May 21, 2024
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Kramer: Shared assets and unspoken expectations


Edward Kramer

By Edward Kramer

With young children at home, my family has a common saying: “Share with your brother/sister.” Interestingly, sharing can be as difficult for adult siblings as for their younger selves, though the stakes are higher. Adult children are asked to share the family farm, beach house or mountain cabin — and, to complicate matters, they also may be asked to share it with their in-laws, nieces and nephews. The simple life skill of sharing becomes complicated, even for the healthiest family with the best of intentions.

A shared family asset could draw the family closer together, or it could lead to disappointment, anger and the shutting down of relationships because of unmet expectations.

We enter this relationship with the best of intentions and unspoken expectations. We have all experienced unspoken expectations being infringed upon by those we hold most dear. So, we should not be surprised when our expectations are not met. Fortunately, formulating a plan in advance for handling the most important family ownership issues and agreeing to stick to the plan dramatically lowers the risk of tension and disputes for all parties involved.

Family members typically have expectations in seven areas that should be addressed in a bilateral operating agreement. The following thinking points will help to start the process:

Exit strategies. It is naïve to assume that all the family members, including future generations, will want to continue their shared ownership forever, or that everyone will want to sell at once. Family members need an exit strategy that is clearly defined if the need occurs to leave the shared asset arrangement.

Expense allocation. Will expenses be shared equally? Family members may want to consider coordinating expense allocation with usage of the property. It is also important to include current and past contributions of labor and capital when determining expenses. The operating agreement should address how family members will contribute their fair share to expenses.

Management. There will be a division of labor, and the family should name a manager with ultimate responsibility for coordinating the needs of the property. Families are encouraged to think through the list of management responsibilities and consider rotating this position so the burden does not fall on one family or family member.

Sweat equity. Many arrangements involve a relative providing construction work. But what if the relative does poor work, is slow in completing the job or is inefficient, resulting in additional costs or waste? Treat the service relationship as a formal business transaction. A written agreement signed by all family members detailing expectations, timeline and compensation removes confusion and hurt feelings in the event of unmet unspoken expectations.

Death. Considering this eventuality can help people avoid making an already horrible passage worse. The best approach is to assume the family has no control over who inherits and focus on the aftermath. Consider these questions:

• 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 differ depending on who inherits?

• Should the rights of an inheriting owner be different from those of others?

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. The form of ownership impacts numerous issues, including disputes, defaults, death, liability and taxes.

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 or her future rights in areas like usage, tax benefits, income allocation, decision-making power and appreciation.

The expectations for each section of the operating agreement should be discussed among family members before drafting the document with an attorney. With open communication, your family can minimize unspoken expectations, which can lead to hurt feelings.

• Edward Kramer is a fiduciary financial adviser at Abacus Planning Group and an adjunct professor in the California Lutheran University School of Management.