Shared Assets and Unspoken Expectations

By Edward W. 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, and/or mountain house—and to complicate matters, they may be asked not only to share with their siblings but also 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 brings with it both the possibility to draw the family closer together and also unmet expectations, which can lead to disappointment, anger, and shutting down of relationships. 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 (expressed or not) seven areas that should be addressed in a bilateral Operating Agreement. The following thinking points will help to start the process:

EXPECTATION #1: 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 now (or in the future).

EXPECTATION #2: EXPENSE ALLOCATION

Will expenses be shared equally? They 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.

EXPECTATION #3: MANAGEMENT

As with all arrangements, 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.

EXPECTATION #4: SWEAT EQUITY

Many family ownership arrangements involve a relative providing construction work or construction management. But what if the relative, despite the best of intentions, does poor work, is inefficient (resulting in additional material costs or waste), or is slow in completing the job? Many awkward situations and disputes can be avoided by treating the service relationship as if it were 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.

EXPECTATION #5: DEATH

Although it is difficult to contemplate the death of a relative, considering this eventuality can 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 of the inheritance. Consider these questions:

• Following a death, 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 for buyout be different depending on who inherits?

• Should the rights of an inheriting owner be different from the rights of the other co-owner(s)? For example, if the deceased family member had the right to force a sale at the time he/she died, should someone who inherits the share also be able to force an immediate sale?

EXPECTATION #6: 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 family ownership issues, including disputes and defaults, death, liability, and taxes.

EXPECTATION #7: 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/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.

While these discussion points will start the conversation, Abacus Planning Group strongly recommends that you consult an attorney and/or financial advisor to ensure that your Operating Agreement covers the most important areas and family members are able to voice their expectations.

 

About Edward W. Kramer

Edward W. Kramer, CFP® is a 2004 graduate from Texas Tech University with a BS in Personal Financial Planning. He received the CFP® designation in August 2006. Eddie was a financial planner on Abacus’s financial planning team from 2004-2009 prior to returning to Texas, his home state, to work as a Wealth Manager at USAA. Eddie returned to Abacus in 2014, and earned the EA designation in February, 2016.

As a member of the financial planning team, Eddie works closely with clients to understand their objectives in order to develop, implement and monitor a comprehensive financial plan to achieve those goals.

 

About Abacus

Abacus is a financial advisory and investment counsel firm known for its passion in creating success for clients and family businesses through skillful listening and smart financial decision making. Managing over a billion dollars on behalf of its 200 plus clients, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.