One baffling question when dealing with Wills and Estate Plans is what should happen to your residence when you die. If one of your children expresses an interest in buying it and you agree, how do you incorporate that desire into the Will? The question is not limited to your home. There may be a favored vacation property in the mountains or down the shore that one child wants to keep and pass on to her or his heirs. One option is to write into your Will an option referred to as a “right of first refusal” that gives your child the ability to state she or he wants first to have the opportunity to buy the property from your estate.
Note that a right of first refusal is not the same as giving the house to your adult child. In most cases parents want to divide their property equally among their children on their passing. If the parent gives the child the property in her Will that usually means the remaining children receive a smaller portion of the estate. If that is the parent’s wish that is fine but usually parents want to divide equally among the children.
A right of first refusal means that, before the property is placed on the market, the designated person can buy it from the estate. The funds could come from a number of sources. One possibility is the adult child could take a smaller share from the other assets of the estate thereby “rebalancing” the estate. Another choice is to take out a loan. There are even cases where a child borrows from her own property either by placing a mortgage or a home equity line of credit (HELOC) on her current residence. If a right of first refusal is being reviewed as a possibility one important consideration is to establish clear guidelines so that the executor of the estate is not left to decide how and when the option is to be exercised.
Timing. When should the right be exercised? The executor should not need to determine what is a reasonable time. Frequently in documents prepared by our office we give a time period not to exceed 3 months from the date of a parent’s passing to state in writing the desire to exercise the right. Three months is the time period in Pennsylvania during which prepayment of Pennsylvania inheritance tax needs to be made to take advantage of the 5% discount. However, it would also be reasonable to designate a shorter time. Not to exceed nine months to settle is another possible benchmark since that is when Pennsylvania expects Inheritance Tax Returns to have been filed and final payment made.
Property Maintenance. Does the person who wants to exercise the option currently live in the house? For a reasonable period of time the estate might carry costs associated with the property or not. This decision should be stated in the Will. It may also be a good idea to have someone other than the person
exercising the option named as either the decision maker or executor of the estate so the child exercising the option would not need to make decisions regarding herself.
Price. One means to determine the “sale” price of the property is to require at least two fair market value appraisals by persons certified as residential real estate appraisers in the area and then take the average of the appraisals. One appraisal could be ordered by the person exercising the option and the other by the estate. This procedure should be written into the Will.
Mortgage. Another consideration is whether there is already a mortgage on the house. If so, in order to transfer title the adult child may need to satisfy the lender and pay off the mortgage or refinance. One consideration is finances. Will the person exercising the option have enough to meet monthly payments and is his credit rating good enough to obtain a mortgage in his own name?
Family Settlement Agreement. In handling the estate, all of this should be memorialized in a Family Settlement Agreement when the estate is being settled. A good estates/elder law attorney can prepare this for you. The Family Settlement Agreement includes an informal accounting whereby all beneficiaries agree and sign off on the results.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.