Client have occasionally asked us whether their estate plan can include a right of first refusal (ROFR) on assets in their estate.
To illustrate this issue, here’s a hypothetical scenario:
The Family Farm
Brad and Nancy have owned and operated a farm for decades. As they’ve gotten older, their youngest son, John, has helped them manage the farm – mostly pro bono – because of his love for his parents and the farming business. John is sentimentally attached to the farm, which also served as his childhood home, and doesn’t want to see it leave the family when his parents are gone. Brad and Nancy also don’t want the farm to leave the family, but since their other children have not shown any interest in owning or operating the farm, leaving it entirely to John seems unfair to the other two children as it accounts for over 50 percent of the value of their entire estate. In order to give equal shares of the estate, the farm would need to be sold and each child takes 1/3 of the profit.
The solution to the farm being sold outside of the family is for Brad and Nancy to provide a Right of First Refusal to John in their estate planning documents. This would ensure that John has the opportunity to purchase the family farm before it is put up for sale to the public. There are two ways to do this through estate planning.
Estate Planning Document Approach
The first approach would be to create a ROFR provision in their wills or living trust. An example ROFR statement may say something like “At my death, I instruct my Trustee (or Executor) to provide John 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 John fails to exercise that right and enter into a contract to purchase the property after 30 number of days, this right terminates and my Trustee may accept the offer from the independent party making the initial offer.”
While the exact language would need to be more precise with a bit more detail, that is one simple example of how it could be stated. The ROFR would allow John to make an offer of fair market value, ensuring that the other children receive a fair portion of the value of the estate.
Of course, if John decides for whatever reason to not exercise his ROFR within the time period provided by his parents, then the right would expire. At that point, the trustee could list the property for public sale, and when sold, a third of the profit would go to each child.
An advantage of handling a ROFR through the estate planning documents is that if circumstances were to change in the future, Brad and Nancy could always amend the documents to remove this provision – giving them final and ultimate control of the farm property.
Contract Approach
The second approach that could be used is a separate contract between John and his parents. In this scenario, the farm would be owned by Brad and Nancy’s trust. The trustee of the trust (which could be either Brad, Nancy or an independent party) would be a party to the contract with John, in which Brad and Nancy could grant the ROFR to John 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 Jake first according to the terms of the agreement.
This is a useful approach if both parties wanted to have a greater assurance that the property would be sold to John with less ability for Brad and Nancy to change their minds without the legal consequences of breaking contract.
Should You Include a ROFR In Your Estate Plan?
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.
At Davis Law Group, our experienced estate planning attorneys would be happy to discuss how we can help you leave your property to those you care about and to leave the legacy you want to leave. We are available for in-person and virtual consultations, so contact us today to set up an appointment.
Including a Right of First Refusal on Property in Your Estate Plan
Client have occasionally asked us whether their estate plan can include a right of first refusal (ROFR) on assets in their estate.
To illustrate this issue, here’s a hypothetical scenario:
The Family Farm
Brad and Nancy have owned and operated a farm for decades. As they’ve gotten older, their youngest son, John, has helped them manage the farm – mostly pro bono – because of his love for his parents and the farming business. John is sentimentally attached to the farm, which also served as his childhood home, and doesn’t want to see it leave the family when his parents are gone. Brad and Nancy also don’t want the farm to leave the family, but since their other children have not shown any interest in owning or operating the farm, leaving it entirely to John seems unfair to the other two children as it accounts for over 50 percent of the value of their entire estate. In order to give equal shares of the estate, the farm would need to be sold and each child takes 1/3 of the profit.
The solution to the farm being sold outside of the family is for Brad and Nancy to provide a Right of First Refusal to John in their estate planning documents. This would ensure that John has the opportunity to purchase the family farm before it is put up for sale to the public. There are two ways to do this through estate planning.
Estate Planning Document Approach
The first approach would be to create a ROFR provision in their wills or living trust. An example ROFR statement may say something like “At my death, I instruct my Trustee (or Executor) to provide John 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 John fails to exercise that right and enter into a contract to purchase the property after 30 number of days, this right terminates and my Trustee may accept the offer from the independent party making the initial offer.”
While the exact language would need to be more precise with a bit more detail, that is one simple example of how it could be stated. The ROFR would allow John to make an offer of fair market value, ensuring that the other children receive a fair portion of the value of the estate.
Of course, if John decides for whatever reason to not exercise his ROFR within the time period provided by his parents, then the right would expire. At that point, the trustee could list the property for public sale, and when sold, a third of the profit would go to each child.
An advantage of handling a ROFR through the estate planning documents is that if circumstances were to change in the future, Brad and Nancy could always amend the documents to remove this provision – giving them final and ultimate control of the farm property.
Contract Approach
The second approach that could be used is a separate contract between John and his parents. In this scenario, the farm would be owned by Brad and Nancy’s trust. The trustee of the trust (which could be either Brad, Nancy or an independent party) would be a party to the contract with John, in which Brad and Nancy could grant the ROFR to John 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 Jake first according to the terms of the agreement.
This is a useful approach if both parties wanted to have a greater assurance that the property would be sold to John with less ability for Brad and Nancy to change their minds without the legal consequences of breaking contract.
Should You Include a ROFR In Your Estate Plan?
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.
At Davis Law Group, our experienced estate planning attorneys would be happy to discuss how we can help you leave your property to those you care about and to leave the legacy you want to leave. We are available for in-person and virtual consultations, so contact us today to set up an appointment.
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