Benjamin Franklin is credited with the oft-repeated saying, “If you fail to plan, you are planning to fail.”
This statement is very realistic in its application to the long-term ownership and management of family properties. Many clients have fond memories of time spent with their families at the family property, whether that property is farmland, hunting land, or a cottage. Clients envision their children continuing the traditions that they formed together at the family property.
Melissa S. Kampmann, U.W. 2003, is a shareholder in Ruder Ware’s, Trusts & Estates Practice Group, where she concentrates her practice in the areas of family business succession planning, estate planning, estate and trust administration, and tax exempt organization planning. She also serves as trustee of family trusts through Ruder Ware’s Fiduciary Services Department.
Shanna N. Yonke, Minnesota 2012, is an associate attorney in Ruder Ware’s Trusts & Estates Practice Group, where she concentrates her practice in the areas of family business succession planning, estate planning, and estate and trust administration. She also serves as trustee of family trusts through Ruder Ware’s Fiduciary Services Department.
However, many problems arise if families do not create a plan for the future ownership and management of the family property.
The Result of Failing to Plan
What happens if you fail to plan for the future ownership and management of the family property?
A family member’s interest in the property may be subject to the claims of his or her creditors. A family member may transfer his or her interest in the property to a nonfamily member, free of any restriction. A family member may fail to pay for his or her share of property expenses, and the only recourse may be to sue the family member in order to recoup expenses. Multiple people means multiple income and asset levels, tastes, preferences, and personalities. This often leads to discourse when decisions arise.
In any conflict involving co-owners of property, the most commonly-employed legal remedy is a partition action if prior negotiations fail. Under Wis. Stat. chapter 842, a partition action involves one or more co-owners suing the remaining co-owner(s) and requesting a physical division of the property or a sale of the property. Oftentimes, physical division of the property in an equitable manner is impossible, leaving a forced sheriff’s sale of the property as the only option. Either result is unwelcome and undermines the intent of maintaining the family property.
Succession Planning for the Family Property
If your clients are intent on maintaining the family property for many generations, it is imperative to engage in planning for the future of the ownership and management of the property. Clients should include any family member in the future generations who wishes to be involved in maintaining the family property.
The most common form of ownership is a limited liability company (LLC). Depending on the goals of a particular family, a trust may be the better selection but most often LLCs are used for their flexibility. Each family situation will dictate the terms of the LLC’s operating agreement. Families should consider and incorporate rules governing the management of the LLC, the process for making decisions and who the decision makers are, transferability of an owner’s interest and the price to be paid for an owner’s interest on transfer, payment of annual expenses, and processes for scheduling use of the property.
When clients engage their families in a planning process that results in the creation of an LLC to hold their family property, they are readied for success in the long-term ownership and management of the family property. A well-reasoned plan, coupled with the enrollment of future generations of family members in the plan, eliminates or minimizes the risks associated with the common ownership of property.
This article was originally published on the State Bar of Wisconsin’s Real Property, Probate and Trust Law Blog. Visit the State Bar sections or the Real Property, Probate and Trust Law Section web pages to learn more about the benefits of section membership.