Family Property Partnership

Anna is calling because her husband and some other family members want to keep a property in the family. They've all signed a purchase contract except her husband. Should he sign it?

QUESTION: Anna in Salt Lake City is calling because her husband’s grandmother owns some land. She had it up for sale, but her husband and some other family members want to keep it in the family. They’ve all signed a purchase contract except her husband. They’re waiting on him to finish this. Should he sign it? Dave says most of these situations go bad.

ANSWER: There’s more downside than upside. Most of these things go bad. My first advice is don’t do it. That’s going to be very unpopular because they all think it’s going to work perfectly, and they’re all young, naïve, and immature and they think it’s all going to work perfect, and they’re wrong. The thing you can’t see coming is all the bad stuff in life. When it happens to one of them, then the others have to pick up the slack. For example, your husband’s cousin raises a kid who gets drunk at 16 years old and hits somebody head-on. You are liable for the actions of your children, and so the $500 million lawsuit will be placed against the cousin and everything that he owns, including this property, and the property will be lost. In a bankruptcy, a beneficial interest in a trust is subject to bankruptcy court. If you’re an individual and you get sued as an individual and you have the beneficial interest in a trust, that beneficial trust in the trust is open game.

You’re probably not going to break the news to them, because they truthfully have no idea. What happens when the other brother gets a divorce and his wife is awarded his half of the cabin or his fourth of the cabin? How pleasant is that vacation stay going to be with her hanging around? They have not thought of any of these things. This is a bad idea. It’s really going to end up being a problem later on. I would rather you not be in it. However, if you are going to go into it, at least slow down enough to have an attorney draw up a full-on partnership agreement and put the thing in an LLC—a limited liability company. Have a detailed partnership agreement. What happens in the event of…? All the “Ds” is what I call them: default, divorce, disability, drug use, disinterest. You plan every possible negative thing that can happen, and you put it in that document how the partnership is going to deal with this in the event of that.

They haven’t thought of any of this stuff yet. Figure out all the possible downsides and cover for them. You’ll need an attorney to help you do that. Draw a partnership document for the operation of the LLC interests. That’s the only way I would even think about doing this, and I think you’re going to have a problem. If it were me, I wouldn’t do it, but I don’t think there’s any talking these guys out of it, so at least try to put something in place that covers everybody when this stuff happens—not if it happens. Because it will happen.