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 at a later date. But a recent court case out of Virginia teaches an important lesson to those who have a will or a trust that relies solely on the term “fair market value” to set a future price of property.
In Wilburn v. Mangano, a mother signed a will that left her home to her three daughters, but also granted an option, exercisable within one year of the will being probated, to allow her son to purchase the home from the estate at the assessed tax value of the property as 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, thereby requiring the home to be sold to the son, should he exercise his option to buy, at a purchase price equal to the “fair market value.”
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 because of the maintenance costs they had incurred during the dispute. 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 decided that the term “fair market value” standing alone 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. In order for the court to be able to compel the son to carry out his earlier stated intent to buy the property, the court found that there needed to be more specific language beyond the term “fair market value” for the parties to determine how the 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 depending upon the anticipated uses of the property. And because the codicil to the will 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.
Even though this Virginia court case does not apply in other states, it can be helpful to property owners who intend that their property be sold when they pass away or are otherwise unable to decide on an appropriate purchase price. 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.
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.
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 to help you determine the method that makes the most sense for the property in question, as well as for your own family circumstances and dynamics. 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.
 Wilburn v. Mangano, 851 S.E.2d 474 (Va. Sup. Ct. 2020).