Provisions for an Heirloom Agreement: Ownership Privileges & Restrictions

Co-ownership of an heirloom property can be daunting, with disagreements ranging from whether to allow clotheslines to who is responsible for opening and closing each year. But legacy home partnerships can succeed with a little planning. Heirloom agreements are used to ensure co-owners are aligned on the ownership, management, usage, maintenance, and ultimately the disposition of the property. Some of the key components of an agreement are the privileges and restrictions that accompany ownership.

Ownership does not always need to be equal. Ownership interests can vary by owner and can change over time depending on which owners buy or sell their shares or spend more or less than others on property expenses. Records must be kept so that contributions to the maintenance or improvement of the property can be shared and monitored. This will also help to determine each owner’s interest.

When a beneficiary wants to sell their interest, it should be a prerogative of the other owners to buy the available share. The heirloom agreement can outline how the owners do this. The right of first refusal could take any of these forms:

• The share could be sold to the highest bidder.  
• All bidders interested would have an equal right to purchase at an agreed price by fair market analysis.  
• The price might be set at fair market value minus a percentage, and sold to the co-owners who agree to purchase the interest. It is often reduced by 5% to 50%, since no sales commission is required. The property is transferred “as is,” and getting cash today for something you don’t use and won’t otherwise get paid for years or even decades comes at a price. A reduction also compensates the remaining beneficiaries who must come up with the cash to buy the seller out.

Important: co-owners rarely––if ever––agree on this discount. It is imperative that the parents/grandparents/current owners lay down the law in this regard. Otherwise, the issue will stymie even the closest of families.

The heirloom agreement should also specify how ownership interest will be transferred upon the death of a co-owner. Options include:

• The surviving beneficiaries are required to purchase the interest of the deceased member at its fair market value minus a pre-set discount. A reasonable period of time would be provided for the other members to obtain the cash necessary. If any member does not want to participate in the purchase, then he or she could opt out and the others could buy the interest without his or her participation.
• The interest of the deceased beneficiary would pass to his or her heirs at law. This would ordinarily include only children, grandchildren, and other next of kin. Spouses might be included but typically only in cases of very few participants, uniquely close in-laws, and where there are no children, but current spouses only please! You never know about those second- and third-wives and husbands!
• The interest of the deceased beneficiary would pass to the other owners without any purchase requirement. This is akin to the idea of “right of survivorship” where whoever lives longer ends up owning the property. This option doesn’t compensate the estates of the deceased and ignores the greater family considerations for the next generation.

The heirloom agreement keeps track of all of these ownership privileges and restrictions, so when there is a shift in ownership, everyone is on the same page.

Read about other important provisions covered in the heirloom agreement involving the usage and maintenance of the property and the exit strategy.

Tim Borchers, Esq., EPLS, AEP® – Tim is the author of the Heirloom Ownership Trust, Heirloom Toolkit, and co-creator of SecondHomeSavvy.com