Leaving Commercial Property to Your Family? Consider the Law of Unintended Consequences

May 20, 2014

Moorhead Law Group, LLC recently was involved with a commercial property that was left to family members as part of an inheritance.  While the family member who left the property to children undoubtedly had only good intentions, including financial stability for his family and their future children, there were several unintended negative consequences.

 

Some of the more significant issues to consider when leaving a commercial property to family members as part of an estate plan are the following:

 

  • Even if the property initially is placed in trust, with the family members as beneficiaries, there likely will be a day when the trustee no longer wants, or is able, to serve as trustee.  If the property is conveyed out of the trust to family members as tenants-in-common, there should be some management agreement in place.  Otherwise, it may not be clear who has the authority or responsibility for the management of the property.  There is a chance that family members may be in a dispute in the future, so a good practice is to have such a management agreement in place at the time the trust is created.

 

  • With normal real estate investments, the owners almost always operate with the goal of maximizing profit.  However, when families are in business or own property together, a unique dynamic can be at play.  Families, particularly those who have inherited the property together, may bring family issues of many kinds – petty issues, childhood grudges, and emotions – into the property ownership.  If these issues are significant enough, they can impact the management of the property and profits.  The mantra “don’t do business with friends or family” should be thoughtfully considered as part of an estate plan.

 

  • At the time the estate plan is created, the entire family may be living in the same city or state and may have relatively equal involvement in the property.  However, people move states, and priorities can change.  Although a snapshot of the family at the time the estate plan is created may make it appear ideal to leave a commercial property to family members, one should consider the full arc of the family members’ entire lives and how those lives might be impacted by owning and being tied to the commercial property.

 

  • Unless the family members are experienced commercial real estate investors, huge problems may be lingering on the horizon.  Properties need to be managed and managed well – maintenance, capital improvements, tenant improvement costs, and leasing commissions are only some of the critical management items that need to be handled.  If the family members are not aware that these items need to be addressed, the property may quickly become more of a liability than a benefit.

 

  • Family members have individual goals and needs.  If one member needs to sell its interest to receive cash for something else, it may be particularly difficult to sell in this situation.  Although the property may have significant value, the reality is that the family member might not have much liquidity.

 

These are just some items to consider when a family member is thinking of leaving a commercial property as part of an estate plan.  While everyone usually has the best intentions in mind for family, family members and their estate planning advisors should carefully consider the law of unintended consequences and what may result.

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