When Values Matter: Real Estate Entities & Effective Estate Planning

The Need for a Business Valuation to Value Fractional Shares

Business valuations are typically thought of in the event of selling a business, allocating assets as part of a divorce settlement, or settling an estate. What I thoroughly enjoy about what I do is the unique scenarios of how a business valuation can be part of a well-thought-out business plan to protect business interests and reduce estate tax liability.

An Overview of the Situation

A business entity owns real estate. The business and real estate are put into two separate entities, such as an LLC. This is typically done to protect the real estate interest from potential litigation. Next, for estate planning purposes, the real estate interest is divided into fractional shares for the owners. The overriding principle for this strategy is that fractional shares are worth less than the pro rata shares of the whole. A topic for a separate blog, perhaps.

The Role of a Business Valuation

Given the above situation, the business valuation work that I then do determines the value of the real estate entity and the fractional shares. My valuation work accounts for whether the property is income producing property with rental or lease income or if the property is used for the business. To develop the business valuation of the real estate, I will leverage the real estate appraisal completed by a real estate professional. The balance sheet data will be updated to replace the original cost of the property with the current real estate appraisal; then I deduct the liabilities to determine the equity value. Based on the number of fractional share owners, I calculate the value of the fractional shares for the owners, which may go into trusts.

When values matter for a business owner and there is real estate involved, get a certified business appraiser involved to help implement your estate planning strategies with fractional share ownership of the real estate entity. As noted above, you need both a real estate appraisal and a business valuation expert to properly implement this effective estate planning strategy.

Contact us when values matter.