Insights & Resources Resources for Families
Considerations for Successful Governance
Crafting a plan to maintain a property for the enjoyment of multiple family members and generations depends on a number of variables including the property at hand, the family goals, and the dynamics between family members.
There are a number of categories and issues to consider in planning for a family-owned property:
- Ownership vehicle
- Conveyance of property
- Decision making procedures
- Cash flow and bill pay
- Expense contributions
- Maintenance plans
- Schedule for use
- Insurance, mortgage, taxes
- Ability of members to sell interest in property
While the considerations are numerous, the family unity and memories gained from shared property make it well worth the effort for most families.
At Threshold Group, we help families through all stages of this process, from the long-term estate and legacy plan down to the details of insurance and bill payments.
We hope this summary can help you with your family’s process.
Below are considerations for different stages of the shared property governance process.
Often families choose to hold property in a limited liability structure or a trust. Liability protection, governance structure, control, property transfer and time/money allocation mechanisms are some of the features of these vehicles that are appealing to families.
CONVEYANCE OF PROPERTY
The four most common options for conveying the property to the chosen entity are lifetime gift/estate exemption gifting ($5,250,000 per individual in 2013), annual exclusion gifting ($13,000 per donee in 2013), lifetime trusts (including qualified personal residence trusts), and testamentary (at death) trusts.
DECISION MAKING PROCEDURES
The family who can elect one family member to make all decisions is rare. Usually people have differing opinions, especially when it comes to where they live and vacation. Developing a stream-lined decision making process is important and including all family members to buy off on the process can help with long-term success.
If adult membership is under five, it may make sense to elect one person to make day- to-day decisions; determine a maximum dollar amount before group input is required. For the family with multiple branches, create a process for electing a representative from each branch to vote on a board. For larger decisions, like whether to build or remodel a home, it’s a good idea to schedule family meetings with an option to tune in remotely. It’s important that everyone feel heard, but empowering key individuals with decision making authority is most efficient.
When the decision making authority is passed from one generation to the next generation, an understanding of the basic goals of the family should be revisited so any new decisions regarding procedure are in line with those goals.
CASH FLOW AND BILL PAY
An annual budget helps to streamline the cash flow of the entity and in cases where members are making contributions to the entity, it helps individuals’ cash flow planning. Budgets should track and project costs of maintenance, repairs, capital improvements, utilities, security, insurance and property taxes. Funding a maintenance reserve will avoid unexpected capital calls. Whenever possible, it’s best to pay bills from the entity. When that’s not possible, it helps to have a good system in place for reimbursing members for their direct bill payments.
Allocating expense contributions requires balancing ownership interest and use of the property by various members. In some cases, families are comfortable using the property equally. For example, they each spend two weeks at the property during the summer. For geographically dispersed families, a calculation for use cost makes for a fairer and more agreeable arrangement. Consideration for whether certain amenities (tennis court, pool) are used by some more than others may also come into play for allocating expenses.
Some families find an annual maintenance schedule contributes to family unity. Breaking down the tasks required for spring cleaning and assigning these tasks to different stakeholders on a rotating schedule allows for teamwork and joint pride of ownership. While this may work for cleaning the windows and gutters, the family should recognize that, like any homeowner situation, certain projects should be given to a professional.
SCHEDULE FOR USE
Developing a scheduling protocol depends on the seasonal appeal and the number of people the property can accommodate. Will the property be used by numerous family members or branches at the same time? Or is it necessary to assign exclusive use periods? And who gets to use it when the weather is ideal?
INSURANCE, MORTGAGE, TAXES
Structuring insurance policies, establishing mortgage debt, applying tax rules and benefits require careful consideration as options depend on the structure of property ownership. Work with insurance, legal, and tax professionals to cover every detail.
ABILITY OF MEMBERS TO SELL INTEREST IN PROPERTY
Sometimes a family member wants to opt out of the family property, whether it’s a matter of financial need or unfortunate dynamics. If the entity allows for sale, to keep it in the family consider language for permitted transferees, first rights of refusal, and clear assessment procedures.
BRINGING IT ALL TOGETHER
By setting family goals, working through the details with professionals, and implementing and monitoring procedures, families enjoy the governance process for shared property. If you’re considering using a family office to help with the planning and details, Threshold Group has experience to draw upon.
The information in this report is confidential and is provided solely for the use of Threshold Group and our clients. Threshold Group prepared this report utilizing information from a variety of sources, including legal publications, the direct experience of our employees, industry contacts, and other sources deemed to be reliable. Threshold Group took reasonable care to ensure the accuracy of the information, but we do not warrant it is complete, current, or accurate and it should not be relied upon as such. We urge you to independently validate the information contained herein is correct before basing any decisions on
it. The information provided herein is not exhaustive and has been summarized for convenience. There are many additional factors to consider when evaluating a shared property arrangement that are not included in this report, but should be considered before making any decision. The information contained herein is intended only for the designated recipient and may not be copied or distributed.
Drummond Woodsum Attorneys at Law. (2012). Multi-Generational Ownership and Planning for Family Owned Properties. Retrieved from http://www.dwmlaw.com/wp-content/uploads/Multi-Generational- Ownership-Planning-Family-Owned-Properties.pdf