Planning for long-term enjoyment of cherished real estate is increasingly important to families today. Beach and river houses, mountain cabins, and farms which have long served as family vacation places, hunting grounds or retreats can be preserved for the use and enjoyment of future generations through careful legal planning.
Succession planning for real property involves management of several critical factors: The partition right, control, and estate taxation.
Partition. Under Virginia law any party who owns a fractional interest in real estate has the right to seek partition of the property. Partition means court-ordered division of the property such that a co-owner receives acreage which he or she can sell. If an equal division of the property is not possible because of the characteristics of the property (if the property is a house, for example), a co-owner has the right to seek court-ordered sale of the property, and a division of the proceeds. Thus the partition right allows a single family member to wreak havoc on a family which is otherwise content to hold and enjoy property.
The partition right has a hidden consequence related to creditors’ rights. A creditor of a co-owner has the right to attach the co-owner’s interest and then seek partition as a source of funds to pay the debt owed to the creditor. Thus, a co-owner (heirs, devisees under a will) of a family property who incurs liabilities intentionally or unintentionally can upset hopes for continued family enjoyment of family property. For example, let’s assume the four Smith sisters each inherit a one-fourth interest in a beach house that has been in their family for generations. One of the sisters is heavily in debt and a creditor attaches her interest in the beach house. Obviously, partitioning a beach house into four tracts of property is not possible, so a forced sale by the creditor would be likely.
Control. When property passes from generation to generation and the ownership interests become fractional, decision making regarding the property becomes difficult. No law establishes that a majority vote of numerous co-owners is sufficient to sell, convey, lease, harvest timber on or otherwise control real estate in Virginia. Thus unanimity is required for any decision amongst co-owners, no matter how numerous. Here again, the law allows a single family member or faction to handcuff the remaining owners. Owners who cannot be found or contacted or owners who simply will not cooperate present barriers to efficient use and control of real estate. Let’s look at our beach house scenario again and assume that three of the Smith sisters want to sell the beach house but one sister does not. In lieu of documentation providing otherwise, the fourth sister has a strict veto power over sale of the beach house.
Additionally, numerous co-owners of property present a situation in which property is sometimes referred to as “heir” property, where the property is owned by so many diverse, disagreeable or unknown individuals that use, sale or division of the property is impossible. The value, use and enjoyment of real estate is destroyed in that scenario.
Estate Taxation. Large valuable real estate holdings are subject to estate tax like other assets of a decedent. Historically, families have struggled to pass valuable land to subsequent generations without the necessity of selling the land to pay estate taxes. In wealthier families, gifting property during life is a common strategy in reducing the size of taxable estates. One of the challenges of gifting land from generation to generation is finding a convenient way to transfer interests in the property, without executing numerous deeds over many years, or allowing co-owners to subsequently transfer or encumber the property.
Available Planning Tools
A number of options exist which offer advantages to families planning for succession of real property to subsequent generations:
- Family Limited Partnerships
- Family Corporations
- Family Limited Liability Companies
Trusts, partnerships and corporations all offer advantages which can solve the succession planning and tax issues referenced above. One of the most current and popular options, however, is a family limited liability company (“LLC”). Family LLCs are created with an operating agreement governing the voting powers of LLC owners (called “members”), restrictions on the transfer of members’ interests in the LLC (which thwart creditors’ claims), and a governance structure which makes it simpler to decide on such issues as use, sale, timbering and management of family property. –Gregory R. Davis