by Richard H. Goldman
The transfer of real estate to children upon the death of the last to die of their parents can lead to unexpected problems for the children. It is not uncommon for parents’ estate plans to provide that upon the death of the last parent to die, their real estate shall be distributed to their children equally as tenants in common. However, problems arise when the children cannot agree upon the disposition of the real estate. This article offers suggestions for provisions to be included in the estate plans of parents so that such disputes can be avoided.
Right of First Offer
One way of addressing these issues is to include in the parents’ estate plans a “right of first offer,” applicable to each parcel of real estate that is to pass to their children. A right of first offer is a contract provision that enables one joint owner of property (“Potential Seller”) to offer to sell his or her interest in the property to the other joint owner (“Potential Buyer”) for a price specified by the Potential Seller (“the Specified Price”).
Within an agreed period of time, to be specified in the estate plans, the Potential Buyer may elect (a) to purchase the Potential Seller’s interest at the Specified Price; or (b) agree that the Potential Seller can sell the Property for a price not less than what would provide the Potential Buyer the amount he or she would have received if the Potential Buyer had sold his or her interest to the Potential Seller for the Specified Price.
If the Potential Buyer does not timely elect to purchase the Potential Seller’s interest at the Specified Price, or having elected to purchase, does not complete the purchase within the permitted time, then for a subsequent specified period of time, the Potential Seller can try to sell the Property to a third party for a price that would cause the Potential Buyer to receive not less than the Specified Price for his or her interest in the Property.
By way of example: Assume that a husband and wife have two children. They own two homes, one in Massachusetts and the other in Florida, each with a value of $1,000,000. Their estate plans provide that upon the last of them to die, the balance of the estate, including the two homes, is to be distributed to the two children equally as tenants in common.
The two children agree that the Massachusetts home will be sold, but one child wants to sell the Florida home and the other child wants to retain it. The estate plans do not contain any guidance as to how to resolve the situation if the children do not agree on the disposition of the homes. The children consult their respective attorneys and are advised that either one can commence a partition proceeding which could be expensive and adversarial.
A better solution is for the parents’ estate plans to set forth a right of first offer. The parents’ estate plans could provide that if the children cannot agree on the disposition of the properties, then within 90 days after the death of the last parent, either child can notify the other in writing that the property should be sold for a price which he or she specifies, in his or her sole discretion, in this example, $1,000,000. The child who receives the notice then has a specified period of time after the receipt of the notice to elect in writing to buy the interest of the other party for $500,000, and to complete the purchase within the period of time stated in the estate plans. If the recipient of the notice does not elect to purchase the interest of his or her sibling for $500,000, or to complete the purchase within the applicable time period, the party providing the notice can sell the property to an unrelated third party for not less than $1,000,000 within a time period specified in the estate plans. If a sale of the property is not completed to a third-party within the agreed time period, either sibling would continue to have the right to utilize the right of first offer in the future.
Offer to Purchase for at Least Federal Estate Tax Value
There are other alternatives that can achieve the same result as a right of first offer. The estate planning documents can provide that following the death of the last parent, either child can offer to buy a property owned by the parents for not less than the federal estate tax value of that property. The estate’s attorney would prepare a purchase and sale agreement at that price. If only one child is interested in purchasing the property, that child could then submit a written offer to purchase to the estate for the federal estate tax value, accompanied by a check payable to the estate equal to 10% of the purchase price and a signed copy of the purchase and sale agreement.
If each child would like to purchase the property for not less than the federal estate tax value, each child submits a written offer to the estate with his or her offer, accompanied by a 10% deposit payable to the estate and a signed copy of the purchase and sale agreement. The child who offers the highest price would be the purchaser of the property at the price offered by him or her.
If neither child is interested in purchasing the property from the estate for at least the federal estate tax value, the Personal Representative will sell the property on behalf of the estate.
Right of First Refusal
In some cases, clients have been advised to use a right of first refusal instead of a right of first offer. While a right of first refusal can lead to the same result as a right of first offer, a right of first refusal brings with it some potential problems. In a right of first refusal, one of the children could negotiate a sale with a third party but would then have to come back to the other child and give that child the right to purchase the property at the price offered by the third party. It can be difficult for a seller to deal with a third party if that party knows that the seller cannot complete the sale without first offering the property to the other child at the price offered by the third party. For this reason, the right of first offer is a better solution than the right of first refusal.
It is important for lawyers to recognize problems that may arise when family real estate is transferred from parents to their children. The right of first offer is a tool available to estate planning attorneys that can be used to plan for the transfer of real estate from parents to children and minimize any potential conflicts.
Richard Goldman is Senior Counsel at Sullivan & Worcester LLP in Boston. He is an Adjunct Professor at Boston University School of Law and is Vice President of the Wesleyan Lawyers Association.
by Elizabeth Sillin and Colin Korzec
On January 8, 2019, the Massachusetts Supreme Judicial Court issued Ciani v. MacGrath, 481 Mass. 174 (2019), which clarified certain provisions of the Massachusetts spousal elective share statute, G.L. c. 191, § 15. Specifically, Ciani held that the surviving spouse’s elective share of the deceased spouse’s real estate is a life estate in possession, not simply an income interest for life. A right to partition (and sell) the real property is now borne – a right that may severely disrupt the estate plan of the testator. Additionally, the SJC again urged the Legislature to update the elective share statute due principally to the fact that the statute is “woefully inadequate to satisfy modern notions of a decedent spouse’s obligation to support the surviving spouse or modern notions of marital property,” Bongaards v. Millen, 440 Mass. 10, 21 (2003).
Raymond Ciani died testate in 2015 survived by his wife, Susan, and his four adult children from a prior marriage. Raymond did not make any provisions in his will for Susan. Susan timely filed for her elective share of Raymond’s estate in accordance with G.L. c. 191, § 15.
Raymond died with personal property valued at just under $40,000 and with multiple parcels of real estate valued at just under $638,000. Susan brought partition actions seeking to force the sale of real estate in order to monetize her interest therein. Raymond’s children claimed she did not have a right to force the sale, and that she had the right only to receive income produced by the real estate.
The Massachusetts elective share provisions are found in G.L. c. 191, §§ 15 and 16 (the Elective Share statute). The Elective Share statute was enacted to prevent spousal disinheritance, either by inadvertence or design. It provides a mechanism by which a surviving spouse can waive the provisions of a deceased spouse’s will and take instead a statutorily prescribed share of the decedent’s estate.
The Elective Share statute provides a formulaic approach to determining the amount of the surviving spouse’s claim. The formula depends on whether the deceased had issue and/or kindred, as well as on the dollar amount of the deceased’s estate. The Elective Share statue provides, in part:
[I]f the deceased left issue, [the surviving spouse] shall thereupon take one third of the personal and one third of the real property . . . ; except that . . . . if [the surviving spouse] would thus take real and personal property to an amount exceeding twenty-five thousand dollars in value, he or she shall receive, in addition to that amount, only the income during his or her life of the excess of his or her share of such estate above that amount, the personal property to be held in trust and the real property vested in him or her for life, from the death of the deceased. G.L. c. 191, § 15.
The dispute in this case centered on the nature of a Susan’s interest in a Raymont’s real property where the income-only limitation applies, i.e., where Susan’s share of Raymond’s personal and real property, taken together, exceeds $25,000 in value. Susan contended that she held a life estate in an undivided one-third of each parcel of real property and that Raymond’s children were tenants in common subject to her life estate. Raymond’s children contended that Susan’s interest in real estate is limited to an income interest for life, not a life estate. The issue was one of first impression. The judge in the Superior Court reported the ruling to the Appeals Court and the SJC granted direct appellate review.
The Ciani Decision
The SJC construed the Elective Share statute by first looking at its plain language and then whether the legislative history supported the Court’s interpretation. The SJC declared:
[W]e read the statute this way: the first clause (“only the income during his or her life”) limits the surviving spouse to an interest in the “income only,” and the second clause (“the personal property to be held in trust and the real property vested in him or her for life”) describes how that limitation is to be achieved for each type of property — the personal property is to be held in trust and the real property is to be vested in the surviving spouse for life.
Ciani, 481 Mass. at 180-81.
Next, the SJC considered the legislative history of the elective share concept to test its statutory interpretation. Id. at 183-85. The first iteration of the Elective Share statute simply provided for a widow’s right to waive the provisions made for her in her husband’s will and afforded her a life estate in a prescribed portion of her husband’s real property. In 1833, the statute was revised to afford the widow a limited claim to a deceased husband’s personal property. The statute was reworked in 1854 to allow the spouse to take instead an intestate share of his estate, along with a $10,000 limitation on the personal property. Around 1861, the concept of the income-only interest in the personal property was introduced. Subsequent revisions around 1900 brought the statute to what it largely looks like today, including the expansion of the statute to include surviving husbands. An additional revision in 1964 adjusted the $10,000 figure to the current $25,000. Id.
The SJC found that the history of the statute demonstrated that the Legislature consistently and intentionally treated personal and real property differently from the outset. Id. The income-only limitation initially applied only to the decedent’s personal property. It was not until 1900 that the real property limitation was enacted. And even then, the SJC held, the real property limitation was characterized as “vested” and not as an “income only” limitation. Id. at 186. The fact that the Legislature did not enact an analogous provision for the management of the real property, but instead instructed that the excess of the surviving spouse’s share thereof would be “vested,” supported the Court’s conclusion that the Legislature intended for the surviving spouse to take an ownership interest in the excess. Id. The fact that the Legislature simultaneously anticipated that the surviving spouse’s share would be “set off” for the duration of his or her life also supported the conclusion that the Legislature intended to convey a life estate. Id.
Ultimately, the SJC found that (i) Susan holds an estate in possession, for life, in her share of the real property, and (ii) Raymond’s children hold an estate in possession, absolutely, in the remaining property, as well as an estate in remainder in Susan’s share. As a result, the parties are tenants in common as to their estates in possession and each has a right to a partition. Instead of simply having the right to live in the house, Susan has the right to force a sale of the property and realize a monetary sum upon the sale. Indeed, Raymond;s children also now have the right to partition as well – possibly forcing Susan out of the house in which she wishes to continue to live. This right has the potential to disrupt a well-intended estate plan by allowing the forced sale of the family residence over the objections of certain members of the family.
Postmortem – My Kingdom for a Postnuptial
The Court noted parenthetically that the Elective Share statute, which has been around in some form since 1783, is “unwieldy and perplexing to apply” and “decidedly gendered” and “in desperate need of an update” by the Legislature to conform with modern notions of spousal support obligations and marital property. Ciani, 481 Mass. at 187 n.12. Indeed, as the Court noted, a similar appeal to the Legislature was made in 1984 in Sullivan v. Burkin, 390 Mass. 864 (1984), some 35 years ago. Id. Several attempts have been made over the years by various bar association committees to address the spousal elective share. To date, no consensus has emerged in Massachusetts about modernizing the elective share law. Until such time as it does, estate planners must continue to take advise clients as to the pitfalls of the current law and to give further consideration to prenuptials or postnuptials as part of the estate planning process.
Elizabeth Sillin, Esq. is a partner at Bulkley, Richardson and Gelinas and is a member of the Massachusetts Ad Hoc Elective Share Study Committee. Colin Korzec is a National Estate Settlement Executive at U.S. Trust, Bank of America Private Wealth Management and was also a member of the Massachusetts Ad Hoc Elective Share Study Committee.