When a family owns property with significant financial or emotional value, deciding what should happen to it after the owners pass away can be challenging. One family member may hope to keep the property in the family, while others may prefer to receive their inheritance in cash or other assets. A Right of First Refusal (ROFR) can provide a practical way to balance these competing goals.
An ROFR gives a designated person the opportunity to purchase a specific property before it is sold to an outside buyer. In many situations, the right is triggered after a third party submits a formal offer, allowing the holder of the ROFR to match those terms and purchase the property instead.
This approach can be especially valuable when parents want to divide their estate equally among their children while still giving one child the opportunity to preserve a family home, farm, business, or other meaningful asset.
The Family Farm
Consider Allen and Betsy, who have owned and operated a family farm for decades. As they have grown older, their youngest son, Chet, has become heavily involved in managing the farm and hopes to keep it within the family. His two siblings, however, have no interest in owning or operating the property.
Allen and Betsy want all three of their children to inherit equal shares of their estate. Unfortunately, the farm represents more than half of their total assets, making it impossible to simply leave the farm to Chet without unfairly reducing his siblings’ inheritances.
A practical solution is to give Chet a Right of First Refusal. This would allow him the first opportunity to purchase the farm after his parents pass away before it is offered for sale to the general public.
Estate Planning Document Approach
One of the most common ways to establish a Right of First Refusal is by including it directly within a will or revocable living trust.
Instead of immediately listing the property for sale, the estate planning documents can grant Chet the exclusive first opportunity to purchase the farm. The documents can clearly define:
- How long Chet has to exercise his right.
- How the purchase price will be determined.
- Whether the value will be established through an independent appraisal rather than relying on outside offers.
This approach provides clarity for everyone involved. Chet receives a fair opportunity to purchase the property, while his siblings are assured that the farm is being valued using an objective and predetermined process.
If Chet decides not to purchase the farm within the specified timeframe, he simply allows the Right of First Refusal to expire. The executor may then sell the property on the open market, and Chet still receives his equal share of the estate.
Another advantage of incorporating the Right of First Refusal into a will or revocable living trust is flexibility. While they remain alive and legally competent, Allen and Betsy can amend or remove the provision if their circumstances change.
Contract Approach
Another option is for Allen and Betsy to create a separate legally binding agreement with Chet.
This agreement can specify:
- When the Right of First Refusal becomes effective.
- How long Chet has to decide whether to purchase the property.
- Whether he must match a third-party offer or purchase the property based on a predetermined appraised value.
Depending on state law, the family may also be able to record a notice or memorandum in the county land records. Doing so alerts future buyers that Chet possesses certain rights that must be addressed before the property can be sold.
Unlike a provision in a will or trust, a separate contract generally offers greater certainty for the beneficiary because it cannot simply be revoked without potential legal consequences. However, Chet must still satisfy the terms of the agreement and obtain the necessary financing if he chooses to purchase the farm.
Get Legal Assistance
Whether a Right of First Refusal is created through a will, revocable living trust, or a separate contract, it must be carefully drafted. The laws governing these arrangements vary by state and by the type of property involved.
An experienced estate planning attorney can explain how a Right of First Refusal should be created, documented, recorded, and enforced based on the laws where the property is located.
If you have questions about protecting family property or incorporating a Right of First Refusal into your estate plan, contact us. We can help ensure your hard-earned assets are transferred to the people you care about in the manner you intend.
