Structuring Defined Value Clauses in Trust Transfers: Formula Allocations and Price Adjustment Clauses

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Tuesday, July 18, 2017

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide estate planning counsel and advisers with a comprehensive and practical guide to successfully structuring defined value formula clauses to avoid gift tax consequences on asset transfers. The panel will provide specific guidance on making formula allocations to withstand IRS scrutiny and identify conditions in transfer structures that trigger gift tax imposition.

Description

The use of defined value clauses to mitigate gift tax impact on the transfer of hard-to-value assets has long been an item of IRS scrutiny. While the Service has lost a number of tax court challenges to defined value clauses, the Service continues to take an adverse audit position and to seek suitable new cases to take to court.

Several different types of defined value clauses have withstood IRS scrutiny, utilizing both formula allocations and price adjustment clauses. Critical to structuring a defined value clause is ensuring that the transfer was implemented properly and that no pre-arrangement exists between the transferor and the transferee.

In the current uncertain planning environment, with potential major changes and possible elimination of the estate tax with or without its replacement by capital gains recognition, it is more important than ever that lifetime transfers be protected as much as possible from unintended gift tax. A well-designed defined value clause is a crucial element of that protection.

Because the Service will likely continue to take the approach of scrutinizing the construction and implementation of defined value clauses, estate planners must ensure such clauses are properly drafted and strictly implemented according to their terms.

Listen as our experienced panel provides comprehensive guidance to structuring defined value clauses that will withstand IRS scrutiny and challenge.

We will review specific language designed to be as robust as possible if challenged yet flexible enough to be used in multiple contexts.

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Outline

  1. Types of defined formula value approaches
    1. Formula allocation clause based on subsequent agreement of involved parties
    2. Formula allocation clause based on final values as determined for gift tax purposes
    3. Price adjustment clauses
  2. Impact of Belk holding (4th Cir. 2014)
  3. Defined value clauses on IRS 2016-17 Priority Guidance Plan
  4. Exercising substitution powers using a defined value clause
  5. Traps to avoid

Benefits

The panel will review these and other key issues:

  • What are the grounds for IRS challenges of defined value clauses?
  • What types of defined value clauses have failed to withstand IRS challenges?
  • How to best structure defined value clauses
  • How to structure defined value clauses involving non-taxable transfers other than to public charities

Faculty

Paige K. Ben-Yaacov
Paige K. Ben-Yaacov

Partner
Baker Botts

Ms. Ben-Yaacov’s practice focuses on estate planning and estate administration for high net worth individuals,...  |  Read More

Patrick J. Duffey
Patrick J. Duffey

Attorney
Holland & Knight

Mr. Duffey focuses his practice on complex estate planning, trust administration and probate matters. He provides...  |  Read More

Jonathan J. Rikoon
Jonathan J. Rikoon

Partner
Loeb & Loeb

Mr. Rikoon practices in the areas of trust and estate planning, administration and litigation. He engages in...  |  Read More

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