Can an Estate Plan Include a Right of First Refusal on Certain Property?
Estate planning attorneys are occasionally asked by clients whether an estate plan can include a right of first refusal (ROFR) (sometimes called a first right of refusal) on certain items or parcels of property. The following example helps to illustrate the way this legal tool is used and why it might be useful in your own situation.
The Family Farm
Allen and Betsy have owned and operated a farm for decades. As they have aged, their youngest of three children, Chet, has helped them manage the farm out of the goodness of his heart. Over time, Chet has grown very sentimentally attached to the farm and would hate to see the farm be sold outside of the family upon the death of his parents. Allen and Betsy would also hate to see the farm leave the family, but the other children in the family have expressed no interest whatsoever in owning or participating in the farm’s management. As Allen, Betsy, and Chet have talked it over, Chet’s parents have made it clear to Chet that they want their children to receive equal shares of their accounts and property at their deaths. The problem, however, is that the farm is worth well over 50 percent of the value of all of their accounts and property. As a result, Allen and Betsy cannot just give the farm to Chet as his one-third share. Instead, the farm will likely need to be sold so that the money and property can be equally and easily divided (remembering that the other two children have no interest in owning any part of the farm property).
A possible solution to address this dilemma is for Allen and Betsy to provide Chet with a ROFR. This solution would ensure that Chet has the opportunity to purchase the farm property at the death of his parents, as long as his offer meets the conditions of the ROFR.
Estate Planning Document Approach
There are at least two approaches that Allen and Betsy could take to allow Chet a ROFR. The first approach would be to have their estate planning attorney create a ROFR provision in their wills or living trust documents. It might read something like this: “At my death, I instruct my Trustee (or Personal Representative) to provide Chet with the right to purchase the Family Farm under the same terms and conditions made by an independent third-party offer on the property. If Chet fails to exercise that right and enter into a contract to purchase the property after <x> number of days, this right terminates and my Trustee may accept the offer from the independent party making the initial offer.”
The language of the ROFR would likely need to be more precise and include much more detail than this sample language, but this is the basic idea. The ROFR would allow Chet to make an offer that would match an independent third party’s offer, which should reflect the fair market value of the property. By doing this, the other children receive some reassurance that the property will be sold at fair market value so that they get the full value of their one-third share of everything Allen and Betsy owned. Additionally, Chet is provided with a legitimate opportunity to purchase the property at fair market value and obtain ownership of land that has meaning to him beyond the monetary value of the property.
Of course, if Chet decides for whatever reason to not exercise his ROFR within the time period provided by his parents, then he is not locked into any sort of obligation. Rather, he could allow his right to expire or could waive his ROFR to speed up the property’s sale to the independent party and still receive his one-third share of everything his parents owned.
One main advantage of including this ROFR in Allen and Betsy’s estate planning documents is that if circumstances were to change in the future, Allen and Betsy could amend their estate documents to remove this provision. This preserves Allen and Betsy’s ultimate control of their farm property.
The second approach that could be used is a separate contract between Chet and his parents. If the farm was owned by Allen and Betsy’s trust, the trustee of the trust would be a party to the contract with Chet. In the contract, Allen and Betsy could grant a ROFR to Chet in exchange for an agreed-upon sum of money. Once the contract is signed, a Notice of Right of First Refusal could be recorded with the county recorder to put the public on notice that before the farm can be sold, it will have to be offered to Chet first according to the terms of the agreement.
This approach might be used if the parties wanted to provide greater assurance that the property will be sold to Chet and that Allen and Betsy will not later change their minds without the legal consequences of breaking a contract.
Get Competent Legal Assistance
A ROFR is a useful legal tool to ensure that certain types of property end up in the hands of those who value them most while balancing a family’s desire to fairly distribute accounts and property among other loved ones. However, ROFRs must be carefully drafted whether placed in a will or a trust or drafted as a contract. A poorly drafted ROFR can create more problems than it solves, so proceed with caution and make sure you consult with an experienced estate planning attorney. Such legal counsel can provide much needed guidance and drafting expertise when creating a ROFR for your situation. Give us a call today to discuss ways we can leave your hard-earned money and property to those you care about and in the way you want. We are available for in-person and virtual consultations.