose the new paint/wallpaper/furnishings when remodeling is done? What will the procedure exist for gaining buy-in from other family members?

Financial Responsibility

  • How will expenses of the property be funded? Pro-rata by ownership? Will amount of usage come into play (should family members pay rent for use of the property)?
  • Which manager will handle tracking the expenses and managing the budget?
  • Should rental to third parties be immune?

Ownership Changes

  • When and how will the next generation get a vote? What happens if a member of a senior generation dies or otherwise passes a voting interest to a lower generation – will the lower generation's voting rights equal those of their aunts and uncles?
  • Do in-laws have a vocalization/vote in any governance matters? What happens when a family member dies leaving a surviving in-constabulary spouse? Will he or she have a voice?

Usage

  • How volition usage of the belongings be determined? Will in that location be "usage slots" of a standard length of time? Will some slots during peak times of the year be worth more than slots during other times? How will the prime slots be allocated? Who is in charge of the schedule?
  • At what point in time is the next generation allowed slots of time?
  • What rules, if any, volition there be for pets?
  • What are the rules about the condition the firm is left in for the next user? Should a cleaning crew exist used between users of time slots?
  • What will be the penalties, if any, for failure to comply with policies, rules and regulations?
  • What will the procedure exist for handling grievances? 1

A KEY POINT: While each of these governance points is important and many should be idea about in advance, not all need to exist (or should be) addressed in the Operating Understanding. Instead, many of these bug can be decided amidst the family and adopted past the managers or members as resolutions and documented in a handbook of household procedures and rules.

4. Checklist of LLC Terms

General

  • Name of LLC: __________________________________________________________
  • Registered agent and address: _______________________________________________
  • Holding to be contributed to LLC:
    1. Real estate ________________________________________________________
    2. Cash for expenses ___________________________________________________

Direction

  • Who will be the manager(south)? _________________________________________________
  • If more than than ane manager, are the decisions past the managers made by majority vote or unanimous consent? ______________________________________________________________
  • Certain decisions may require consent of the members in addition to consent of the manager(south). What consent of the members (based on % ownership) should be needed for the following actions:
    1. Amend the operating agreement: ________
    2. Elect new manager(s): ________
    3. Remove manager(south): ________
    4. Sell property/assets over $________ in value: ________
    5. Buy property/assets over $________ in value: ________
    6. Majuscule improvement expenses: ________
    7. Other expenses in excess of $________: ________
    8. Borrow coin in excess of $________: ________
    9. Require additional fellow member upper-case letter contributions: ________
    10. Add new members (other than permitted transferees): _______
    11. Transfer LLC interest (other than permitted transferees): ________
    12. Dissolve the LLC: ________
  • Is anyone other than the manager(s) authorized to write checks and deposit in the account of the LLC? ________
    1. If so, who? ________________________________________________________

Capital Contributions

  • If a member fails to brand a required capital contribution, what are the options?
    1. Dilute his/her ownership involvement: ______
    2. LLC or other fellow member(southward) loan money to the not-contributing member, obtain lien on the non-contributing member'south LLC buying and receive interest on the loan at ________% per year: ________
    3. Consider it a default result which gives the LLC and the other members the right to buy out the non-contributing member's LLC ownership. (If 3 is yes, typically i and 2 volition be no): ________

Transfers of LLC Involvement

  • Should there exist any restrictions on transferability?
    1. Correct of beginning refusal: ________
    2. Just to permitted transferees: ________
    3. Right of starting time offer: ________
    4. For non-permitted transferees, approval by ________% of members: ________
  • Who are the permitted transferees? ____________________________________________
  • When a member dies or withdraws from the LLC, practise the other members or the LLC have the correct (but not the obligation) to buy out the deceased/withdrawing person's interest? ________
    1. If so, at what price? ________
  • If a fellow member transfers his/her interest in violation of the Operating Understanding, practise the other members have the right to buy out the transferred interest? ________
    1. If and then, at what price? ________
  • Will transferees have:
    1. Full voting rights? ________
    2. Lesser voting rights? ________
    3. Should the members vote on whether to grant them voting rights? ________

5. Complexities of Shared Family Existent Estate

All families who own family unit businesses know that the interrelationship betwixt the family and the business concern is very circuitous. The basic objective is for (at to the lowest degree some) family members to invest their time and capital in guild to generate financial returns for the broader family unit. Articulation ownership of family recreational property is too complex, peculiarly because the basic financial structure is the opposite – family members contribute their money in order to enjoy recreational time at the property. This dynamic heightens the need to have a long-term, multi-generational plan for the financial support, governance and usage of the property that takes into account the inevitable changes in family makeup. Family-owned properties can be a great source of joy, memories and togetherness, but they can too exist the cause of stress in the family.
The following is a fractional listing of topics/questions to be considered as a family contemplates joint ownership of recreational property:

Numbers Matter: The Math of the Family Tree

The starting point is normally simple: Mom and Dad own the property. They make all the rules and pay all the bills.
If the holding passes to their three adult children, it becomes more circuitous because three people (and mayhap their spouses) demand to concord on everything. If the developed children then, years subsequently, pass the property to their children, then six, nine, twelve or more people (with spouses) must agree on everything.
Every bit the ownership puddle expands, owners' personal interests and financial capacity tend to diversify. Determination-making typically becomes more difficult and time-consuming as the pool of decision makers grows.
For these reasons, broad family buying of recreational backdrop seldom survives the second generation.

Emotional Zipper

If the parents build a beach house and their children spend summers in that location with their parents, those children would likely have a strong emotional attachment to the property equally adults. In contrast, if the great-grandfather built that beach house and the same children spent two weekends a year in that location growing up, they would likely non have as strong of an emotional attachment to the house. Emotional attachment, or the lack thereof, unremarkably drives willingness to lend financial support to a shared property.

Differences

People are all different, whether or not they are related to each other. They accept diverse likes, needs, abilities, personalities, tolerance levels and so on. Some people like fancy, some like casual. Some people are not bad, some messy. Some take more income than they demand, others are on a budget. Some like to play golf game, some would rather ride horses. Some love the sun, others can't be in direct sunlight. Some cull to have many children and love being with them, some choose to have none. Some love rock 'n roll, others hate loud music. Some always make clean out the fridge, some never practice. Some similar to prepare things, others don't know how. And so on, so forth. The challenges in accommodating dissimilar tastes, desires, schedules, resources, etc. of the members of a family grows geometrically with the addition of each generation – every bit does the distance of the relationships. It gets harder.

Leadership

Mom and Dad bought the ranch and made it "perfect" for the family by investing their time and treasure in it. The decision-making process was simple and effective. They decided everything; when, how and how much. Controlling past a group of siblings is much more difficult. It gets even harder with the improver of cousins. A formal construction for governance becomes a necessity. Information technology can go business-like.

Success

Some families determine that preserving a part of their family'south legacy in the form of a piece of real estate is worth the effort, and they devote the time and resources required to brand information technology a positive investment for all family members. Some also have a time frame in their planning, in terms of years or generations, after which they recognize that the dilution of the emotional connexion to the holding makes the effort required become disproportionate to the value and pleasance derived. They design a program to dispose of the property, whether to an unrelated person or entity or to one family member who starts the process over again.

* This paper was written for informational and educational purposes and not for the purpose of providing legal advice. The St. Louis Trust Company is not a constabulary business firm. You lot should contact your attorney to obtain advice with respect to whatsoever item issue or problem that is legal in nature.

1 Many of these governance issues were provided from the following article: Huggins, Ken (2003) "Essay – Passing It On: The Inheritance, Ownership and Employ of Summer Houses," Marquette Elder's Counselor: Vol. 5: Iss. 1, Article 7.