What follows is a quick snapshot of these and related rights and agreements.

Options:

Options are most commonly found with relation to real property, and not personal property or business assets.  An option gives the option holder (called an Optionee) the right to purchase the subject real property and the right to compel the owner of the property to make the sale.  The Optionee has the discretion of determining when to agree to purchase the property (called “exercising the option”) so long as the option is exercised within the time specific in the agreement.  For instance, the agreement may give an Optionee five years in which to exercise the option.  If the Optionee attempts to do so after that time, the option will have expired, along with any rights it may have conferred.

Options can exist on their own or be made part of a lease or real estate purchase deal.  In a lease transaction, the landlord would grant the tenant a right to compel the landlord to sell the property at the tenant’s discretion.

Of all the rights I will discuss in this posting, option rights are the strongest.  The Optionee has the ability to acquire the property regardless of whether the owner wants to sell.  So long as the Optionee exercises the option in the appropriate time and pays the appropriate purchase price (which may be agreed-to later), the owner must sell.  For this reason, options ordinarily require payment, or consideration, in exchange for granting the right.  This is because the owner is giving up a significant right itself: the free alienability of the property.  The owner cannot freely sell the property once an option is attached.  To make up for this burden, the Optionee has to compensate the owner.  This compensation is over and above the price paid for the property, if the option is exercised.

Due to the fact this right costs the Optionee money out of pocket and because it significantly limits the owner, the parties may wish to pursue one of the following rights.

Rights of First Refusal:

Rights of First Refusal (ROFR) are common in both real estate and business law transactions.  A ROFR gives a party the right to purchase the subject asset IF the other party wishes or attempts to transfer the asset to a third party.

Applied to business law, rights of first refusal are critical if you have business partners.  Whether a true partnership, a corporation, or a limited liability company, the owners of those entities should square away what happens when any of them leaves, sells, or dies.  If the other owners want first crack at buying away the ownership from a third party, a ROFR is a vital solution.

Applied to real estate transactions, this gives the ROFR a weaker right than an option.  Unlike an option, an ROFR holder does not have the right to compel a sale.  The holder only has the right to buy the asset on the same terms as the third party is proposing to buy the asset.  Although this is weaker than an option, it still creates some barriers to the free alienability of the land.  If that is still a major concern for the property owner, the owner can avail itself of two other, less-commonly used rights, discussed below.

Rights of First Offer:

Even weaker than the ROFR is the Right of First Offer (ROFO).  A ROFO gives the right holder the right to present the owner of the property with the first offer price for the property prior to taking any other third party offers.  The trick is that the terms of the agreement restrict the owner from accepting any later third party offers that are the same price or cheaper than what the holder offered (the exact terms of which can be subject to negotiation).  The major limitation from the holder’s perspective is that the holder has to make an offer blindly, without knowing what third parties will be offering.  With the ROFR, the third party has already made an offer, and now the holder must match it.  The ROFO is obviously more advantageous to the property owner than the right holder.

Rights of First Negotiation:

Arguably the weakest of these rights is the Right of First Negotiation (ROFN).  The ROFN gives the holder the exclusively right to negotiate with the owner of the property for a set period of time if and when the owner decides to sell the property.  Although such an agreement would contain obligations to deal with each other in good faith, there is no affirmative obligation on the part of the owner to sell to the holder.  Obviously, this would be a disfavored right by any truly interested purchaser.

The outline above was intended to give you a small outline of some of the possibilities that are available in this area of law.  Each of these rights must be drafted with particularity and to avoid any ambiguity.  Chances are the holder will have these rights for years to come, so it is importantly it is done correctly at the beginning.  If you need any assistance with this complicated area of the law, contact our law offices.

One reason to split a trust after the first death, at least historically, had to do with tax savings.  This “A/B split” was designed to take advantage of the federal estate tax exemption at the time of both deaths.  Now, with the portability of the first spouse’s exemption, the A/B split is falling into disuse.  That being said, the law could change in the future, so you still need to plan around the contingencies.  But, this post is not about the A/B split.  This is about the other common split: the one between the Survivor’s Trust and the Marital Deduction Trust (also known as a QTIP Trust).

The purpose of the Marital Deduction Trust split is not really tax-driven, although it does affect estate taxes.  The purpose generally is the desire to exercise some dead hand control over your property after you pass.  By way of background, the federal estate tax laws allow your surviving spouse to pay zero dollars ($0) in estate taxes for anything you transfer to him/her outright at the time of your death.  This is the Marital Deduction.  The surviving spouse’s estate will probably have to pay estate taxes on this amount of the time of his/her death, but at least at the time of the first death, estate taxes are avoided/deferred.  To make the Marital Deduction work, however, the surviving spouse has to receive a non-terminable interest in the property.

In non-lawyer speak, that means the surviving spouse has to own the assets/property outright and can do whatever they want with it.  That includes bequeath it to the pool boy or girl.  If, however, you want your spouse to get this Marital Deduction, but you want to make sure that your property still goes to who you say it should after the surviving spouse dies, then the Marital Deduction Trust comes into play.  It takes advantage of a narrow allowance in estate tax law for claiming the deduction while still restricting the ownership of the assets.  For all assets in the Marital Deduction Trust, the surviving spouse cannot change who it goes to; the trust is irrevocable.  The surviving spouse can enjoy the income and some of the principle for his/her lifetime, but can’t transfer it to someone else.  In other words, the surviving spouse’s interest in the assets is no longer “terminable.”  That is where QTIP comes from: Qualified Terminable Interest Property Trust.

If this is something you want as a part of your estate plan, that is great.  But the problem comes if you did not want this as part of your estate and you find out you have a mandatory QTIP split only after the death of your spouse.  On top of the grief of losing a loved one, now you learn that half your stuff will be tied up for the rest of your life.  If that was not by intentional design on your and your spouse’s part, that can be a huge inconvenience, to say the least.

Whenever I draft or review a trust, I make sure to explain to clients the exact consequences of their plan and ensure that it reflects their wishes.  If you would like assistance in reviewing your estate plan or drafting one, please contact our law firm.  We serve clients all over the Northern California area from Modoc County to Yuba County.

Aaron elaborates on Independent Contractor Agreements while providing additional insight into best practices and noteworthy recommendations when entering a new agreement.

Governor Brown recently signed into law two bills that will allow California corporations to pursue “social or environmental goals” while at the same time focusing on the monetary earnings of their shareholders.  Both laws took effect on January 1, 2012.  In the past, the only option was a “for-profit corporation” (which is a standard corporation) where directors and officers had to make decisions based on what would best benefit the shareholders, even if it was at the expense of things like the environment or benefits to the public at large.

The Corporate Flexibility Act of 2011 is one of these new laws.  This Act allows for the formation of a new kind of corporation, referred to as the “Flexible Purpose Corporation.”  The directors of a Flexible Purpose Corporation choose one “special purpose,” such as providing products or jobs to an underprivileged community, and then the corporation must work to meet the goals associated with that purpose.  In its Articles of Incorporation, a Flexible Purpose Corporation must state its precise purpose and must outline the goals to be achieved.  It must also publish an annual report disclosing its progress in achieving those goals.

The second law, known as Assembly Bill 361, allows for the creation of a similar, but slightly different type of corporation, the “Benefit Corporation.”  In its Articles of Incorporation, the Benefit Corporation must describe one or more particular public benefits that would be the focus of the corporation.  Another defining element of Benefit Corporations is that in addition to listening to shareholders, the directors and officers must take the needs of the community, the environment, employees, and other groups associated with the corporation into account when making decisions.  And, in order to maintain this status, Benefit Corporations must go through periodic assessments by a third party to measure the corporation’s impact on society and the environment.

Both Flexible Purpose Corporations and Benefit Corporations are considered “hybrids” of for profit and nonprofit entities.  They are certainly “for-profit” entities, but they provide protection to directors and officers who pursue socially or environmentally beneficial objectives instead of making decisions solely based on projected corporate profits.  In the past, directors and officers would be subject to liability if unhappy shareholders saw the corporation’s purpose sway from maximizing profits, regardless of the reason.

If you already have a for profit corporation, and wish to convert to one of these new entities, you are able do to so.  An existing corporation can become either a Flexible Purpose Corporation or a Benefit Corporation, with a two-thirds’ shareholder vote.  If you have any questions about these new corporations or are interested in forming one, please contact us.

Aaron elaborates on trademarks and their descriptions within both Common and Federal Law.

Aaron elaborates on Internet & E-Commerce Law while providing additional insight into best practices and noteworthy recommendations.

Aaron elaborates on Estate Planning Documents while providing additional insight into best practices and noteworthy recommendations.

Aaron elaborates on Revocable Trusts in the State of California while providing additional insight into best practices and noteworthy recommendations.