Can an Estate Plan Include a Right of First Refusal?

Gabriel Katzner - November 18, 2020 - Estate Planning
Estate Plan Include a Right of First Refusal

A right of first refusal (ROFR) is a legal tool that can be applied to an estate plan for specific properties under certain types of circumstances. The following example helps to illustrate the way this legal tool is used and why it might be appropriate for your situation.

Family Farm

Roger and Sally have owned a farm for many years. As they have entered their senior years, their youngest child of three, Bert, has helped them manage the farm. Over time, Bert has come to love the farm and does not want it to leave the family after his parents die. Roger and Sally would also like to keep the farm in the family, but neither of the other children have expressed in it. Roger and Sally have expressed to Bert that they want all three children to receive equal shares of their estate when they die. But the farm is worth well over 50 percent of the value of all of their accounts in total. As a result, they cannot just give the farm to Chet as his one-third share and will need to sell it so that the money and property can be equally divided.

Roger and Sally may be able to provide Chet with a ROFR, which would give Chet the opportunity to purchase the farm at the death of his parents as long as his offer meets the required conditions. 

Two Approaches to the Process

There are at least two approaches that Roger and Sally could take to give Bert a right of first refusal. First, they could have their estate planning attorney create a ROFR provision in their wills or living trust documents. This provision might say: “I instruct my Trustee to provide Bert 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 Bert does not exercise that right and does not enter into a contract to purchase the property after <x> number of days, this right terminates and my Trustee may accept the offer from the independent party.” 

Using this or slightly different language, the ROFR would allow Bert to match the other party’s offer, which should reflect the fair market value of the property. With this language in place, the other children know the property will be sold at fair market value and they will get the full value of their one-third share. Additionally, Bert will have an opportunity to purchase the property and own the land that has meaning beyond its monetary value.

If Bert does not exercise his right within the designated time period, he is not locked into any sort of obligation. He could allow his right to expire or could waive his ROFR to speed up the property’s sale to the independent party and still receive his one-third share.

If their circumstances change, Roger and Sally can amend their estate documents to remove this provision and maintain control over their farm property.

Contract Approach

A second approach involves a contract between Bert and his parents. If the farm was owned by Roger and Sally’s trust, the trustee would be a party to the contract with Bert. In the contract, Roger and Sally could grant a ROFR to Bert in exchange for an agreed-upon sum of money. Once the contract is signed, a Notice of Right of First Refusal could be made public, announcing that before the farm can be sold, it will have to be offered to Chet first.

This approach would apply if both parties wanted to make sure that the property will be sold to Bert and that his parents will not later be breaking a contract if they change their minds.

Get Competent Legal Assistance

A ROFR can help keep the property in the hands of those who value it most while allowing the owners to fairly distribute accounts among other loved ones. ROFRs must be carefully drafted or drafted as a contract in order to avoid causing more problems than they solve. An experienced attorney can provide guidance and expertise when creating a ROFR for your situation. Give us a call today to discuss ways we can leave your money and property to the ones you love. We are available for in-person and virtual consultations.

 

You can use the link below to schedule a call with Gabriel Katzner, or just call us at 855.528.9637 to learn more about how best to plan today to protect those most important to you





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