Can an Estate Plan Include a Right of First Refusal on Property?

When a family owns property with significant financial or sentimental value, deciding what happens to it after the owners pass away can be complicated. One family member may wish to preserve the property for future generations, 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 interests.

An ROFR gives a designated individual the opportunity to purchase 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 cases, it is triggered when an independent buyer submits a formal offer. The person holding the right can then decide whether to match the offer's terms and purchase the property.

This approach can be especially helpful when parents want to treat their children equally while giving one child a meaningful opportunity to preserve a family home, farm, business, or another important asset.

The following example demonstrates how an ROFR can work in practice and highlights several important considerations families should address before incorporating one into their estate plan.

The Family Farm

Picture this situation. Allen and Betsy have owned and operated a farm for decades. As they have grown older, their youngest child, Chet, has taken on more responsibility for the farm's daily operations. Over time, he has developed a deep attachment to the property and strongly hopes to keep it in the family after his parents pass away. His two siblings, however, have expressed no interest in: 

• Owning the land

• Helping manage the farm

Allen and Betsy want all three children to receive equal shares of their estate. The challenge is that the farm represents more than half the value of their total assets. As a result, leaving the entire farm to Chet as his one-third inheritance would significantly shortchange his siblings. Under normal circumstances, selling the farm would likely be necessary to divide the proceeds equally among all three children.

One practical solution is for Allen and Betsy to grant Chet an ROFR. This arrangement would give him a formal opportunity to purchase the farm after his parents pass away. If the property is prepared for sale, Chet can exercise his right to buy it, provided he satisfies the specific requirements established in the ROFR.

Estate Planning Document Approach

Allen and Betsy have several options for structuring an ROFR for Chet. One common approach is to have their estate planning attorney incorporate an ROFR provision directly into their wills or revocable living trust documents.

Rather than requiring the estate to list the property and wait for an outside buyer, the provision could give Chet the exclusive first opportunity to purchase the farm before it is offered on the open market. The estate planning documents can establish exactly how much time Chet has to exercise this right after his parents pass away. They can also specify how the purchase price will be determined, such as through an independent professional appraisal, rather than requiring the family to wait for and match an offer from a third-party buyer.

This proactive approach provides several benefits for everyone involved:

• Fair Valuation: Chet's siblings can have confidence that the farm will be valued fairly according to a predetermined method.

• Fewer Complications: The estate can avoid contingencies and extended closing timelines that often accompany outside offers.

• Opportunity to Preserve Family Property: Chet has a meaningful opportunity to acquire the property that means so much to him.

If Chet decides not to exercise his ROFR within the allotted timeframe, he is not locked into a financial obligation. He can simply allow the right to expire or formally waive it. The executor can then 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.

One significant advantage of including an ROFR in a will or revocable living trust is the flexibility it offers. Allen and Betsy retain the ability to modify or remove the provision while they are alive and have legal capacity. To prevent confusion later, the estate planning documents should clearly state whether the right can be amended and specify exactly how any changes must be made.

Contract Approach

Another option is to establish a separate, legally binding agreement between Chet and his parents. This contract would clearly define the circumstances under which Chet could exercise his right and the timeframe within which he must make a decision. As with an ROFR included in estate planning documents, the agreement can specify whether Chet must match a third-party offer or receives the initial opportunity to purchase the property at a predetermined value, such as one established through a formal appraisal.

Depending on state law, the family may also be able to record a notice or memorandum in the county land records. This public notice alerts prospective buyers that Chet holds certain preemptive rights that must be addressed before the property can be sold. Because recording requirements vary significantly by state, obtaining appropriate legal guidance is essential.

Unlike a provision in a will or revocable living trust, a separate contract generally provides greater certainty for the beneficiary. Allen and Betsy could not simply change or revoke the agreement without potentially facing the legal consequences of breaching a contract. However, the agreement does not guarantee that Chet will ultimately purchase the farm. He must still satisfy all contractual requirements and secure the necessary funding to complete the purchase successfully.

Get Legal Assistance

Whether established through a will or trust or created through a separate contract, rights of first refusal must be carefully drafted to address the family's specific circumstances. The applicable rules vary by:

• The state

• The type of property involved

An experienced attorney in the state where the property is located can explain how an ROFR should be created, documented, recorded, and enforced.

Contact our team here at Strauss Attorneys to discuss how we can help you develop an estate plan that protects your hard-earned money and property while ensuring your assets are passed on to the people you care about, according to your wishes. Whether you are creating an estate plan for the first time or updating an existing plan, we can help you explore your options and determine the approach that best supports your family's needs.