When reading through a will or trust agreement, you may see language that grants a right to an individual to purchase certain property from the estate or trust at “fair market value.” At first glance, this phrase may seem a perfectly reasonable method of setting a suitable purchase price for a property to be sold. But a recent court case out of Virginia teaches an important lesson to those with wills or a trusts relying solely on the term “fair market value” to set a future price of property.

Background of Wilburn v. Mangano

In Wilburn v. Mangano,^[1] a mother signed a will that left her home to her three daughters, but also granted an option to allow her son to purchase the home from the estate at the “assessed tax value of the year” of the mother’s death. Sometime later, the mother signed a codicil (an amendment to her will) changing the purchase price from the tax assessment value to the “fair market value at the time of my death.” When the will and codicil were submitted to the probate court, the judge found them to both be valid. This required the estate to give the son the option to buy the house (if he wished) at a “fair market value” purchase price.

The son had previously sent notice to the daughters that he intended to exercise his option to buy the home. However, a dispute arose among them regarding what the fair market value of the home was and how such a value should be determined. The daughters obtained appraisals from two separate appraisers and ultimately offered to sell the home at the higher of the two appraised values. The son decided that he no longer wanted to buy the home because of the dispute, and the daughters sought a court order to compel him to go through with the purchase.

The Court’s Ruling on “Fair Market Value”

The court decided that the term “fair market value” on its own was not specific enough to meet the criteria for determining that a valid contract existed between the son and the daughters, and therefore, the son had not breached a contract. They found that the term “fair market value” is not specific enough for parties to determine how a property should be valued. The court pointed to a variety of different, but equally valid, valuation methods used by appraisers to establish a property’s value. And since the codicil did not clearly define how the price was to be determined, the court felt that it would be inappropriate to force the son to purchase the property under such vague conditions for setting a fair price for the property.

Applying “Fair Market Value” in Estate Planning

Even though this Virginia court case does not apply here in Texas, it can be helpful to property owners who intend for their property to be sold when they pass away, or are otherwise unable to decide on an appropriate purchase price.

Establishing a Concrete Valuation Method

If property is to be offered at “fair market value,” a concrete valuation method should be clearly spelled out in the relevant estate planning documents, such as a will or trust.

For example, you could require that at least two independent appraisals be done and the mean (or average) of the two prices be used as the “fair market value.” You could also get more specific and list who will pay for the appraisals or which appraisal methods should be used—i.e., the cost approach, the income approach, the sales approach, or other well-recognized methods.

Base the “Fair Market Value” on the County’s Tax Assessment Value

Another simple option could be to tie the definition of “fair market value” to the tax assessment value established by the county in which the property resides. If tax assessment values are traditionally too low or too high in your area, you could spell out an approach in which you add or subtract an additional percentage of the price to the tax-assessed value to get closer to what you believe is a more accurate fair market value for the property.

Once a value is determined, consider whether you want to allow your executor or trustee to provide financing for the buyer so the buyer can avoid using a lender to finance the purchase of the property. This may make sense in cases in which a child or friend has a poor credit rating and would be unable to obtain a mortgage on their own. On the other hand, if there is already tension between family members, it may be best to require the individual buying the property to obtain their own financing so that the beneficiaries of the trust or estate receive the value of the property in cash as soon as possible.

Use Careful Planning Techniques

Multiple methods for determining the fair market value of property exist that can erase the uncertainty caused by just using the term “fair market value” in a will or trust. To some extent, you are really only limited by your own creativity. If you are unsure of how to approach such a situation, consult an attorney or a qualified appraiser.  We can help you determine the best method for the property in question and your own family. By taking the time to carefully consider the different options available to you, you can ensure that your loved ones will benefit fairly from any property you leave them and avoid painful disputes that could land them in court.

Give Us a Call

Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area.  For more information and to learn about our firm, please contact us.

^[1] Wilburn v. Mangano, 851 S.E.2d 474 (Va. Sup. Ct. 2020).