Provisions for an Heirloom Agreement: The Exit Strategy
Planning is important when you wish to pass down a vacation home to your heirs. An heirloom agreement is a binding agreement that provides the rules for how co-owners will use, share, maintain, and ultimately dissolve the joint ownership of the home.
Plan with the end in mind.
No agreement is complete without an exit strategy. The agreement should address what should happen when beneficiaries want to sell or buy each other out, and it should also define what happens at a beneficiary’s death.
There comes a time when every owner thinks about his or her exit strategy and who might be a buyer. All heirloom agreements should include a limitation on the ability of any one beneficiary to sell their share to any third party who might have an interest in purchasing a piece of the property. The agreement should limit ownership to beneficiaries, and perhaps, their heirs, but exclude other third parties.
Limiting who can own the property will protect all of the owners from third party claims against an owner’s interest. Such claims are the rotten apple that spoil the ownership for everyone concerned. These potential claims — I call them the Killer DsThese are the risks to beneficiaries’ inheritance: Debt, Divorce, Disability, Destructive Habits, Death, Disputes. (Timothy Borchers, Esq. coined the term in 2010.) of debt, divorce, and disability — can subject any owner’s pro-rata share to being taken and sold to pay a debt, or divided in divorce. Without this ownership limitation, a co-owner’s interest could be required to be liquidated in order to spend down the owner’s share at the time of disability or old age, prior to receiving governmental benefits, like Medicaid or full disability benefits. So while the third party limitation may initially seem like a detractor, it is actually a protector.
However, nothing should prohibit beneficiaries from giving their interest in the property to another beneficiary — such as one of their siblings or half siblings — either by a living gift or in his or her will. Sales between beneficiaries should be regulated to allow all willing owners to participate and possibly veto a sale that will result in any one owner being able to dominate.
Beneficiaries must always have powers of attorney on file and successor trustees for their interests so that there is no lapse in ownership participation.
Another exit strategy provision that should be in the heirloom agreement concerns foreclosure. Not many parents want trustees to foreclose on their child’s interest if the child cannot meet their obligations. A fair alternative is to lower the heir’s interest over time, while allowing the child to continue to use the property. On the other hand, if the children are to be more like business partners, and the agreement is negotiated, then allowing for foreclosure may be fair and reasonable, and should be considered.
The heirloom agreement should specify when the agreement itself should terminate. This date can be at the agreement of all the parties, or after as little as 5 to 10 years or as long as 30 to 50 years depending on the number of members involved, the expense of maintaining the property, and other complexities. One of the simplest and best strategies is to allow for a term on the shorter side, followed by a required listing for sale, with an option to purchase the property for anyone in the family who is able to afford to keep it, usually at a reduced buyout price that favors retaining the property in the family.
When it comes to enjoying an heirloom property, having a healthy exit strategy in place is as essential as sharing the property in an amicable manner, and helps to ensure many years of enjoyable common use.
Read about other important elements of an heirloom agreement, such as ownership privileges and restrictions, as well as the usage and maintenance of the property.
Tim Borchers, Esq., EPLS, AEP® – Tim is the author of the Heirloom Ownership Trust, Heirloom Toolkit, and co-creator of SecondHomeSavvy.com.
