December 2001

Valuing Remainder Interests in Land

Laura W. Morgan

Sometimes, a spouse will be a named remainderman after a parent’s life estate. How does the court value that remainder interest, since the life estate holder can use the property?

In In re Marriage of Foreman, 294 Mont. 181, 979 P.2d 193 (1999), approximately one year after the couple was married, the husband’s father died. His will left to the husband’s mother a life estate in the 300-acre family farm, located in Nebraska. Under the terms of the will, the husband and each of his two sisters received an undivided one-third interest in the remainder of the Nebraska farm, subject to their mother’s life estate. According to a probate appraisal, the Nebraska farm was valued at $688,830 at the time of the death of Ronald’s father in 1979. At trial, Ronald alleged that, approximately one year after the death of his father, he and his sisters deeded to their mother the most valuable five acres of the Nebraska farm, which included the family house, all the outbuildings, and the irrigation wells. The husband maintained that this transfer accounted for 25% of the total value of the Nebraska farm.

The court held that the husband’s vested remainder interest was marital property. The court then approached the question of how to value that interest. The court adopted the wife’s expert’s appraisal, which adopted a discount to present value based on the life expectancy of the life estate holder.

In Chilkott v. Chilkott, 607 A.2d 883 (Vt. 1992), husband was one of the beneficiaries of an inter vivos trust which his father created. The trust became irrevocable when his father died. Securities funded the trust, and at the time of the final hearing were valued at $220,000. The death of father entitled husband’s mother to all the trust income for her life. The trustee had power to invade the principal for the mother’s health, maintenance and welfare, but had not done so. The mother, eighty-seven-years-old, was alive at the time of trial. When mother dies, husband, if he is alive, will receive the income from the trust and an unrestricted right to invade the principal. At husband’s death, plaintiff wife would receive the income for life. Upon the death of all income beneficiaries, the remainder, if any, will be paid to the donor’s grandchildren, or if they are deceased, to their issue by right of representation, free of the trust.

In valuing the husband’s remainder interest, the court stated:

The difficulties in valuing husband’s interest in the trust are similar to those encountered in valuing a pension because the value of the pension is contingent on the worker reaching retirement. Once we accept the pension contingency, the contingencies in the instant case do not defeat the applicability of § 751(a). Wife’s actuarial expert testified that the same principles apply to valuing trusts as to valuing pensions. We have held that the use of such an expert is a proper method to determine the value of a pension in evaluating a spouse’s opportunity for the future acquisition of capital assets and income. The expert took into account the age, situation and past conduct of husband’s mother with respect to the trust. She also analyzed the situations of the parties using annuity mortality tables. Husband’s cross-examination may have served to weaken the weight of the expert’s opinion, but it did not completely eliminate its probative value.

The court’s acceptance of the expert’s estimate of husband’s financial interest in the trust was not clearly erroneous. The actuary, qualified as an expert in the field, served to “assist the trier of fact to understand the evidence.” Certainly, the court could have attributed some value to husband’s expectancy interest, and the actuary’s opinion gave the court guidance in valuing it. In short, the expert advice improved the reliability of the fact-finding on the value of husband’s interest in the trust.

In Davidson v. Davidson, 19 Mass. App. Ct. 364, 474 N.E.2d 1137 (1985), under the terms of the testamentary trust of the husband’s father, the husband’s remainder interest would be distributed free of trust when his mother died and when he reached age 35. The husband was about 33 years old and his mother was alive. The trustees were empowered “in their uncontrolled discretion” to invade principal for the benefit of the husband’s mother. “The value of the remainder interest was, therefore, uncertain and actuarial calculations would be to no avail.” Despite this recognition, the court held, “The Judge was correct in valuing Henry’s remainder interest under his father’s testamentary trust on the basis of the distributions from the trust which Henry had received at the time of trial.”

In Buxbaum v. Buxbaum, 214 Mont. 1, 692 P.2d 411 (1984), the court held that it was proper to value the husband’s remainder interest in a testamentary trust at current value rather than discounted present value, because the current value of the remainder interest was being used as collateral by the husband’s corporation for the purpose of obtaining loans.

Finally, in Brown v. Brown, 586 P.2d 83 (Okla. Ct. App. 1978), the court held that equating the value of a remainder interest with market value was improper. The court noted that there must be some kind of discount for the life tenant’s interest that would decline with the life tenant’s advancing age. The value should also take into consideration the likelihood of appreciation or depreciation of the value of the property over the life of the life tenant.

Cases

In re Marriage of Robinson, No. D 118361 (Arizona Court of Appeals, November 27, 2001): An employee’s vested and matured stock options are “income” for purposes of child support. The opinion gives an excellent review of the case law on the subject, and discusses methods of valuing the options.

In re Parentage of M.J. and N.J., No. 1-00-0590 (Illinois Court of Appeals, October 29, 2001): The complaint sought to establish the paternity and child support obligations for twin boys that the plaintiff conceived through artificial insemination. The defendant was not married to the plaintiff and he was not the semen donor, but the plaintiff claimed that the defendant should be liable because she was inseminated based on his suggestion that she become artificially inseminated, and on his promise that he would love and support her and the children. The defendant The trial court dismissed the action, and the appellate court affirmed. Based on the Illinois Parentage Act, the court held, the defendant’s consent to be held liable for parentage and child support would have to be in writing.

Henry v. Henry, No. 02A03-0106-CV-203 (Indiana Court of Appeals, November 2001): The wife appealed the division of property, arguing that the court was obligated to consider the value of the husband’s interest in certain stock options through his employer that he had not exercised, but could have, as of the final hearing date on the petition for dissolution. The court distinguished the options at issue in Hann v. Hann, 655 N.E.2d 566 (Ind. Ct. App. 1995), and held that the court should have included the value in the marital estate.

Long v. Long, No. 1844 (Maryland Court of Special Appeals, November 29, 2001): The Maryland Court of Appeals just made it easier to hide income by holding that a court may not impute income by drawing an adverse inference against a party who pleads the fifth amendment with regards to questions about income, without independent corroborating evidence.

Bracci v. Chiccarelli,.99-P-620 (Massachusetts Court of Appeals, December 3, 2001): “In 1986, the parties executed a modification agreement altering the terms of a judgment of divorce nisi entered in August, 1984. The agreement stated that it was to survive as a binding contract and not merge with any judgment. The parties filed a “Joint Motion for Entry of Judgment of Modification,” and a judgment of modification incorporating their agreement entered on May 13, 1986. Almost eleven years later, in March, 1997, the plaintiff, alleging that her needs had changed drastically, filed a complaint for modification seeking alimony and a division of certain assets, including two pensions of the defendant. In May, 1998, a judge of the Probate Court, after an evidentiary hearing, awarded the plaintiff a portion of one of the defendant’s pensions, concluding that the parties “never had a judicial determination that [the 1986 modification] agreement was fair and reasonable.” Accordingly, she ruled, the defendant could not “use the [m]odification [a]greement as a defense to either the [p]laintiff’s request for alimony or her request for a division of the [d]efendant’s pensions.” The defendant has appealed citing, among other authorities, Mass.R.Dom.Rel.P. 60(b), claiming that it was too late for the plaintiff to attack, and too late for the judge in effect to vacate, the 1986 modification judgment. We agree and reverse the judgment.”

Greer v. Alexander, LC No(s). 99-720945-DC (Michigan Court of Appeals, November 9, 2001): The stepfather appealed an order granting custody of the children to the natural father after the death of their natural mother. The appellate court held that the trial court applied the inappropriate legal standard for disputes between a natural parent and a third party custodian, in ruling on petition for change of custody, and remanded the case for reconsideration in light of the Michigan court’s decision in Heltzel v Heltzel, ___ Mich App ___; ___ NW2d ___ (Docket No. 232736, issued October 23, 2001).

Seyboth v. Seyboth, No. COA00-1160 (North Carolina Court of Appeals, November 6, 2001): The trial court awarded the child’s stepfather visitation rights over the objection of the mother. The appellate court reversed, holding that although the mother had encouraged the child and stepfather to bond and establish a parent-child relationship (the child’s natural father had died), the court could not simply apply a “best interests” analysis when deciding a visitation dispute between a parent and a non-parent. In light of Troxel, the court had to defer to the mother’s parental rights and responsibilities.

Siliquini v. Kegel-Siliquini, 2001 Pa. Super. 312 (Pennsylvania Superior Court, November 9, 2001): Mother appealed a custody decision allowing the father to transport the four-year old child for visitation by private airplane. The superior court reversed, holding that where the father logged only 250 hours in 14-years and much of this time included flight instruction, his piloting a private plane was inappropriate.

Bogan v. Bogan, No. E1998-00060-SC-R11-CV (Tennessee Court of Appeals, November 8, 2001): An “objectively reasonable retirement” at age 59, where the husband was eligible to retire with full benefits, constitutes a substantial and material change in circumstances so as to permit modification of a spousal support obligation.

Hager v. Hager, No. 29688 (West Virginia Court of Appeals, November 29, 2001): One of the few cases to hold that a party’s deliberately false testimony before a master constitutes “fraud” on the court, thus allowing the other party to challenge the judgment under 60(b).