When a will includes multiple pieces of real estate—especially commercial properties—dividing those assets among several beneficiaries can create unintended financial consequences. One of the most overlooked risks is the devaluation that occurs when beneficiaries inherit partial interests in real estate. This is particularly true for commercial properties, where the sale of a minority or fractional interest often triggers a discounted appraisal.
Understanding how and why this happens—and planning accordingly—can help preserve the full value of your estate and prevent conflicts among heirs.
The Problem with Partial Interests
When a person dies owning a commercial property and leaves it equally to three children, for example, each child inherits a one-third interest. On paper, this might seem fair. But in the real world, that fractional ownership may be worth significantly less than one-third of the property’s total value.
Why? Because a one-third share in a commercial building isn’t easily sold on the open market. It offers no control over the property’s operations and comes with limited liquidity. As a result, appraisers apply what’s called a valuation discount—often for lack of control and lack of marketability. Depending on the property, these discounts can range from 10% to 40%, substantially reducing the value of what each heir receives.
Real-World Example: The Family Retail Plaza
Consider a real-world-style scenario: a man owns a small retail plaza that generates monthly rental income. In his will, he leaves the property equally to his three adult children. The plaza is appraised at $1.5 million. However, each one-third share is valued at only $300,000 instead of $500,000 due to the valuation discount applied for lack of control and marketability.
Now the estate shows $900,000 in value rather than $1.5 million on paper. This not only reduces the apparent size of the estate for estate tax purposes (which may be a benefit in some cases) but also leaves the heirs with illiquid, discounted assets that are difficult to use, sell, or manage.
What could have been a straightforward inheritance has now become a source of frustration—and financial loss.
Solution 1: Direct the Sale of Real Estate in the Will
One of the simplest ways to avoid this problem is to direct your executor to sell the real estate and divide the proceeds among your beneficiaries. By doing this, you ensure that:
- The property is sold at full market value (not discounted).
- Each beneficiary receives their fair share in liquid cash.
- Disputes over management or sale decisions are avoided.
This approach works well when none of the beneficiaries wants to keep the property.
Solution 2: Use a Trust to Hold and Manage the Property
If your goal is to preserve the income from a property or keep it in the family long-term, a trust may be the better option. A revocable living trust or testamentary trust can hold the property after your death and provide instructions for:
- Who manages the property (a trustee or property manager).
- How income is distributed to beneficiaries.
- When and under what conditions the property can be sold.
Because the trust holds title to the property as a whole, beneficiaries receive distributions from a unified interest—not discounted fractional shares.
Solution 3: Create a Family LLC
Another strategy is to transfer real estate into a limited liability company (LLC) either during your lifetime or through your estate plan. In this case, your will or trust would pass LLC membership interests to your heirs instead of the property itself.
This setup offers:
- Centralized management through designated managers or majority voting.
- Flexibility for heirs to buy out one another.
- Asset protection and potential tax benefits.
Just like with trusts, this helps avoid the sale of unwanted fractional interests and supports long-term planning.
Balancing the Estate Fairly
What if only one beneficiary wants the property while others would prefer cash?
In that case, your estate plan can equalize inheritances by:
- Leaving the property to one heir and giving other heirs equivalent value from other assets.
- Using life insurance to provide liquidity to balance out the distribution.
- Giving the executor the power to sell the property to a third party or to a beneficiary who can buy out the others.
Careful appraisals and clear instructions can make this process transparent and fair, reducing the likelihood of disputes.
Work with a Professional Team
Real estate adds a layer of complexity to estate planning that calls for professional input. In particular:
- A qualified estate planning attorney can help you structure your plan to reflect your goals and protect your beneficiaries.
- A real estate appraiser can provide accurate valuations and explain how discounts may affect the estate.
- A tax advisor can help you evaluate the impact on estate taxes and potential capital gains.
Your estate plan should reflect not only what you own but how you want to preserve its value and minimize friction among your heirs.
Conclusion: Don’t Let Your Legacy Be Discounted
Owning multiple properties—especially commercial ones—is a sign of financial success. But that success can be eroded if the assets are divided without considering the impact of partial interests and valuation discounts.
With thoughtful planning, you can ensure your real estate is passed on at full value, distributed fairly, and handled in a way that honors both your wishes and your family’s needs.
Whether that means selling a property, creating a trust, or forming an LLC, the right strategy can help you avoid a discounted legacy—and leave behind a gift that truly reflects your life’s work.
Like all information on this website, this article is informational in nature, and is not to be relied upon as legal advice. For counsel specific to your specific circumstances, contact the Palley Law Office. Palley Law Office gives estate planning sessions at no charge.
