At first glance, calculating the value of a decedent’s elective estate may seem somewhat straightforward. However, experienced probate practitioners know that this calculation is far from easy, particularly when the decedent held interests in jointly owned businesses at the time of death.
A sticking point is often the proper valuation of the decedent’s interests in jointly owned corporations. For instance, the personal representative may assign a lower value to these interests than the surviving spouse deems appropriate. In such an instance, the surviving spouse must file an objection to preserve his or her right to contest the valuation. Business valuation experts routinely employ large discounts when determining the fair market value of the decedent’s factional interests in businesses. More particularly, minority/lack of control and lack of marketability discounts are frequently utilized to lower the value of these interests. The percentages utilized are very subjective and open to expert debate.
The plot thickens when the sole asset of a company is real estate. Logic dictates that when the sole asset is real estate, the fair market value of the property would control the value of the company and the decedent’s interest. For instance, if the decedent owned 50 percent of 123 Main Street Corp., and the sole asset of that corporation is real property with a date of death value of $2 million, one could assume that the fair market value of the decedent’s one-half interest is $1 million. This is not necessarily the case.
If a company is owned 50-50, technically the valuation is of a minority/noncontrolling interest. A controlling interest is typically more valuable than a noncontrolling interest. Additionally, despite the fact that no sale is actually taking place, the expert can examine the marketability of the interest as of the decedent’s date of death. This takes into account the degree of difficulty associated with selling a fractional interest in an entity, among other factors. But, because marketability and minority/lack of control discounts in this context are based on expert opinions about a theoretical market (which in actuality doesn’t exist), a wide range of discounts may be plausibly asserted. For instance, 10- to 40-percent discounts are routinely used.
Florida courts have discretion to determine whether marketability or minority discount should be applied. However, the law is scarce on this exact issue—applying discounts to single asset real estate companies. Nevertheless, courts in other states (New York in particular) have held that the unavailability of discounts is apt where the business consists of nothing more than ownership of real estate. In such an instance, courts have found that the value of the interest equals the amount the individuals would receive if the property were sold at arm’s length. Other courts have flat out held that where the subject holding consists solely of real property, a discount for lack of marketability should not be applied.
Whether discounts should be applied to real estate holding corporations for purposes of calculating the value of the elective estate is still up for debate in Florida. If faced with large discounts in the elective estate, you should not concede these values as a surviving spouse, as these interests may have a huge financial impact on the value of your elective share. A surviving spouse should always consult with legal counsel when seeking to obtain his or her elective share.
Jeffrey M. Fauer is a director at Tripp Scott in Fort Lauderdale. His practice focuses on trusts, estates and fiduciary litigation.