Drafting Formula Clauses DoneeSelection Post Pettermedia.straffordpub.com/products/leveraging-defined-value...2011/05/31 · Presenting a live 110‐minute teleconference with interactive

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Leveraging Defined Value Clauses to Mitigate Estate and Gift TaxDrafting Formula Clauses and Donee Selection Post‐Petter

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TUESDAY, MAY 31, 2011

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Michael Whitty Shareholder Vedder Price ChicagoMichael Whitty, Shareholder, Vedder Price, Chicago

Susan M. Holzman, Shareholder, Orloff Lowenbach Stifelman & Siegel, Roseland, N.J.

David J. Slenn, Akerman Senterfitt, Naples, Fla.

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Leveraging Definedg gValue Clauses to Mitigate

E t t d Gift TEstate and Gift Tax Opportunities After McCord,pp

Christiansen, and Petter

Susan M. HolzmanDavid J SlennDavid J. Slenn

Michael D. WhittyStrafford Webinar

Tuesday, May 31, 1:00pm-2:50pm EDT

Why UseDefined Value Clauses?

Not all assets have an easily determinedNot all assets have an easily determined value for transfer tax purposes.

Transferors should be able to use someTransferors should be able to use some technique to protect themselves against unanticipated gift taxesunanticipated gift taxes.

Those techniques where defined value l l l th i d b t t tclauses are clearly authorized by statutes

or regulations are not appropriate for every it tisituation.

Strafford Webinar May 31, 2011 Page 6Leveraging Defined Value Clauses

Defined Value Clauses:A Working Definition

Defined Value Clause: A clause thatDefined Value Clause: A clause that minimizes or eliminates transfer tax liability arising from the transfer of assets toarising from the transfer of assets to recipients, by applying a value-based formula as part of a condition precedentformula as part of a condition precedentto determine how the transferred assets are allocated among recipients other thanare allocated among recipients other than the transferor.


Defined Value Clauses:A Working Definition

The defined value clause can be contrasted with a revaluation clause that, based on a condition subsequent, causes:

i i ( d i id) ti f th a recission (rendering void) or revocation of the original transaction (“whoops, never mind”),

a reversion of all or part of the transferred assets to the a reversion of all or part of the transferred assets to the transferor (“send some of that back now”), or

a retroactive adjustment to consideration in a t ti th t t t d l t ift ttransaction that was structured as a sale or part gift, part sale, or creates consideration where no consideration existed before.


Defined Value Clauses:More Working Definitions

Transferor: The party making a transfer by gift Transferor: The party making a transfer by gift, bequest, or sale, who (absent a net gift agreement) will bear any resulting transfer taxes (gift, estate, GST t )GST taxes).

Taxable Transferee: A transferee not eligible for a transfer tax exclusion, exemption, or deduction withtransfer tax exclusion, exemption, or deduction with respect to the transferor.

Non-Taxable Transferee: A transferee eligible for a t f t l i ti d d ti ithtransfer tax exclusion, exemption, or deduction with respect to the transferor.


Defined Value Clauses:More Working Definitions

Fixed Share: In a transfer subject to a defined value clause, Fixed Share: In a transfer subject to a defined value clause, the share of the transferred property that is fixed by amount or formula based on the ultimate determination of the value of the transferred property. The fixed share is typically transferred to the taxable transferee.

Variable Share: In a transfer subject to a defined value clause, the share that is not fixed, and that would receive any excess value if the subject property’s value is ultimately determined to be more than the original estimate. The variable share is typically transferred to the non-taxable

ftransferee. Excess Value: The excess, if any, of the transferred

property’s ultimately determined value over its originally i d lestimated value.


Defined Value Clauses: Fact Pattern for Case Study

Howard and Wendy are a married couple in their 50s. Th h th hild D b St d DiThey have three children, Debra, Steven, and Diana, who range in age from 17 to 27. Debra is married and is expecting her first child. p g

Howard works as a senior executive for Management Corporation, Inc., a privately-held corporation that provides commercial real estate management servicesprovides commercial real estate management services.

Howard owns stock in Management Corporation. Howard does not have a controlling interest, and the other g ,

shares of stock in Management Corporation are owned by unrelated individuals.

Howard’s shares are subject to various transfer restrictions jimposed by unrelated parties pursuant to a Shareholders’ Agreement.



Howard’s stock in Management Corporation is hard to g pvalue with any precision since the stock is not publicly traded. Howard has some idea of the value based on conversations with other senior management and aconversations with other senior management and a review of the financial statements. The stock in Management Corporation is not registered , so there are

additional restrictions imposed by the SECadditional restrictions imposed by the SEC. Management Corporation has never paid a dividend, but its revenues

are increasing rapidly, and there is talk around the office about the possibility of going public.possibility of going public.

Howard thinks that his stock in Management Corporation is worth approximately $15.0 million now (before taking any discounts for a minority interest and lack of marketability), and he expects his stock to be worth significantly more if the company goes public.



Howard earns between $1.0 million and $2.0 million each year, including his salary from Management Corporation. He and Wendy own two homes and have significant living expenses, including Steven’s current college expenses and Diana’s upcoming college expenses.

Although Howard and Wendy’s marketable securities and bank accounts have a value in excess of $10.0 million, they are

d b t th i t th t ki l ift ld hconcerned about the impact that making large gifts would have on their ability to continue to support their lifestyle, especially after Howard stops working. N t ith t di th t th i t t d i hifti th Notwithstanding that concern, they are interested in shifting the future appreciation in a substantial portion of the Management Corporation stock out of their estates to or for the benefit of their children and grandchildrenchildren and grandchildren.



In 2005 Howard’s father Hubert established an irrevocable trust for each of Howard and Wendy’s children (the “Hubert Trusts”). Howard is the trustee of each of those three trusts. Each trust has marketable securities with a value of approximately $500,000.

In 2007 Howard established an irrevocable trust which owns a large In 2007 Howard established an irrevocable trust, which owns a large second-to-die life insurance policy on Howard and Wendy’s lives (the “2007 Trust”). The annual premium is $40,000. The 2007 Trust is a grantor trust for income tax purposes. Howard and Wendy have each used approximately $100,000 of their respective

GST exemptions in connection with contributions to the 2007 Trust, and they each expect to continue to allocate GST exemption at the rate of approximately $20,000 each year. , y

Upon each contribution to the 2007 Trust, each child has a withdrawal right equal to the greater of $5,000 or 5% of the value of the assets in the 2007 Trust.

Howard and Wendy have each made taxable gifts of approximately $62,500 in connection with contributions to the 2007 Trust and based on the current assetsconnection with contributions to the 2007 Trust, and, based on the current assets in the 2007 Trust, Howard and Wendy expect to continue to make annual taxable gifts to the 2007 Trust for several years.


Defined Value Clauses: Case Law

Procter Comm’r v. Procter, 142 F.2d 824, 32 AFTR 750 (4th Cir. 1944), cert. d 323 U S 6 (1944)den. 323 U.S. 756 (1944)Procter involved a transfer agreement including a reversion to the donor, based on a condition subsequent (in this case, a subsequent determination of gift tax liability)determination of gift tax liability). “[I]t is agreed by all the parties hereto that in that event the

excess property hereby transferred which is decreed by such court to be subject to gift tax shall automatically be deemed notcourt to be subject to gift tax, shall automatically be deemed not to be included in the conveyance in trust hereunder and shall remain the sole property of Frederic W. Procter free from the trust hereby created.”t ust e eby c eated

This condition was held to be against public policy, as it thwarted gift tax enforcement efforts and would require a court to pass on a moot case, and therefore the condition was disregarded for gift , g gtax purposes.



King King v United States 545 F 2d 700 (10th Cir 1976) King King v. United States, 545 F.2d 700 (10th Cir. 1976)

King involved a sale of closely-held company stock to family trusts. The sale was subject to a price adjustment clause, rather than a reversion. The price adjustment clause stated that if the fair market value (“FMV”) p j ( )of the stock were ever determined by the IRS to differ from the FMV as determined for the agreement, the purchase price would be adjusted to the FMV determined by the IRS. Th T th Ci it The Tenth Circuit:

• concluded that the parties intended a sale for full and adequate consideration, and acted consistently with that intent,

• noted that the transferor’s estate was not diminished by the price adjustment y p jclause, and

• distinguished the facts from Procter and cases involving recissions or reversions.

The Tenth Circuit upheld the district court’s decision to give the price The Tenth Circuit upheld the district court’s decision to give the price adjustment clause effect for gift tax purposes.



Harwood Harwood v. Comm’r, 82 TC 239 (1984), aff’d without published , ( ), popinion 786 F.2d 1174 (9th Cir. 1986) Taxpayer attempted to prevent gift tax using a savings clause triggered by a

determination that the gift tax value exceeded a target gift amount, and requiring the trustee to issue a promissory note for the difference to make it a part-giftthe trustee to issue a promissory note for the difference to make it a part-gift, part-sale.

Although Procter was found not to be applicable to the facts of this case, the Tax Court disregarded the price adjustment provision requiring a promissory note, in part because the transferor and trustee of the transferee trust weren’t honoring itpart because the transferor and trustee of the transferee trust weren t honoring it themselves. Following the IRS’s notice of deficiency, which met the definition of a final determination, the promissory notes should have been issued, but had not been issued.B th th T C t i H d d th di t i Ki it d E t t f R ld Both the Tax Court in Harwood and the dissent in King cited Estate of Reynolds v Comm’r, 55 T.C. 172 (1970) for the proposition that transactions within a family group “are subject to special scrutiny, and the presumption is that a transfer between family members is a gift.”



Ward Ward v. Commissioner, 87 T.C. 78 (1986)

Ward involved a transfer adjustment based on a condition subsequent (gift tax revaluation) that might result in shares going back to the transferor; followingresult in shares going back to the transferor; following Procter, it was rejected as being against public policy.

Knight Knight v. Comm’r, 115 T.C. 506 (2000)

Attempted to use a defined value clause in the instrument transferring family partnership units.T i d th d fi d l l i b th Taxpayers ignored the defined value clause in both implementation and gift tax reporting, so court did likewise.



McCord McCord v. Comm’r, 120 T.C. 358 (2003), rev’d 461 F.3d 614 (5th Cir. 2006).

M C d i l d if f l l h ld b i i hild d McCord involved a gift of closely-held business interests to children and charities, with a fixed share to children, and the variable share to charity.

The plan, designed by Stacy Eastland (then at Baker & Botts LLP) used a condition precedent with all of the transferor’s interest irrevocablycondition precedent, with all of the transferor s interest irrevocably transferred, and the formula only defining how much was allocated between the tax-sensitive gift/sale portion and the gift to charities that would receive any excess value.

Bad facts – the charity was bought out at a steep discount soon after the gift – did not defeat the plan in the courts.

The Tax Court found the formula clause deficient because the term “fair k t l ” t f ll d b “ fi ll d t i d f F d l ift tmarket value” was not followed by “as finally determined for Federal gift tax

purposes.” Tax Court went on to say that if the formula had been structured so that each donee had an enforceable right to a fraction of the gifted interest as finally determined for Federal gift tax purposes, the Court might y g p p , ghave reached a different result.



McCord (continued)

Taxpayer appealed Tax Court decision. An after-the-fact Confirmation Agreement entered into by the donees, which had been considered by the Tax Court, was determined by the Fifth Circuit to have no bearing on the value of the gifted interests Fifth Circuit: “Regardless of how thethe value of the gifted interests. Fifth Circuit: Regardless of how the transferred interest was described, it had an ascertainable value on the date of the gift.”

The IRS surprisingly withdrew its Procter public policy argument on The IRS surprisingly withdrew its Procter public policy argument on appeal, focusing instead exclusively on the valuation issues. The Fifth Circuit ruled that the IRS had not met its burden of proof on the valuation methodology. The case was remanded for judgment consistent with the Fifth Circuit’s conclusion, and the issue of the defined value clause was rendered moot.

The overall result was mixed, mostly favorable to this taxpayer, but not a l i t f d fi d l lclear victory for defined value clauses.



Christiansen Estate of Christensen v. Comm’r, 130 T.C. No. 1 (2008), aff’d 586 F. 3d 1061 (2009)

Christine Christiansen Hamilton disclaimed a portion of her interest under her mother’s Will equal to a fraction of that interest, the numerator of which was the fair market value (“FMV”) of the gift onnumerator of which was the fair market value ( FMV ) of the gift on April 17, 2001 less $6,350,000, and the denominator of which was the fair market value of the gift on that date. FMV was determined based on the price that the interest would change hands under willing p g gbuyer/willing seller standard “as finally determined for federal estate tax purposes.” In addition, there was a savings clause in the disclaimer that provided that to the extent the disclaimer was not a

lifi d di l i Ch i ti ld t k h t tiqualified disclaimer, Christine would take whatever actions were needed to cure the problem.

Pursuant to the terms of the Will, the disclaimed interest passed 75% to a charitable lead annuity trust and 25% to a private foundationto a charitable lead annuity trust and 25% to a private foundation.



Christiansen (continued)

The IRS and the estate stipulated to a higher value for the limited partnership interests included in the estate than the value reported on the estate tax return, and, therefore, the Tax Court did not address valuation issues.

Although the formula disclaimer of the excess over a pecuniary amount was Although the formula disclaimer of the excess over a pecuniary amount was found not to be a qualified disclaimer with respect to the portion passing the CLAT (since the disclaimant retained a contingent remainder interest in the CLAT), and the disclaimer savings clause was held to be ineffective, the Tax C t h ld th t th f l dj t t l it lf t d tCourt held that the formula adjustment clause itself was respected to increase the charitable deduction to reflect the increase in the value of the estate’s property going to the foundation.

This plan involved no unwinding of the transfer; the estate tax valuation p g ;adjustments merely reallocated value among Christine, the CLAT, and the foundation.

The IRS raised its Procter-type public policy arguments, but the court rejected themthem.



Petter Estate of Petter v. Comm’r, T.C. Memo. 2009-280 (Dec. 7, 2009) , ( , )(a case worth reading in its entirety, including the footnotes)

Transferor funded an LLC with UPS stock. Pursuant to one formula, Transferor disposed of a specified number , p p

of LLC units in a series of gift transactions:• Transferor contributed LLC units to two intentionally defective

grantor trusts (the “Trusts”), with each Trust receiving units with a value as finally determined for federal gift tax purposes equal to one-half of the amount that could pass free of federal gift tax based on the Transferor’s gift tax exemption; and

f f C f• Balance of the specified LLC units in excess of the units that were contributed to the Trusts went to two public charities that had donor advised funds (the “Charities”).



Petter (continued)( )

Pursuant to another formula, Transferor disposed of a specified number of LLC units in a series of sale and gift transactions:

• Transferor sold LLC units to each Trust with a value ofTransferor sold LLC units to each Trust with a value of $4,085,190 as finally determined for federal gift tax purposes; and

• Balance of the specified LLC units in excess of the units that pwere sold to the Trusts went to the Charities.

• Each recipient agreed that: (i) if the value of the units as finally determined for federal gift tax ( ) y g

purposes was different than the tentative valuation, and (ii) that recipient received more units than it should have,

• that recipient would transfer the excess units to the proper recipient.



Petter (continued) Petter (continued)

After a review of the prior case law on adjustment clauses, including Procter, King, Knight, Ward, Harwood, McCord, and Christiansen, the court upheld the formula clauses in this case.

The court rejected the IRS’s public policy arguments, and concluded that “there was no severe and immediate frustration of public policy” as a result of the use of these formulasa result of the use of these formulas.

This case provides a road map for doing transactions based on defined value clauses.

Petter is due for a hearing in the Ninth Circuit on June 14 2011 Petter is due for a hearing in the Ninth Circuit on June 14, 2011.


Defined Value Clauses: Statutes and Regulations

Formulas to divide gifts and bequests between Formulas to divide gifts and bequests between marital and non-marital shares Sanctioned by Rev. Proc. 64-19, 1964-1 CB 682.

Formula GST Tax allocations Authorized in Treasury Regulations

Sec. 26.2632-1(b)(2)(ii) (lifetime transfers) and 26.2632-1(d)(1) (transfers at death)

Formula Disclaimers: Formula Disclaimers: Code §2518, Regs §25.2518-3(b), § 25.2518-3(d),

Example 20p


Defined Value Clauses: Statutes and Regulations

Formula adjustment clauses for charitableFormula adjustment clauses for charitable remainder trusts, charitable lead trustsRegs §1 664 2(a)(1)(iii)Regs. §1.664-2(a)(1)(iii) Rev. Rul. 72-395, sec. 501, 1972-2 C.B. 340,

344 (acceptable sample formula clause)344 (acceptable sample formula clause)Formula adjustment clause for GRATs:

T R §25 2702 3(b)(1)(ii) 3(b)(2)Treas. Reg. §25.2702-3(b)(1)(ii), -3(b)(2).


Defined Value Clauses: UpdatesDefined Value Clauses: Updates

Other than the upcoming 9th CircuitOther than the upcoming 9th Circuit hearing in Petter, since Petter (and up to May 23 2011 when this presentation wasMay 23, 2011 when this presentation was finalized), there have been no:New cases citing McCord Christiansen orNew cases citing McCord, Christiansen, or

PetterStatutory regulatory or legislativeStatutory, regulatory, or legislative

developments that might affect the outcome in a case involving a defined value formula gclause


Uses of Defined Value ClausesUses of Defined Value Clauses

Wills and Revocable TrustsWills and Revocable Trusts Disclaimers

Ch i ti lChristiansen exampleGifts Sales Irrevocable Trusts e ocab e ustsGifts to trusts (Petter example)Sales to TrustsSales to Trusts


Using Defined Value Clauses in Wills and Revocable Trusts

Whether the primary estate planning document p y p gis a will or revocable trust,

allocation of the person’s estate at death i ft d i b il bl t tiis often driven by available tax exemptions,

and defined value clauses are often used to allocate the estate according to the amount of various exemptions.estate according to the amount of various exemptions. Estate tax exemption: The common “A/B” plan uses defined

value clauses to allocate between one tranche that postpones estate taxes through the marital deduction and another trancheestate taxes through the marital deduction and another tranche that avoids it by using the estate tax exemption.

GST tax exemption: Defined value clauses allocate between GST tax-exempt and non-exempt shares, based on the amount


GST tax exempt and non exempt shares, based on the amount of available GST tax exemption.

Using Defined Value Clauses in Disclaimers

Christiansen scenario, disclaiming a bequest Christiansen scenario, disclaiming a bequest With explicit regulatory authorization, and a

precedent rejecting the IRS’s public policy p j g p p yarguments, a formula disclaimer using a defined value clause appears to be safe.

What about disclaiming part of a gift? If the transfer instrument or trust agreement provides

f l k ( f bl blfor an alternate taker (preferably a non-taxable transferee) in the case of a disclaimer by the primary donee, a formula disclaimer should also work in a gift , gcontext.


Using Defined Value Clauses in Gifts

Petter scenarioA d ld k i bl ift t f f A donor could make an irrevocable gift transfer of a clearly defined asset or set of assets to two or more donees, and use a defined value clause to allocate the transferred assets between or among those donees.

If the second donee, receiving the variable share including any excess value is a non taxable transfereeincluding any excess value, is a non-taxable transferee, this could have the desired effect of first discouraging gift tax audits, and then mitigating their negative effects when they do occur.

Query: should the variable share going to the non-taxable transferee have a material value before any


taxable transferee have a material value before any adjustment?

Using Defined Value Clauses in Sales

A scenario blending elements of Petter and Harwoodg(but hopefully with the success of the former?) A transfer agreement executed by all of the parties could include

the defined value clausethe defined value clause. The taxable transferee would purchase the fixed share for a

fixed price, while the non-taxable transferee would purchase the variable share (including the excess value if any) for a variablevariable share (including the excess value, if any) for a variable price.

Alternatively, the non-taxable transferee could receive the variable share as a giftvariable share as a gift.

As with the purely-gift case, query whether the non-taxable transferee’s variable share should have some


material value even before any adjustments.

Using Defined Value Clauses in Sales

Application to Case Study:Howard and Wendy’s Goal: Provide for their descendants while maintaining their ownHoward and Wendy s Goal: Provide for their descendants while maintaining their own lifestyle.Selection or Creation of Trust to be Used: Howard selects one of the following as a purchaser for an installment sale: the existing Hubert Trusts, the existing 2007 Trust, or a new trust for his family The Hubert Trusts have sufficient “seed money” capital to supportnew trust for his family. The Hubert Trusts have sufficient seed money capital to support an installment purchase, but the other trusts would need an influx of capital for that purpose, preferably cash or marketable securities.Installment Sale with Defined Value Clause: Howard then transfers some Management Corporation shares to two transferees under a Purchase Agreement, with each receiving a tranche: (i) the Sale Portion (the fixed share), as an installment sale, to the trust selected in the previous step, and (ii) the Gift Portion (the variable share) to a lifetime QTIP trust for Wendy. Using the Defined Value Clause: The Purchase Agreement defines the Sale Portion as the lesser of a fixed number of the transferred shares or a fraction of the shares, based on their value as finally determined for gift tax purposes, the fraction being:

Target Sales Price Amount


Target Sales Price Amount FMV total property transferred

Using Defined Value Clauses in Trusts

A defined value clause might be built into a trust agreement, as opposed to a separate transfer agreement.

A trust agreement might provide for either or both of the following formula allocations: Contribution of property, part of which is GST exempt and part of which

is not, should be allocated to separate shares based on exempt status Trust contributions or other events that result in a mixed inclusion ratio

f f ff fmay see the fund divided by the trustee by formula to effect a qualified severance

Division of the trust upon the grantor’s death between the portion includible in the grantor’s taxable estate and the rest of the trustincludible in the grantor s taxable estate and the rest of the trust

Allocation by the trustee between the fixed share with a taxable transferee as beneficiary and a variable share, including any excess value, with a non-taxable transferee as beneficiaryy


Designing the Formula:“How Low Can You Go?”

Query: Should the transfer be designed so that the Q y gvariable share (the one receiving any excess value in case of adjustments resulting from a transfer tax audit) has a significant value even before any adjustment?has a significant value even before any adjustment?

“How low can you go” in setting the pre-adjustment allocation to the variable share?

Does it look bad if the variable share is zero or near zero under the values as reported on the return?Sh ld “ ti ” b id d? Should “optics” even be considered?


Alternative Recipients for Excess Value

Alternative recipients for excess valueAlternative recipients for excess value under Petter-type formula allocation Public charityPublic charityDonor advised fund Private foundationPrivate foundation GRAT

CLATCLAT Intervivos QTIP or outright marital gift


Public Charity as R i i t f E V lRecipient for Excess Value

Strongest form of tax-neutral transferee toStrongest form of tax neutral transferee to receive the excess value (variable share) under a defined value clauseunder a defined value clause.Existing favorable precedents.A large public charity will typically have theA large public charity will typically have the

resources, expertise, and motivation to enforce its own rights under the defined valueenforce its own rights under the defined value clause.


Donor Advised Fund (“DAF”) as R i i t f E V lRecipient for Excess Value

DAFs give the donor the advantage of allowing allocation of charitable funds to multiple charities over timecharitable funds to multiple charities over time.

DAFs are structured as public charities and are generally treated the same for tax purposes. The charity operating the DAF h th th it ( l i d) t d li d ’DAF has the authority (rarely exercised) to decline a donor’s advice as to allocation, thereby making the transfer to the DAF a completed gift that is generally eligible for charitable d d tideductions.

The charitable transferees in Petter were DAFs operated by community foundations.y

A large DAF may be better than a small public charity as the recipient of the excess value in a defined value clause; the large DAF may be more able to defend its interest This waslarge DAF may be more able to defend its interest. This was alluded to by the Tax Court in Petter.


Private Foundation as R i i t f E V lRecipient for Excess Value

Taxpayers do not yet have a favorable Taxpayers do not yet have a favorable precedent involving a defined value clause with a private foundation receiving the excess value.

A court might distinguish a case involving a private foundation by considering whether the private foundation has the resources or the independence required to defend its rights to object to the original valuation or to receive aobject to the original valuation or to receive a higher share in case of revaluation.


GRAT as R i i t f E V lRecipient for Excess Value

Using the GRAT as the recipient for the excess value in a defined value f l l t k d t f th GRAT’ lf dj t t lformula clause takes advantage of the GRAT’s self-adjustment clause (authorized under Treas. Reg. §25.2702-3(b)(1)(ii), -3(b)(2)) to substantially or completely eliminate the risk of gift tax resulting from a gift tax audit adjustmentgift tax audit adjustment.

Taxpayers may not be able to rely on the favorable precedents involving public charities as the recipient of the excess value.A d t ift t GRAT h ti A zeroed-out gift to a GRAT has competing concerns; some practitioners avoid them for that reason.

Query: if a GRAT is used, should it be funded with anything else to give it b t ?it some substance? Stated another way, if the GRAT receives nothing (or next to nothing) if the values as reported on

the return are not challenged, would that give some court that is seeking some basis to support the IRS position an excuse to dismiss the GRAT as having no substance and no purpose other than to discourage gift tax audits with the consequence that the defined value transfer isthan to discourage gift tax audits, with the consequence that the defined value transfer is disregarded?


CLAT as R i i t f E V lRecipient for Excess Value

The Christiansen case was a taxpayer victory and p y yinvolved a CLAT as the recipient of part of the excess value.Th CLAT ti h ld t b i lid di l i The CLAT portion was held to be an invalid disclaimer because of the disclaimant’s interest in the CLAT remainder, but that did not invalidate the defined value formula clause or indicate that a CLAT would not be a valid recipient for the variable share with the excess valuevalue.

If a CLAT is used, then neither the transferor nor the disclaimant (if a disclaimer is involved) should be beneficiaries of the CLAT remainder.


Intervivos QTIP as R i i t f E V lRecipient for Excess Value

Lacks some of the arguments availableLacks some of the arguments available when public charity is the recipient For example consider the possible return ofFor example, consider the possible return of

property interest if donee spouse predeceases donor/spousep p

Enhanced asset protection alternative in states that protect the donor/spouse asstates that protect the donor/spouse as recipient of originally transferred property


Advantage of Using Grantor Trusts T f f B th P tas Transferees for Both Parts

Even when a defined value clause works and is upheld by courts, there is a potential problem on the income tax side.

The fixed share and variable share are supposed to be allocated retroactively, but the allocation of income (via 1099s and K-1s) between the shares may have already been reported on returns. This may require that those tax returns be amended.

If the fixed share and variable share both pass to trusts that are grantor trusts as to the transferor, then the retroactive reallocation of the income-producing property should not require any amended returns for those periods between the original transfer and the d t i ti th t th i iti l ll ti d d t b t ti ldetermination that the initial allocation needed to be retroactively adjusted.


Strategies for Dealing With IRS Challenges

Documenting transactionsDocumenting transactions Appraisals

D i i b t ti t tiDecisions about reporting transactions on gift tax returnsDisclosure implicationsStatute of limitations discussion

• Consider reporting gifts, even those with little value, in order to run SOL


FacultyFaculty Susan M. Holzman, Shareholder, Orloff Lowenbach Stifelman & Siegel P.A.,

Roseland, N.J. Her focus is on tax and estate planning, including business succession planning, p g, g p g,

generation-skipping transfer tax planning, and the implementation of gift programs, life insurance arrangements, and intra-family sales. She is a Fellow of the American College of Trust and Estate Counsel and is on the Board of Consultors of the New Jersey Bar Association Real Property, Trust and Estate Law Section.

David J. Slenn, Akerman Senterfitt, Naples, Fla. He is Co-Chair of the ABA's Asset Protection Planning Committee. He speaks

nationally on the topic of asset protection planning and was featured in publications such as Bloomberg Law Reports, Leimberg Information Services and the ABA's g p , gProbate & Property magazine. He has more than eight years of experience in estate planning, life insurance planning, trust and estate settlement, and taxation.

Michael Whitty, Shareholder, Vedder Price P.C., Chicago He concentrates his practice in estate planning taxation and estate and trust He concentrates his practice in estate planning, taxation, and estate and trust

administration. He is a Fellow of the American College of Trust and Estate Counsel, and serves on the American Bar Association Section Council. He recently served as Chair of the Wealth Planning and Nontax Issues Group of the Probate and Trust Division of the Section of Real Property, Probate and Trust Law.Division of the Section of Real Property, Probate and Trust Law.


ContactContact Susan M. Holzman

[email protected]

David J. [email protected]

Michael [email protected]

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