by Frederick Hertz² and Judy Barber

Introduction

Whether one is an estate planner, real estate attorney, or business counsel, dealing with the interpersonal dynamics of family members who co-own real property can be extremely challenging. All too often, attorneys focus only on the legal and tax aspects of co-ownership, paying little attention to the family relationships and how they affect the legal issues. Such challenges arise when estate planners plan for future co-ownership arrangements or where siblings jointly manage assets upon the death of the family patriarch or matriarch, as well as when attorneys are dealing with inherited or jointly purchased assets.

Many attorneys are uncomfortable exploring this “non-legal” territory. For some, there is concern about their lack of expertise; for others it may trigger uncomfortable memories of their own family experiences. Many clients – even those in open conflict – avoid family discussions about assets, fearing further deterioration in the relationships and feeling pessimism about the group’s capacity to agree. It is, however, extremely difficult to complete effective estate planning or resolve ongoing co-ownership conflicts without addressing these dynamics.

This article explores the “below-the–surface” legal and psychological dimensions of family property conflicts, by identifying recurring patterns of discord, explaining the interaction between the substantive issues and family concerns that cause tension, and presenting various non-traditional methods that attorneys can use to resolve such conflicts.

What is the problem?

Co-ownership conflicts arise in three contexts: the formation, the duration, or the termination of the relationship, either through death or dissolution. Like any union between romantic or business partners, a successful co-ownership relationship demands a nuanced integration of the practical dimensions of asset management with the emotional needs and individual goals of each owner.

These relationships usually are formed via an estate plan that bequeaths an asset to family members. Developing the plan is often not simple, but in truth, most parents focus on the economic benefits to their family and often ignore the complex tasks of management they also are bequeathing to their heirs. Such bequests, in effect, thus impose a business partnership on relatives who probably have never worked together in this way. The heirs may also feel very uncomfortable or unskilled in taking on this challenge.

Purchases of property typically are also motivated by financial or practical concerns, without sufficient consideration of the individual personalities of each of the co-owners or the group chemistry. There may also be little thought given to the disparate personal needs of each owner and how that will affect their decision-making process. In many instances there is a great disparity of knowledge, wealth, experience, and patience, resulting in an amplification of otherwise small disputes into painful rifts – with significant impacts on the management of the asset.

What are the “relationships” each owner has to the asset?

The first step in analyzing any co-ownership situation is to determine how the particular asset fits into the individual lives of each owner. Real estate, for example, can be a place to live, a source of rental income, a location for a family business (often at below market rents), a place to employ children, or a resource to borrow against for other investments. It can also be viewed as a source of long-term financial security or a property ripe for a §1031 exchange. For others, real estate is a sentimental tie to a childhood home, or a source of identity or status. For some families, the business or the property can be a way to stay connected to relatives. Depending on the situation of each owner and his or her spouse or partner, even a low-revenue business can take on enormous personal importance.

As a result, one of the owners may feel a deeper sense of “ownership,” and may view the others as peripheral or uninvolved. These differences can become acute over time, as various siblings pursue new careers or relocate, leaving others to manage the asset. But unlike relationships adhering to more conventional business models, the allocation of tasks in family co-ownerships tends to develop more organically, even unconsciously, with little thought to formalizing the decision-making procedures or the authority hierarchies.

Will the owners experience conflicts in their decision-making styles?

One of the biggest sources of conflict is incompatible decision-making styles. Lawyers may be unaware of these stylistic differences, which oftentimes are the result (or the cause) of long-simmering resentments and conflicts.

Some owners are quick and decisive; others are deliberate and cautious. One owner’s caution may due to insecurity or ignorance, and in other situations, it may arise from an unconscious “resistance” to the perceived dominance of another sibling. Owners have different tolerance for risk, and some owners focus on “big picture” concerns and have little patience for details. Some owners tend to rely on trusted advisors and skip the particulars, whereas others require reams of back-up documents.

Decision-making styles also depend on each party’s business expertise. The most experienced and knowledgeable one may be a quick decision-maker who thinks: “I have the expertise here, why doesn’t my brother trust me to make decisions. It is so frustrating, he procrastinates and doesn’t get back to me. We’ve lost a few good deals.” By contrast, the less skilled owner may not want to admit to not understanding the complexity of the deal. In his mind, he’s thinking, “Just because my sister is the oldest, she thinks I should rubber-stamp her decisions. I want to talk to my own advisors and she doesn’t want to give me more time to do that.”

There are a variety of ways to address these differences in decision-making styles. For some families allocating decisions by category makes the most sense. One person handles practical issues (building renovation, business expansion), another handles “human” issues (personnel, tenant management, expert retention), and yet another manages the financial affairs. For other families, responsibilities might be allocated based on the amount of time each owner can devote due to health, family pressures, or demanding careers.

Time demands on each party may create tension, and this may lead to one or two family members dealing with most of the details. Who makes the decisions regarding acquisitions, exchanges, sale, debt, and distributions? Family members may be appreciative of the hard work of others until requests for payment begin to surface. One owner may ask: “Why should we pay you a salary; or “What do you mean, you want a commission for the sale of the property?” Ultimately the attorney needs to provide guidance and direction, which mandates a surfacing of these process-related tensions.

Leadership is a difficult and challenging dimension of family co-ownership decision-making. In some families leadership is based upon age, experience, or personality. In others there is patience with the needs of the dependent family members, and in still others, there is resentment and competition.

What are the likely non-legal family issues that are connected to – and are revealed by – these conflicts?

In successful family partnerships, owners come to consensus and each of the members values the differing perspectives. However, if siblings were raised in a competitive family environment they may each find it hard to relinquish their individual positions. Thus, in many instances a stalemate may arise. While hiring an attorney can aid in such conflicts, the lawyer should be aware that the decision to engage an attorney could itself be a source of conflict, especially if one owner questions the attorney’s neutrality. If one party wants to control the flow of information and resist new input, hiring an expert can jeopardize the trust of other family members.

Siblings raised in a relentlessly competitive environment, in which children were played off against each other, are ripe for conflict. Talking about the impact of competition on their relationships can help them understand the need to compromise so that all siblings can gain from the decision-making process, rather than “winner take all.” Facilitating these kinds of family conversations can help some siblings to move from emotionality to rational problem solving.

An attorney with a willingness to understand that sibling relationships in business have their roots in childhood dynamics can move the process along dramatically. Trust in the attorney is often enhanced when siblings are able to express feelings about fairness in the family; older siblings might feel deprived because younger siblings lived in a more affluent household. By contrast, younger siblings may feel that the older sibling acted like a parent and had too much power, because parents were pre-occupied with things other than parenting.

Varying degrees of financial success in families can create unspoken envy. As much as attorneys would love to avoid these “messy” issues, in some instances, it is not be possible to resolve the business matters unless these deeper issues are directly addressed.

What other non-property factors should be anticipated?

If these core problems were not complicated enough, a variety of tangential factors can further complicate the co-ownership relationships.

The role of spouses/partners may be fuzzy but ever-present, and even if spouses/partners are not directly included in the decision-making, they can influence the outcome. Sometimes, the spouse observes and then “exposes” the family tensions in a way the family member is unable to do, and thus the spouse can alternately be a troubling accelerator of the conflict – as well as a vital contributor to its solution.

Although deciding who should or should not be included may be divisive, spouses/partners typically should be included in a meeting with the sibling-owners about the intended decisions, particularly when it involves succession planning and timing of distributions. Doing this prevents misinformation and provides an opportunity for the spouses to express their views about the potential impact on their children and when their children will begin to receive income. Even in families that have long-standing prenuptial agreements that clarify that the real estate is separate property, to exclude spouses/partners is a disservice to them that can create rifts in the family consensus, if their views are not heard and respected.

In addition to the concerns of spouses and partners, the relationship of step-siblings and a surviving step-parent also can be important, even if such parties do not have legal authority. Each one of these “non-parties” may have his or her own expertise – or believed expertise – and each one also will have his or her own financial challenges and emotional issues.

The varying levels of experience and skill of each co-owner is not a problem if there is a leader in the sibling group who is interested in consensus building. If, however, a sibling believes her perspective and decision-making prowess should overshadow the others, there will be great difficulty. Those with less skill and experience may not trust their sibling and may thus choose to hire their own counsel. This decision can work – but only if the attorneys involved work constructively to resolve conflicts, and do not contribute to a potentially adversarial situation.

Each owner needs to balance his or her personal financial goals and desires with those of other siblings. One owner may say, “I need all the income I can get right now and I don’t care about capital improvements or further acquisitions,” and the other one may assert “I don’t need the money now, I’m interested in a financially secure future.” This dissonance creates difficulties unless each sibling can understand the other siblings’ needs – even when they don’t agree.

A further challenge for each owner is assessing the benefits of income earned from the property or business, versus income earned elsewhere. This complex decision-making process has many factors that must be considered: personal earning capacity, desire and motivation to earn, emotional and financial needs of own nuclear family, and views of other siblings. Individual situations and family pressures can make this difficult. A 45- year-old professor who is saving for college educations for two children graduating from high school in the next five years is in a different position than her 38-year-old investment banker sister who is pregnant for the first time and has her own income-producing portfolio. The “income now” scenario versus “increased investment value and acquisition” scenario requires give and take and leadership in the family, and demands an approach that integrates all of these concerns.

What are the likely substantive asset and property issues that will arise?

Overlapping emotional family and business dynamics arise in all three phases of the relationship, but conflicts are most keenly felt when making major decisions. These decisions include whether or not to keep the asset/property or sell it, and if so, when; if the asset is real property, whether to rent it out, keep it empty, or allow a family member to occupy it; whether to maintain the property as is, renovate, or improve it; and whether to undertake significant new financial or contractual obligations.

There are different tax impacts based upon the differently situated owners, as well as long-term tax issues, the allocation of basis amounts, future tax characterization, and possible §1031 exchanges.

The attorney needs to consider not just the legal mechanics and tax implications, but also, how these issues might trigger emotional concerns. A sale decision can arise after a parent’s death unless a parent has ordered the sale at his/her death because sibling decision-making is not seen as viable. A decision to sell also can result if siblings realize that their individual emotional/financial needs are too diverse, or they don’t want to own and/or manage property together as it might ruin their personal relationships.

The attorney may be able to facilitate discussion which can lead to some number crunching, to create an investment policy that meets some of the differing needs of everyone. This can be done by defining objectives that balance distribution and growth over an agreed upon period, with a defined level of growth, rate of amortization and debt-to-equity leverage, and a general plan regarding how potential transactions will be evaluated – with some consensus about what will be sold and what remains in the family.

Decisions regarding property housing a family business can raise questions about fair rent, which can come up soon after the parent’s death or during the parent’s final illness. Siblings may have been thinking about these decisions for a long time and forming arguments to support their positions. The lawyer may be focused primarily on the legal dimensions of the decision-making process, but the lawyer must also be conscious of the deeper issues at play, such as the personal/financial needs related to the balance of income versus growth in value of property for each particular owner. If these deeper issues are ignored, the advice will not be relevant, effective, or heeded.

Once the larger issues are acknowledged, in most instances finding solutions becomes possible. For example, a family in conflict and with different experience and skill levels in estate planning would be well-advised to sit down with the parent’s attorney and/or accountant to discuss the pros and cons of different tax strategies in advance. This way, rushed decisions made soon after parent’s death won’t later haunt the siblings.

what is in a parent’s will, a step-mom, for example, may seek her own legal counsel. How do step-siblings balance their own feelings and financial desires and needs with the wishes of their father? Can they work together to offer a proposal to their step-mother that would meet enough of her needs and some of their needs to prevent litigation? Stepping into her shoes may seem difficult, but it may prevent step-siblings discord and save on legal fees that could otherwise provide income.

What are most effective solutions and strategies?

Lest the attorney feel completely overwhelmed and frustrated by this litany of concerns, in fact there are real solutions to most of these problems. However, it is essential that the attorney is realistic about the particular property or asset issues involved, and then, try to understand these problems in terms of the larger dynamic of the family. Rather than focusing just on the legal issues, the lawyer advising the family must be cognizant of issues involving financing, occupancy, and maintenance, as well as long-term ownership questions and value and investment factors – and know that none of these issues can be viewed in a vacuum separate from family relationships. Rather than seeing the family dynamics as irrelevant “obstacles” to the legal problem, they must be acknowledged as a core element of the legal concerns.

The attorney involved in the formation of the relationship, either in a bequest or a purchase, thus needs to be realistic about the non-legal issues that will likely arise when the family members are asked to manage the property together. Depending on the attorney’s comfort level, it can be helpful to share concerns regarding tension within the sibling group. Ask them if they see ways to reduce the tension as they move through the difficult process of closing their parent’s estate. Successful moving through the family-related obstacles requires the siblings to take some responsibility for managing their differences. An attorney can use the position of trusted advisor to highlight and legitimize the need to address these issues, as a group issue that is not any one particular person’s “fault.”

The attorney’s willingness to share stories and examples of similar situations can be sobering and educational for the group. Often siblings are not thinking about what might happen down the line, but rather, focusing only on what they believe is the “right” thing to do based on their own immediate and individual needs.

It is critical to be realistic about each party’s housing needs, financial capacity, interpersonal dynamics, styles of decision-making, involvement of spouses/partners, and the range of skills and education. You also may need to persuade your clients that it is appropriate for you, as their attorney, to address these concerns, since if you don’t deal with these concerns, your legal plan is less likely to be realistic or effective. Keep in mind the goal is to move the planning process along by providing a forum for family members to talk about their feelings and be acknowledged by you and hopefully by their siblings, so they be less emotional and more capable of rational problem solving.

Ask the right questions of your client by moving the conversation beyond the tax consequences or detailed legal provisions, to address the broader implications for the siblings of joint ownership of properties or a business.

For example, does a family limited partnership and/or an LLC make sense given the relationship of the siblings or step-siblings? Are there any obstacles to their working well together? If the parent acknowledges tensions but hopes co-owning property will bring them closer together, caution your client that may not be a realistic expectation. Then ask, “How would you feel if they end up litigating to divide the properties?”

Also ask how will individual siblings feel about owning assets together? Go down the list, asking “How will Jack feel since, from what you’ve said he knows little about the business and feels intimidated by Ted?” “How would Mary feel since she lives on the East Coast and refuses to come to California?”

If the task is estate planning, be sure to also ask a testator “How do you feel about the response siblings might have when they learn they will own the property jointly? What are your thoughts about bringing them together to discuss your estate plan? What are the pros and cons of such a discussion with your children?”

If the problems appear more complex and troubling than you initially thought, consider a family meeting or family mediation, or a series of private meetings with various individuals. If the issues are mostly interpersonal rather than legal, consider inviting a therapist or family counselor or perhaps a family religious advisor to address these nonlegal issues. Remember, you are not the only “professional” in town, and in many instances hiring a counselor can be timely and useful. It may be wise for you to participate in these discussions, so that the “emotional” work is integrated into the practical tasks.

You may also consider involving an “outsider” trustee, either another relative or a nonfamily professional trustee who has the experience and skill to deal with the different emotional/financial needs of sibling groups. Most importantly, design an appropriate strategy in consideration of the emotional realities. Is the sibling group motivated to address their issues so they can take advantage of the potential financial rewards? What can the client and the siblings do now to prevent future conflict after the parent (who may be holding the family together) is gone?

Most importantly, be constantly aware that these are not “business” deals. Rather, they are an outgrowth of a family relationship – with all the strengths, weakness, and complexities inherent in any extended family relationship. Only by acknowledging these dynamics, which lie within the framework of the family relationship, can the solution to these conflicts be found.

¹This article was original published in 2007-2008 as a two-part “CEB TOPICS” on the website of the State Bar of California’s Continuing Education for the Bar

²Frederick Hertz represents clients and serves as a mediator in matters involving co-ownership of property and assets by families, siblings, cohabitants, and domestic partners. More information on his practice can be found at www.FrederickHertz.com