INTRO: The litigation I describe in this two-part series is a very unfortunate example of what can happen without proper planning and documentation between people who co-own real estate and/or a business.
Many people, like my clients, become "involuntary" co-owners by inheriting a fractional interest in an asset. In my clients' case, they inherited a partial interest in both a commercial property and a retail business.
Family members often become "involuntary" co-owners of real estate and/or a business by inheriting a fractional interest in an asset co-owned by other family members.
Proper planning and related documentation should be completed by the first generation of (voluntary) co-owners, ideally at the time an asset is purchased. Otherwise, this co-ownership can become very problematic - even if such problems don't arise until the death of a first generation co-owner.
This article features an interesting case on point. I'll summarize the background, illustrate the core legal issues and outline a lesser known legal remedy.
Basic facts (names changed): My clients are siblings, John, Jane and Judy, whose mother, Carol, died 17 years ago. For decades, Carol owned fifty percent (50%) of a commercial building with her brother, Sam. The family operated a retail business at the property, of which Sam long ago became 90% owner and Carol 10% owner.
It's unknown what amounts Carol received from Sam for her 10% of the business and for rent that should have been paid by the business to Carol and Sam, as equal owners of the property.
When Carol died, my clients inherited her 50% of the property and her 10% of the business. My clients' Uncle Sam continued to run the business and it seemed to be pretty successful. But Sam never provided any significant information to his nephew and nieces. He simply sent them each a small monthly check, without identifying whether these distributions were for rent and/or for business profits.
My clients are of modest means and could certainly have used more funds from their inheritance. But they loved their Uncle Sam and trusted he was being fair. As the years went by, the value of the property increased substantially and presumably so did the business profits. Yet, while purchasing a large home for himself and buying a nice home for his daughter, Sam did not increase distributions to my clients. My clients began to suspect they were not being treated equitably.
In recent years, my clients made numerous requests for a business accounting and other relevant information, but Sam gave excuses and failed to honor these requests. My clients became frustrated and finally asked Sam if he would buy their 50% of the property. Sam said he was unwilling to do so, and my clients felt as though they had no options.
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.
BUSINESS LEGAL SERVICES: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on prospective business purchase, business entity formation and general business counsel, including vendor contracts, customer contracts, independent contractor agreements, employee matters, acquiring another business, offering to sell and selling or gifting fractional interests in the business (e.g. fractional LLC membership interests or corporate shares), insurance matters, establishing business retirement plans, disputes or potential disputes with customers, vendors, employees, or selling the entire business.