What are some solutions to trust disputes?
Some parents envision that their children or grandchildren will happily enjoy the legacy of the family homestead. Others may have invested the bulk of their net worth in real property, leaving little else to pass along to the family. The expectation that a family will be peaceful co-owners of real property is unrealistic. In these situations, the beneficiaries will need procedures for avoiding or terminating co-ownership of the real property.
One approach is to sell the real property and divide the proceeds. This approach has the virtue of avoiding controversy over an uncertain value; the property’s value is determined on the open market. Any beneficiary who believes that the property is being sold at too low a figure can be a bidder. The disadvantages of this approach include the costs of sale (e.g., the real estate broker’s commission), and income taxes on gain in value over the tax basis. Furthermore, this approach will not be satisfactory to a beneficiary who has an emotional attachment to the property.
Another approach is for the beneficiary who wants to retain the property to buy the others out based on an appraised value. This approach avoids the broker’s commission but still involves potential income tax on the gain over tax basis on the interests that are sold. Furthermore, the appraisal process may pose its own problems. Will the beneficiaries accept the appraisal that was prepared for the estate tax return as definitive? If there is going to be a new appraisal, how will this affect the valuation used on the estate tax return? Can the adversaries agree on a single appraiser or will some more complicated process be necessary? Who will pay the cost of the appraisal? Finally, this approach may not be feasible if the purchasing beneficiary is unable to fund the purchase price, whether by using his or her own resources, by trading his or her interest in other estate assets, or by obtaining financing on the real property.
A third approach is to conduct an auction among the beneficiaries. The beneficiary making the highest bid buys out the others. This approach avoids a broker’s commission, potential disputes over the appraisal process, and the cost of an appraisal. However, it requires the adversaries to agree on an auction procedure, e.g., whether the auction should be conducted by sealed bids or open bidding. Because the effect of an auction is for one beneficiary to buy out the others, this approach involves potential income tax on gain.
Suggestions Regarding the Dividing of Property with Emotional rather than Economic Value
Trust disputes often involve fights over who should get what estate property. In a common scenario, the parties negotiate vigorously over the division of hundreds of thousands of dollars of property before grudgingly reaching a settlement. Then, almost as an afterthought, the discussion turns to disposition of a few items of miscellaneous personal property. Within minutes, the settlement has fallen apart because each side demands that a certain furnishing or other tangible object with emotional value be distributed to himself or herself. When this happens, it can be very difficult to get the settlement back on track. Each side has committed itself to its “final” dollar figure and is unwilling to make a dollar value adjustment to “buy” the valueless item. Yet each side refuses to give the other side a psychological victory by yielding. The valueless item becomes the lightning rod for lingering resentments and the settlement vaporizes due to an impasse over bric-a-brac.
The way to avoid this negotiation trap is to bring items with emotional value into the settlement discussions at the very first offer. A written list should be used, with an express allocation of all items not expressly listed (“Items 1 and 2 to Party A; all other personal effects to Party B”). In this way, as the economic settlement is hammered out, these items will already have been dealt with.