Defined Value Gifts Monograph
Despite continuing IRS resistance, the use of defined valuation clauses in gifting assignments, sales agreements, disclaimers, and exercises of powers of substitution is now very common in estate planning. Due to the recent proliferation of defined valuation clauses in gifting assignments and sale agreements, estate planning practitioners are now seeing defined valuation clause issues being raised during audits of estates and fiduciary reviews of trusts as well as in some income tax audits.
This monograph examines the governing case law that has grappled with defined valuation clauses, provides examples of defined valuation clauses that are likely to work and identifies those defined valuation clauses that will not work, and it discusses how defined valuation clauses are being implemented in day to day practice. I’ve included a few forms to demonstrate how defined value clauses can be crafted.
Table of Contents
What is a Defined Value Clause?
Why Use a Defined Value Clause?
The Early Case Law-Procter.
Modern Case Law and the Trend for Court Acceptance of Defined Value Clauses.
What might work?
- Gift or sale of a certain amount, with all increases on final determination to a “backup Walton GRAT.”
- Gift by formula that, on revaluation as finally determined for gift tax purposes, creates a small or insignificant taxable gift.
- A gift to family donees, with a contemporaneous transfer to charity.
- A sale or gift with a gift over of any excess to a spouse or a marital deduction trust.
Defined Value Clauses I Know Won’t Work.
- One way adjustment-gift of specific property, with interest in gifted property reduced and returned to the donor on adjustment by IRS.
- Two way adjustment gift/transfer of specific property, with interest in gifted or transferred property increased or reduced on adjustment for federal gift tax purposes.
- “Intended Value” Transfers.
- Private annuity, parties agreed to value of the assets, with a seemingly two way adjustment to the annuity amount on adjustment of the values of those assets, either by IRS settlement or by final decision of the Tax Court.
- Gift of specific interest in property, with a one-way obligation to pay consideration to donor for value in excess of original intended value of gift.
Sample Defined Valuation Clauses - What I Think Might Work and Whether To Use or Not to Use.
- Purchase price adjustment on sale when IRS revalues.
- Gift of an amount of value tied to the federal gift tax annual exclusion, federal gift tax applicable credit equivalent, GST Tax Exemption or some other tax-related item.
- Gift of a specified dollar amount that is not expressly tied to any tax-related number.
- Disclaimer of an amount that will trigger federal transfer tax of a certain amount.
- Disclaimer of a formula amount of a lifetime gift.
- Formula Fractional Disclaimer of Share of Estate.
- Implementation Trends in Defined Valuation Clauses.
- Suggested Steps for a Defined Value Transaction Involving a Charity.
- Why is this Belk case even relevant?
- Reporting defined value gift transactions.
- Threat of Retroactive Legislation on the Defined Value Transaction Formula.
- Best Practices for Wandry-type Transactions.
- Basic Defined Value Donation.
- Defined Value Sales Agreement.
- Defined Donation/Sale Agreement.
- Defined Value Pledge Clause.