Estates, Wills & Trusts

Defusing Emotional Timebombs

When is a Dollar not equal to a Dollar? For those who have dealt with estate or trust distributions, it is found in the difference in the theoretical value and the true value received in distributions. Would you prefer $1,000 in cash or $1,000 in the present value of a US Savings Bond? Both are worth $1,000, but the US Savings Bond has "built-in" accumulated taxable interest. Knowing that you will have to pay income tax on the accumulated interest, are the values the same?

Should each beneficiary receive exactly the same in value, or is adjustment in value warranted in some cases? For example, it is said that the law favors a distribution "in kind." Suppose there are exactly equal amounts of cash and "blue-chip" stocks. Also imagine that two beneficiaries are to divide the assets equally. One decides to take cash, the other the stocks. Is this the equivalent? Arguably, the recipient of stock must sell, pay a transaction fee (commission) before having cash in hand. Leaving out the market fluctuations, that transaction fee will be due someday, and an appropriate adjustment should be made now to truly equalize the distribution.

Real estate and appraisal issues are a bit more complex, but essentially the same sort of issue. Real estate appraisals are made by the compilation of sales amounts for similar properties, then extrapolated to apply to the subject property. The reported sales figures are the gross sales price, not the net after sales agent/broker commissions. The appraisals therefore inherently overstate the "true value" to the estate. If a particular beneficiary wants a particular piece of real property instead of cash, is the appraisal amount appropriate for distribution purposes? Generally no, because in like fashion to the stock, the beneficiary would have to sell, pay a commission at closing, and only then receive cash of a lesser amount. If the property is to be distributed, not sold, it should be counted at a lesser amount.

For example, assume the entire estate consists of cash of $400,000, and a parcel of real estate appraised at $100,000, all to be equally split between "A" and "B". Beneficiary "A" wants cash, and "B" wants the parcel plus cash. In this hypothetical, assume it is well known that the typical commission in this community for a parcel of this type is 10%. The estate would then receive a net amount of $90,000 after paying a 10% commission, not the appraised amount of $100,000. The total estate value for distribution is reduced to $490,000 rather than $500,000; one-half each beneficiary is $245,000. "A" should receive $245,000 in cash; "B" should receive the parcel valued at $90,000 for distribution purposes, and $155,000 in cash.

Automobiles are another source of stress and potentially unfair distribution. Valuation of used vehicle run the gamut, from wholesale to retail, form poor to excellent condition. Classifying a vehicle as having a distribution value at the retail pricing is abusive, although the wholesale is often too low; something in between is fair. An expert can review the condition to alleviate disagreements. It is best to reach an understanding as to value for distribution by all to avoid family discord.

It is often optional under law to consider these issues in asset distribution, but if they are taken into account, a fair distribution occurs. Fairness goes a long way to family harmony, or at least a long way toward avoiding disharmony.