Valuing The Homestead Estate (US v Rogers, 461 US 677 (1983))
The right to shelter one’s entire lifetime in the estate considers the facts of each case. When the property in question is unencumbered, the value of the lifetime estate equals the present value of future market rent over the spouse’s lifetime, less the present value of future maintenance costs (which include taxes, insurance and certain other expenses). As a future market rent can be very difficult to predict, the estate could best be valued implicitly, by subtracting from today’s value of the property today’s discounted value of the future property at the time of death. This Homestead Estate is discounted for the probability of survivorship and for the time-value of money. When the property is encumbered, the cost of maintenance includes the yearly cost of the mortgage. Depending on the percentage of encumbrance there could still be a sizeable homestead property estate left.
Valuing the homestead estate is sometimes visited in litigation when the property is bequeathed to someone other than the spouse and that spouse retains the right to continue to live in that property. A conflict develops when the new property owner wants to acquire exclusive rights to the property and would like to liquidate that spouse's property interest in the homestead. Survivorship is not considered a discount once death of the owning spouse occurs. The estate's value considers the above methodology and a discount only for earnings.
Few that value the life estate understand how to do it. This equally applies to all other estate type assets such as the elective share estate under Florida law or any other type of asset like a unitrust interest that does not have a market value. Instead, they refer to the IRS tables that define its value for income tax purposes that ignores state statutes or the individual facts that have to do with real value. The most important reason the IRS ignores real facts driving real value is because real value involves indefinite contract terms making its value unenforceable without a court weighing in, taking testimony in an evidentiary hearing, and making findings of fact and conclusions of law making collection of tax nearly impossible to do.
Valuing its real value requires understanding the state or federal statutes that apply, including but not limited to valuations that include only current circumstances be used, assumptions that have an evidentiary basis to support its use and the ability to support any assumption that varies with current circumstances that must be very likely to occur. There is an extensive body of case law that defines each. These three criteria are the underpinnings that allows the court to identify valuations that involve pure speculation from evidentiary based ones and create reversible error if the court accepts the valuation and enters it into evidence.
It has been my experience that trial lawyers seldom know how to attack expert reports that are speculative (which most are) or who understand the law that drives the valuation result which often explains the huge differences in the reports furnished by battle of the experts. Yet when the value sought is for determining income tax liability then the IRS tables must be used.
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