When a family owns a property with significant financial or emotional value, deciding its future after the owners pass away can be complex. One family member may hope to keep the property in the family, while others might prefer to receive their share of the inheritance in cash or other assets. A right of first refusal (ROFR) can offer a practical way to balance these competing goals.
An ROFR gives a designated person the opportunity to buy a specific property before it is sold to an outside party. This right typically applies only after the owner has decided to sell. In many situations, it is triggered after an independent buyer has submitted a formal offer. The individual holding the right can then choose whether or not to match the terms of that offer and purchase the property.
This approach is particularly helpful when a parent wishes to treat their children equally while still giving one child a meaningful opportunity to preserve a family home, farm, business, or other important asset.
The following example illustrates how an ROFR works in practice. It also highlights several key issues families should carefully consider before including one in their estate plan.
The Family Farm
Allen and Betsy have owned and operated a farm for decades. As they have aged, their youngest child, Chet, has stepped in to help them manage the daily operations. Over time, Chet has grown deeply attached to the property and strongly desires to keep it in the family after his parents pass away. His two siblings, however, have expressed no interest in owning the land or participating in the farm’s management.
Allen and Betsy want their three children to receive equal shares of their estate. The challenge is that the farm accounts for more than half the value of their total assets. Consequently, it is nearly impossible to simply allocate the farm to Chet as his one-third inheritance without heavily shortchanging his siblings. Under normal circumstances, the farm would probably need to be sold so the proceeds could be easily and equally divided among all three children.
A practical solution to this dilemma is for Allen and Betsy to grant Chet an ROFR. Such an arrangement provides Chet with a formal opportunity to purchase the farm after his parents pass away. If the property is prepared for sale, Chet can step forward and buy it, provided he meets the specific requirements outlined in the ROFR.
Estate Planning Document Approach
There are multiple ways Allen and Betsy could structure an ROFR for Chet. The most common approach involves their estate planning attorney drafting an ROFR provision directly into their wills or living trust documents.
Instead of requiring the estate to list the property and wait for an outside buyer, this provision can give Chet the exclusive first option to purchase the farm before it ever goes on the open market. The planning documents can spell out exactly how much time Chet has to exercise this right after his parents pass away. They can also establish exactly how the purchase price will be determined, such as by relying on an independent professional appraisal, rather than forcing the family to wait and match a third-party offer.
This proactive approach provides clarity for everyone involved. The siblings are reassured that the property is being fairly valued based on the predetermined method. It also prevents the estate from addressing contingencies or extended closing dates that often accompany outside offers. Most importantly, it guarantees Chet a meaningful opportunity to secure the property he values so deeply.
If Chet decides against exercising his ROFR within the allotted timeframe, he is not locked into any financial obligation. He can simply allow his right to expire or officially waive it. At that point, the executor can list the farm for sale to the general public. Regardless of his decision, Chet will receive his full one-third share of his parents’ estate.
A significant advantage of placing the ROFR in a will or a revocable living trust is the flexibility it provides. Allen and Betsy retain the ability to modify or remove the provision while they are alive and have legal capacity. To avoid future confusion, the planning documents should always specify whether the right can be amended and exactly how those changes must be executed.
Contract Approach
The second approach involves creating a separate, legally binding agreement between Chet and his parents. This contract would clearly outline when Chet could exercise his right and exactly how much time he would have to make a decision. Just like the estate planning documents, this agreement can dictate whether Chet must match a third-party offer or has the initial option to purchase the property at a predetermined value, such as a formal appraisal.
In Wisconsin, the family may also be able to record a notice or memorandum in the county land records. This public notice alerts any prospective buyers that Chet holds certain preemptive rights that must be addressed before the property can be sold. Because these recording requirements vary widely by state, proper legal guidance is essential.
Unlike a will or a revocable living trust, a separate contract provides greater certainty for the beneficiary. Allen and Betsy could not simply change or revoke the agreement without facing the legal consequences of breaking a contract. However, a contract does not guarantee that Chet will ultimately buy the farm. He must still fulfill all the agreement’s requirements and secure the necessary funding to successfully complete the purchase.
Get Legal Assistance
Whether they are included in a will or trust or created through a separate contract, ROFRs must be carefully drafted. The rules vary by the state where the property is located and by the type of property involved. An experienced attorney in the state where the property is located can explain how the right should be created, documented, recorded, and enforced.
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Posted in: Estate Planning