Probate & Trust Law Section Conference Manual ... - Minnesota CLE

including the date of division of such residue, as determined by Trustee in its absolute discretion,
and not the actual fair market value of the Loans. Specifically, it is hereby provided that the Loans
shall be so valued even if they are then legally unenforceable or if they are uncollectable for any
other reason, including the lapse of any applicable limitation or claim period, or the insolvency or
bankruptcy of the obligor.”
3. Addressing Valuation Discounts. Particularly when it comes to family
businesses, there is often a large difference between the estate tax value of
property and its true value to the family. Many funding formulas require that
interests in a business be used to fund the share of the estate for a family member
involved in the business. If the family business stock is valued at its estate tax
inclusion value for funding purposes, the shares for the beneficiaries who are to
receive the business may be over-funded. On the other hand, if the undiscounted
value is used, the plan may favor the beneficiaries who are not involved in the
business at the expense of the beneficiaries who inherit the business.
One case where this was addressed is Estate of King, 668 N.W.2d 6 (Minn. Ct.
App. 2003). In this case, the decedent’s will provided that the residue of her
estate would be divided between her two nephews. Among the assets of the
residue was the decedent’s minority interest in a closely held corporation. The
nephews owned the rest of the stock of the corporation. The will provided that
the share for one nephew should be funded with stock, and that stock would only
pass to the other nephew if other assets were insufficient to fund his share.
Because the stock was a minority interest, the decedent’s estate tax return
reflected combined minority and lack of marketability discounts of 45%. The
trustee decided to use this value for purposes of funding the nephews’ shares.
The nephew who received the assets other than stock objected because after
distribution of the residue, the other nephew owned a majority interest in the
corporation and the stock was therefore worth much more to him than it was
worth in the estate. The end result was that the nephew who received the stock
ended up much better off financially even though the will provided for equal
distribution between the nephews. The trial court and the Minnesota Court of
Appeals both held that it was within the trustee’s discretion to use the estate tax
value (the fair market value).
There is no right or wrong way to address this issue, but it is better to address it
specifically to avoid disputes. Here are two alternative provisions:
Estate Tax Value
For purposes of funding the shares so allocated to my
issue, the value of property included in my estate shall
be its value as finally determined for estate tax purposes,
and the value of property not included in my estate shall
be determined in the same manner that its estate tax
value would be determined if it were so included.
Undiscounted Value
Notwithstanding the foregoing, the value of any interest
in [describe family business interest] for allocation
purposes shall be the fair market value of such interest,
determined by the Trustee as the Trustee deems
appropriate, without applying any discount for lack of
marketability, lack of control, or similar features.
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