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Can You Include A Right of First Refusal in an Estate Plan?

first right of refusal

Sometimes clients will ask their estate planning attorneys whether it is legal for them to include a Right of First Refusal (sometimes referred to as the First Right of Refusal) on certain items or on property. The good news is that this is possible as long as it’s carefully drafted by an experienced estate attorney.

Below we will discuss the ways that this legal tool may be utilized in your estate plan.

Example: A Family Farm

Ashley and Bernard have three children. They have owned, managed, and operated their family farm for decades. However, in their older age, their youngest son Clifton has been helping them out with managing and operating the farm. Over the years, Clifton has become emotionally attached to the farm, and for emotional reasons, he doesn’t want to part with it when his parents pass away. Clifton’s parents share his sentiment; however, he is the only one out of their three children who have expressed interest in owning the property when they pass away. In any event, Clifton’s parents have made it clear that they want their three children to share their property and assets equally when they die. As such, Ashley and Bernard cannot just give Clifton the farm as his one-third share.

One solution is to provide Clifton with a Right of First Refusal. This way, Clifton will have the opportunity to buy the farm when his parents pass away as long as his offer meets the terms and conditions of the Right of First Refusal.

Estate Documents

Ashley and Bernard’s goal to give Clifton the Right of First Refusal can be achieved in a couple different ways. First, they can insert the Right of First Refusal provision in a will or living trust. Specifically, a provision in the will or living trust may say something to the effect of “At my death, I instruct my Trustee to provide Clifton with the Right of First Refusal to purchase the family farm under the same terms and conditions as an independent third-party offer on the property. In the event Clifton fails to exercise his right and fails to enter into a contract to purchase the property, after 90 days, the Right of First Refusal will terminate, and my Trustee may accept the offer from the independent party making the initial offer.”

Practically, your estate planning attorney will need to draft a more precise and more detailed provision beyond this standard language. However, this is a general idea. Overall, the Right of First Refusal allows Clifton to make an offer for the family farm that matches the third party’s offer and will most likely reflect the fair market value of the property. Keep in mind, by doing it this way, Clifton’s siblings will be able to receive some assurance that the property will be sold at the fair market value and that they will each still receive the 1/3 share of their parent’s estate. Moreover, Clifton has a legitimate opportunity to purchase the family farm at a fair market value in obtaining ownership of the family farm.

Obviously, if Clifton does not exercise his Right of First Refusal within the 90 days provided by Ashley and Bernard, he is not locked into any obligation to purchase the family farm. Instead, the Right of First Refusal would simply expire. Alternatively, Clifton could waive his rights of first refusal to speed up the sale of the property to a third-party buyer. The main advantage to structuring the Right of First Refusal in the estate planning documents is that should the circumstances change in the future, Ashley and Bernard could amend the document to remove the Right of First Refusal provision. In other words, Ashley and Bernard will retain control over their property until death.

Contract Approach

Another way that Ashley and Bernard can grant Clifton the Right of First Refusal is to use a separate contract between themselves and Clifton. For example, if the family farm is owned by Ashley and Bernard’s Trust, the Trustee would be one of the parties to a contract with Clifton. In this separate contract, Ashley and Bernard could give Clifton the Right of First Refusal for an agreed amount of money. Once the contract is executed, a notice of Right of First Refusal may be recorded in the local county recorder’s office to make it a part of public records as to give notice to any buyer. This approach should be utilized if Ashley and Bernard are confident that they will not change their minds and they want to ensure that the property is sold to Clifton.

Get Competent Legal Assistance

A Right of First Refusal is a terrific way to ensure that your property ends up in the hands of your intended family member while at the same balancing your interest in distributing your property equally amongst several heirs. No matter how you choose to structure your Right of First Refusal, it must be drafted carefully by a competent and experienced estate attorney. Notably, a carelessly drafted Right of First Refusal can create a big headache for your family when you pass away. In any event, experienced estate attorneys like us can ensure that your Right of First Refusal is carefully drafted to meet your estate planning needs and goals.

Contact us today to discuss your estate planning options and to ensure that your property and assets are left to your family members according to your wishes.

For your convenience, we are available for both virtual and in-person consultations, depending on your preference.

James Dolenga, JD

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