The Special Assets Team: Valuations

Feb 23, 2021 | Special Assets, Understanding Trust Administration

As members of the Special Assets Team at Cumberland Trust, Dayton Hale, April Drennan, Natalicia Hosseinzadeh, and David Shetler utilize their collective expertise in all matters of unique, illiquid, and hard-to-value assets held in trust. This installment of the Trusted Ideas blog, written by Dayton Hale, focuses on special asset valuations.

Among a fiduciary’s many responsibilities, properly valuing trust assets is one of the most important duties. Accurate and updated values affect any number of administrative functions, including fees, insurance coverage, distributions, and taxes. While most liquid assets (e.g., stocks, bonds, and other marketable securities) have ascertainable values, special or “hard-to-value” assets are inherently more complex. Real estate, closely held business interests, mineral holdings, and other unique assets do not carry “real-time” updated values. Since these asset types can account for a sizable portion of families’ asset bases, and the generation of that wealth, it is imperative that a fiduciary attains and updates values regularly.

The approaches taken by trustees to gain market values for special assets vary across institutions and depends upon the degree to which they exercise investment discretion. Certain fiduciaries have in-house specialists or departmental expertise in determining real asset values. For instance, an institution may feel comfortable appraising mineral interests in-house based on a 12-month trailing cash flow (taking the prior year’s royalty income and multiplying by three) or may value a piece of commercial real estate based on net operating income (NOI) and the applicable capitalization rate. Other trustees and personal representatives outsource valuations and rely solely on licensed and certified third-party vendors to ascertain value. Real estate, for example, would necessitate a drive-by or a full appraisal of trust-held properties. The valuation of a closely held business interest may require a business valuation firm to analyze the entity assets, the applicable industry, customers, client base, and the company’s financials. Regarding closely held entities held on a directed trustee platform, a duly appointed asset manager may carry the responsibility of providing a trustee with updated values of partnership, LLC, and corporate interests based on standard and accepted accounting principles. Many companies conduct annual valuations and assess per share/per interest values for ownership in the company.

Trustees and other fiduciaries have several options available in obtaining appropriate market values for their clients’ unique assets. Cumberland Trust’s Special Assets and Administration teams work diligently to ensure that proper asset values are provided for clients and their advisors.