6 April 2009 version The following describes three broad mangement schemes that could be used to dispose of 1489 Commonwealth. All of the scenarios assume a goal of equal distribution of all of Earl's assets (minus whatever he gives to charity). For sake of argument, in what follows I will assume that Earl will bequest his children a total of $3 million in assets, consisting of $2.2 million in "liquid" assets (cash, bonds, stocks) and $800 thousand tied up in 1489. Briefly, the major points of these 4 alternative schemes are: 1) Daniel get's full possession, compensates other siblings for difference in value. Daniel get's to do whatever he wants with the house, including sell it. He can will it to whomever when he dies. 2) Daniel get's controlling interest (50.1%), other kids have minor interests. Daniel is decision maker regarding house, but other kids have certain rights. If the house is sold, proceeds are divided as 1/2 to Daniel. 1/8 each to four other siblings. A sibling can asked to be bought out at any time. These shares are inheritable, with the same rights enjoyed by the inheritors. 3) Equal division, with Daniel as treasurer. Decision making is by majority rule. Mangement rotates, with Daniel responsible if everyone else refuses the job. If the house is sold, proceeds are divided evenly. A sibling can ask to be bought out at any time These shares are inheritable, with the same rights enjoyed by the inheritors. 4) Equal division, with Daniel as effective manager. This is similar to #3 above, but assumes Daniel is the only one really interested in the house, so he gets to manage it forever. Or until he is deposed by joint vote of all other siblings. Daniel would be responsible for paying expenses, unless some other sibling was living in the house. Siblings would always have the right to stay (as in #2 above). On sale of the house, money gets divided equally. These shares are inheritable, with the same rights enjoyed by the inheritors. My opinion (at this moment in time, I haven't thought this through nearly enough) (1) Unless side deals are made, I am leery of (1) (full ownership by me). And likely side deals convert (1) into (2)! (2) (Daniel majority owner) is my preference. (3) (equal ownership) might work, but may be more complicated than necessary. (4) is probably too idealistic. So I won't comment on it. But if you guys can live with this unequal division of wealth (Daniel can be seen as getting more), I can think about the details some more. In any case, inheritance issues need to be more carefully considered. Note that I am assuming that the house will NOT go to charity on the death of everyone. Tax note: From http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States ..... there is a unified credit against the tentative tax which effectively eliminates any tax on the first $3,500,000 of the estate (or the first $3,500,000 on a combination of taxable gifts during lifetime and a taxable estate at death), Thus, no inheritance tax on estates < 3.5 million. In greater detail. Of course, these are just ideas. I am not wed to any of the details. 1) Daniel gets full possession, and makes up difference with other kids. Using the above assumptions about house and liquid asset values Daniel recieves house. All others recieve 1/4 of $2.2M = $550k Daniel owes each and everyone $50K Daniel has 1 year to pay each and everyone their $50k. If Daniel can work out alternate deal with any of the other siblings, no problem. This implies that if he can't come to an alternate arrangement, and can't find the necessary $50k payment(s), he sells the house and uses the proceeds to pay everyone off. It is likely that Daniel would like to come to alternate arrangements. Here is an example of such an arrangement: Seth agrees to forgoe payment of $50k in exchange for: i) 0.02*50k= $1000/yr "rent". This is based on some fraction what he would get if the $50k was in a bank (not the whole fraction, since .... ii) If the house is sold, Seth recieves 1/16 (50/800) of the profits (the selling price of the house minus realtor and other transaction costs) 2) Daniel as majority owner Again, using the above assumptions. Daniel recieves $200k and a 50.1% interest in the house. Let's simplify and call it 50% with a tiebreaker right. Everyone else recieves $500k and a 1/8 interest in the house. Note: in the appendix I recalculate this scenario using different numbers (smaller cash inheritance). Daniel's rights and responsibilities: All bills (real estate tax, insurance, etc) are Daniel's responsiblity to pay (perhaps as the principal partner of a partnership that owns the house?). Daniel has decision making rights over the house. This includes: a) whether to rent it out b) which rooms siblings get if they move in (see below) c) the timing and type of maintenance Siblings rights and responsiblities: The right to stay in the house whenever needed. They may not get their choice of rooms, but they get a bed room (and "roommate" rights to common areas). Howver, if the house is rented this right can not be exercised. But see belowfor "first refusal" rental rights The right to sell their share to the remaining siblings. If these remaining siblings can not come up with the money for this "buyout payment" in a reasonable time frame (say, 4 months), then the house must be sold within a reasonable time frame (say,an additional 4 months after this initial 4 months). Note that the "remaning siblings" can divide this buyout payment in any way they chose. However, Daniel has first right of refusal, he can purchase the selling sibling's share and keep it for himself. If he doesn't exercise that right, then the other siblings (perhaps including Daniel) can negotiate a split of costs and shares. If they fail to negotiate an agreement, the house will be sold. Upon sale of the house, for whatever reasons, the siblings get a share of the profits. Daniel get's 1/2 All other siblings get 1/8 (This assumes that no one has sold their share to another sibling. If that happens, adjust accordingly) Further details: a) Daniel gets to chose if/when to rent the house. However, any siblings (perhaps one who is living in the house) has first right to rent. This rent will consist of all expenses. During this "rental", the other sibling's rights remain (the right to stay), but the renting sibling now has decision making authority over who gets what room (for as long as the "rental" shall last, where Daniel get's to renew or terminate on a yearly basis) Or, s/he has a reasonable time (say, 3 months) to move out. Of course, such an act by Daniel (imposing a 3 month deadline) would not be a happy outcome, and one would hope that such a situation never arises. b) Proceeds from hosue rental. All proceeds go into an account that will be used to pay house related bills. This can include property taxes, insurance, necessary maintenance, and management fees. Note that Daniel is responsible for paying these expenses, and managing the house (i.e.; selecting a management firm). Any unspent money will remain in the account, to be distributed when the house is sold (using the same shares as used to distribute the profits from the sale of the house). Alternatively, if a sibling exercises his right to be bought out, s/he will recive a share of this account in addition to his buy out payment. c) The buyout payment. Buyout payments will be determined via a fair market value appraisal. This appraisal will be paid for by the sibling demanding the buyout. In event of a disagreement, Daniel (or other siblings) can obtain a second appraisal. If the two are substantially different (greater than 10%), and the disagreement stands, a third appraisal will be obtained and the average of the three used. d) Payment of expenses. Payment of expenses depends on who is living in the house i) House is rented. Expenses will be paid from the "account". Daniel is responsible for any shortfalls. He can ask other siblings to share. They can refuse. If Daniel is unhappy, he can demand a buyout from the other siblings; with sale of the house should the other siblings be unable to pay these expenses. Note that upon the date that Daniel requests a buyout, all further expenses will be shared equally amongst all siblings, or deducted against the sale price of the house (to pay back Daniel's payment of these expenses). ii) One sibling is living in the house. S/he pays all expenses (prorated by month). If the sibling does not pay (for any reason) some or all of these expenses, Daniel is responsible for making up up the short fall. In exchange, Daniel recieves a credit for this amount that can be cashed in on sale of the house (cashed in against the not-paying-expenses sibling's share). Actually, this credit will grow at the prevailing inflation rate. For example: $1000 shortfall in 2015 (Debby can't make expenses) House sells in 2020 25% inflation between 2015 and 2020 Then, Daniel recieves 1.25*1000= $1250 of Debby's share of the profits iii) Several siblings are living in the house. Expense are divided evenly. If Daniel is living in the house, he pays for 2 shares (one for himself, and one for his managerial rights). For example, if Daniel and Nat are living in the house, Daniel pays 2/3 of expenses Nat pays 1/3 of expenses Note that a sibling and a spouse/SO/whatever count as one share (basically, one room per share) Kids count as extra shares, and have no strong rights (they can be kicked out if a room is needed). As in b) above, failure to pay expenses means that Daniel has to pay, and recive a credit. iv) Forced buyout. Daniel may, at any time, force any other siblings to sell his shares to him. The price shall be 166% of the value determined by appraisal. For example, if the house is appraised at $800k million, then a 1/8 share is $100k, so Daniel would pay $166k to whomever he is buying out. v) A sibling who sells his share no longer has any rights. In particular, he has no "right to stay". A sibling who is "forced" to sell his share has "rights to stay" so long as more than one person has shares in the house. Thus, if Daniel (or perhaps some other sibling) were to obtain all the shares, s/he owns the house completely, and this scheme dissolves. In other words, its all his house, and he does NOT have to let anyone stay. vi) Massive failure to pay expenses. In the unlikely event that a sibling's unpaid expenses grow to be the size of a "forced buyout", Daniel (or whomever) can impose a forced buyout. At that point, if the sibling wants to stay in the house, they MUST pay expenses. That is, they have a right to stay but only if they pay their share of expenses. 3) Shared ownership Again, using the above assumptions. Everyone recieves $550k. Everyone recives a 1/5 share of the house. Everyone's rights and responsibilities: A "manager" is selected with a term of 2 years. The first manager is Daniel After that, the office rotates to whomever is willing following the order: Daniel, Seth, Nat, Debby, Marc (or whatever). The person it rotates to can refuse the honor, in which case it rotates to the next person on the list. If everyone refuses, Daniel has to accept. Reiterating: the term of office lasts for two years. As described in scheme 2 (above), while someone is manager, he is responsible for all decisions and payment of expenses. Otherwise, the scheme is the similar to the above. a) The "right to stay", the "sharing of expenses", and the "right to demand buyout" remain the same as described in scheme 2 (above). b) If the other siblings are unhappy with whomever is the current manager, they can vote him out of office. This requires all 4 (or remaining) siblings to agree who should be the new manager, who then will be manager until the two year term expires. c) Possibly the only real advantage of being the "manager" is having your choice of rooms, should you be sharing the house. But while manager, you have to assume an extra share of expenses (as described above) if you are sharing the house. d) If no one wants to be manager, Daniel is stuck with the job. If he doesn't like it, he can demand a buyout (with house sale occuring if the other siblings can't find a way to buy him out). e) There are no forced buyouts. With one exception: should unpaid expenses become as large as the share of the "appraised value", then the sibling no longer can stay for free (he must pay expenses if he wants to stay in the house). ================================ Appendices Appendix 1: Recalculation of scheme 2 (Daniel as principal owner) with new numbers This works with scheme 2, Daniel as majority owner. But it assumes the more realistic scenario where Earl gives 1/2 million to charity (still assuming that the total estate value is 3 million including house). Assumptions: 2.2 million dollars. 800k in house 500k contribution to charity. This yields inheritance of 1.7 million dollars 800k in house So total value to each sibling = 2.5= $500k This would be divided up in the following manner: Daniel: 1/2 house (worth $400k) $100k Other Siblings: 1/8 house (worth $100k) $400k Nothing changes in the management. Daniel has same rights/responsibilities/powers; other siblings have same rights/responsiblities/powers. But we all have $100k less. Since for Daniel the drop from $200k to $100k is proportionately large, an alternate proposal is worthy of consideration: Alternate: Daniel: 45% of house (worth $360k) $140k Daniel Other Siblings: 13.75% (worth $110k) $390k That changes things a bit. Basically, Daniel is manager unless deposed by a joint vote of ALL the other siblings (3 of them wouldn't be enough). He still would have basic rights (right to stay, right to demand buyout); and the other siblings would have to come up with a manager. And if Daniel can convince one of the siblings to desert the cabal and join him, he takes control again. Isn't politics fun! ---------------------------------------------------- Daniel Hellerstein danielh@crosslink.net -----------------------------------------------------