Creative Planning For The Transfer Of Family Real Estate
Posted: November 18, 2020 Filed under: Fall 2020 Vol. 64 #4, Practice Tips | Tags: estates, federal estate tax, housing, potential seller, property, real estate, right of first offer Leave a commentby Richard H. Goldman
Practice Tips
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.
Conclusion
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.
Navigating Rising Waters: The Public Waterfront Act
Posted: May 14, 2018 Filed under: Practice Tips, Spring 2018 Vol. 62 #2 | Tags: chapter 91, development, massachusetts, real estate, seaport Leave a commentby Matthew J. Kiefer and Louise B. Giannakis
Practice Tips
The Commonwealth of Massachusetts prides itself on being “first in the nation” for many milestones: the first public park (Boston Common), the first college (Harvard) and the first to legalize same-sex marriage. A lesser known “first” was the Commonwealth’s formal recognition of the public trust doctrine, a legal concept dating at least to Justinian. The doctrine, first codified by the Colonial Ordinances of the 1640s, obligates the Commonwealth as trustee to ensure that land subject to tidal action is used for public benefit. The doctrine evolved into M.G.L. c. 91 (“Chapter 91”), the Public Waterfront Act (“Act”). Historically, the Act focused on preserving public access to the water, protecting tidelands for water-dependent uses such as fishing and boating, and encouraging uses and development that animate the waterfront. However, with record-breaking coastal flooding and sea level rise no longer distant threats, climate resilient waterfront development has become a policy imperative in Chapter 91 licensing.
Chapter 91 is a comprehensive licensing program, administered by the Massachusetts Department of Environmental Protection (“DEP”), to ensure that proposed waterfront development projects meet public benefit standards with respect to environmental protection, public safety, navigation, preservation of historic maritime industries, and recreational, commercial and industrial activities and uses. Licensing by DEP can be a complex and lengthy process, especially for large-scale urban projects. Although DEP has yet to incorporate formal climate resiliency requirements into its licensing program, a prudent project proponent should include climate resilience as an integral part of a project’s public benefit profile in light of the DEP’s recent licensing decisions, public comments and formal requirements established by other regulatory agencies, such as the Boston Redevelopment Authority (d/b/a Boston Planning and Development Agency or “BPDA”).
Do the regulatory homework: Effective representation of a proponent of a waterfront project requires a determination of how the Chapter 91 and associated regulatory standards and policy goals apply to a particular project. See Waterways Regulations, 310 CMR 9.00 et seq., Designated Port Area (DPA) Regulations, 301 CMR 25.00 et seq., Municipal Harbor Plan (MHP) Regulations, 301 CMR 23.00 et seq. Early analysis of site-specific factors by a cross-disciplinary team is often required to identify which Chapter 91 requirements are applicable to a particular site — such as whether the site is historically filled or currently flowed tidelands or is nontidal, whether it is above or below the historic low water mark, and whether it serves water-dependent or nonwater-dependent uses. This is critical to developing an effective Chapter 91 permitting path, and should include evaluation of appropriate climate resiliency measures. For example, as sea levels continue to rise, it would be wise to anticipate whether structures currently above the high water mark, and thus exempt from licensing, may become “intertidal” and thus subject to Chapter 91 jurisdiction.
Review other agencies’ climate change initiatives for guidance: As climate resiliency becomes a policy imperative for the modern world, federal, state and local agencies are increasingly launching initiatives and establishing requirements to protect communities from the adverse effects of climate change. In March, 2016, Governor Baker signed Executive Order 569, “Establishing an Integrated Climate Change Strategy for the Commonwealth,” and in early 2018, authorized over $1.4 billion in capital allocations “to mitigate and adapt to climate change” and “build a more resilient Commonwealth.” These climate resiliency investments include infrastructure repairs and improvements, as well as grants to communities through the Municipal Vulnerability Preparedness Program and the State Hazard Mitigation and Adaptation Plan. In October, 2017, the BPDA formally integrated climate resilience measures into its approval process under Boston Zoning Code Article 80 for Large Project, Planned Development Area and Institutional Master Plan Reviews by requiring a “Climate Resiliency Checklist Report” that incorporates sea level rise, storm surge, extreme precipitation, extreme heat events, and other considerations. Other Boston initiatives include the recently-approved Downtown Waterfront Municipal Harbor Plan, which encourages a comprehensive, district-wide approach to creating a climate resilient waterfront that overcomes the limitations of a parcel-by-parcel permitting process, and Climate Ready Boston, an ongoing city-wide planning effort to address the effects of climate change. At the federal level, the newly revised Federal Emergency Management Agency flood hazard maps increase the reach of flood zones and show a stepped-up focus on the topic.
Consider climate resilience measures in recently approved projects: Many questions remain on the Chapter 91 licensing implications of many potential climate resiliency measures. Can raised seawalls or berms be licensed if they reduce public pedestrian access? Would a flood protection berm consisting of new fill in flowed tidelands be licensable? Would raising the grade of a project site to anticipate rising sea levels allow for a commensurate increase in building height? What is the scope of responsibility for an individual licensee whose site is located on an area-wide flood zone and whose flood protection activities may not be effective until the entire area is protected?
Regulatory uncertainty notwithstanding, it is clear that adapting to sea level rise is necessary for the long-term viability of a waterfront project. For instance, the developers of Clippership Wharf in East Boston have designed a floodable harbor-walk that can act as a buffer for high seas and are importing significant amounts of new fill to raise parts of the seven-acre site above anticipated flood levels. The developers of a large mixed-use campus at Suffolk Downs in Boston-Revere have proposed a sunken amphitheater with capacity to hold millions of cubic feet of flood water for days to address anticipated flood levels. The developers of the L Street Power Station in South Boston have proposed an elevated floor of the building to accommodate the possible need to raise the ground level while maintaining a reasonable floor to ceiling height.
In short, even in the absence of clear regulatory requirements, waterfront development proponents should incorporate climate resilience measures early in the licensing strategy, not only to extend the project’s design life, but also to facilitate the licensing approval by anticipating the public benefit expectations of the DEP and interests of the waterfront communities.
Matthew J. Kiefer is a Director at Goulston & Storrs, focusing on real estate development and land use. Matt has extensive experience licensing projects under Chapter 91, including Clippership Wharf in East Boston, the Innovation and Design Building in the Ray Flynn Marine Park, and Building 114 and the Spaulding Rehabilitation Center in the Charlestown Navy Yard. He co-chairs the firm’s Climate Resilience Task Force.
Louise B. Giannakis is an Associate in Goulston & Storrs’ Real Estate practice group. Louise graduated from Boston College Law School in 2017 and is a member of the Urban Land Institute’s Young Leader Group.