When acting as a trustee, or advising trustees, business valuations are more than just an accounting exercise. Improper or missing valuations of privately held businesses can lead to serious fiduciary exposure. In this post, we’ll take a deep dive into how valuations intersect with trustees’ duties, what risks arise from getting valuations wrong (or skipping them), and how advisors can help mitigate those risks.
Understanding fiduciary duty in this context
Trustees owe a set of obligations to beneficiaries under both statutory and common law. The duty of care requires trustees to manage assets prudently, which means obtaining reliable information and acting on it. The duty of loyalty obligates trustees to put beneficiaries’ interests above their own and to avoid conflicts. Finally, the duty of disclosure requires trustees to keep beneficiaries informed about material facts and decisions affecting the trust.
When valuations are missing, inaccurate, or poorly documented, all three of these fiduciary duties can come into play — leaving trustees vulnerable to breach-of-duty claims.
Why accurate valuations matter
Accurate business valuations form the foundation of sound fiduciary decision-making. Fair market value serves as the baseline for many trust operations — including distributions, buy-outs, and tax reporting. If the valuation is inaccurate, every downstream decision risks being distorted, leaving trustees vulnerable to claims that they acted imprudently.
Read More: Business Valuations: The Importance of Fair Market Value
Privately held businesses introduce even greater complexity. These entities lack the transparency and market benchmarks of publicly traded companies. They are often illiquid and subject to significant subjectivity, making it easy for errors, or intentional manipulation, to creep into the process. Trustees who underestimate these challenges may fail in their duty of care by relying on valuations that do not withstand scrutiny.
Read More: The Importance of Privately-Held Business Valuations Within Trusts
Timing also plays a critical role. Delays in revaluing can magnify risk. Business performance, market conditions, or industry events can rapidly change the value of a privately held company. Trustees who continue to rely on stale valuations not only misrepresent the trust’s true financial position but also risk disadvantaging certain beneficiaries.
When valuations are outdated, based on flawed methodologies, or poorly documented, they undermine the trustee’s fiduciary responsibilities. Failing to account for factors like minority discounts, liquidity restrictions, or proper comparables may result in significant harm to the trust and open the door to legal challenges. In short, accurate and timely valuations are not a formality. They are a fiduciary necessity.
How valuation failures lead to fiduciary liability
When valuations are inaccurate or missing altogether, trustees can easily find themselves exposed to breach of duty claims. One common scenario involves distributions to beneficiaries. If a trustee relies on an outdated valuation when selling or distributing an ownership interest, the beneficiaries on the receiving end may feel shortchanged, while others may argue that too much value was given away. In either case, the trustee risks accusations of imprudence, favoritism, or even disloyalty, particularly if beneficiaries suffer a measurable financial loss.
Similar risks arise in connection with sales, buy-outs, or tax reporting. For example, if a trustee engages an appraiser who uses inappropriate data or comparables, the reported value may diverge sharply from fair market reality. That error could result in overpaying or underselling trust assets, triggering IRS audits or penalties, or creating disputes among beneficiaries. In such cases, the trustee’s duty of care, and their responsibility to seek expert advice, comes directly into question.
Another frequent pitfall is the failure to conduct periodic revaluations. Trustees who make investment or distribution decisions based on obsolete information are effectively managing the trust blindfolded. If market conditions or business performance change materially and the trustee continues to rely on stale figures, beneficiaries may argue that the trustee neglected their duty to monitor the trust’s assets and make prudent, informed decisions.
Conflicts of interest can exacerbate valuation issues. A trustee who selects an appraiser with a personal or financial stake in the outcome, whether intentionally or inadvertently, faces heightened liability. Inflated valuations that benefit one party, or discounted valuations that advantage another, are particularly problematic because they not only undermine the trustee’s impartiality but also violate the duty of loyalty. Courts tend to treat such conflicts harshly, sometimes imposing not only damages but also removal or even punitive consequences.
Ultimately, valuation failures strike at the heart of fiduciary duty. Whether the problem is stale data, flawed methodology, poor documentation, or conflicts of interest, the result is the same: trustees expose themselves — and often their advisors — to legal challenges, reputational damage, and potentially costly remediation.
Best practices & risk mitigation for advisors
Advisors play a critical role in helping trustees avoid these pitfalls. Some best practices include:
- Establish a regular valuation policy. Define when valuations should be updated; annually and at triggering events such as significant business changes.
- Engage independent, credentialed appraisers. Ensure the appraiser has relevant experience and no conflicts of interest.
- Apply appropriate methodologies. For private companies, this means adjusting for size, liquidity, control, and risk differences, and often triangulating across multiple approaches.
- Document the process thoroughly. Record assumptions, methods, and reasoning, especially when choosing not to update a valuation.
- Be transparent with beneficiaries. Share valuation reports or summaries to build trust and mitigate disputes.
- Consult legal and tax experts. Confirm that valuations meet regulatory requirements and align with state fiduciary standards.
- Educate trustees. Provide training or resources to ensure trustees understand both the technical and fiduciary importance of valuations.
- Consider fiduciary liability insurance. Where appropriate, review coverage to ensure valuation-related exposures are addressed.
Key takeaways
Valuations are not optional — they are central to a trustee’s fiduciary duty. Privately held businesses pose unique challenges, and mistakes can easily lead to breach-of-duty claims. Advisors who guide trustees through independent appraisals, periodic revaluations, clear documentation, and transparent communication provide vital protection for both the trustee and the trust itself.
By approaching business valuations as a fiduciary obligation rather than an administrative task, trustees and their advisors can avoid costly disputes and fulfill their duty to act in the best interests of beneficiaries. Learn more about this topic at our upcoming free webinar with TrustEd, “Navigating the Complexities of Closely Held Entities in Fiduciary Accounts” on October 21 from 1-2 pm, CST.
