Year-End Gift Planning: How Valuation Clauses Can Get Around a Late Appraisal

With the abnormally high gift/estate tax exemption amounts of $5.12 million set to sunset at the end of this year, many attorneys, CPAs and tax-advisors are rushing to help their clients take steps to make significant gifts.  For those who wish to take advantage of this unique opportunity, the clock is winding down.  For the gifts to be effective this year, the transfer must be completed by December 31.

Unfortunately, many planners are now realizing that scheduling appraisals this late in the year means that they will likely not have the appraisal figures back until next year.  Thus, a donor is left to wonder, if I want to make a gift of say, exactly $5.12 million to my children, how do I know how many shares of stock or LLC units to transfer this year if I won't know the value until next year.

Fortunately, due to the availability of defined value clauses and some recent Tax Court cases, the donor (and his/her advisers) can make large gifts with confidence.

In short, a donor need not specificy the exact number of LLC units given, all that needs to be specified is that value to be transferred, expressed in a mathematical formula.

A good example of such a formula clause is found in the recent Wandry decision, and reads as follows:

I hereby assign and transfer as gifts, effective as of January 1, 2004, a

sufficient number of my Units as a Member of Norseman Capital,

LLC, a Colorado limited liability company, so that the fair market

value of such Units for federal gift tax purposes shall be as follows:

                   Name                             Gift Amount

                   Kenneth D. Wandry        $261,000

                   Cynthia A. Wandry           261,000

                   Jason K. Wandry              261,000

                   Jared S. Wandry               261,000

                   Grandchild A                     11,000

                   Grandchild B                     11,000

                   Grandchild C                     11,000

                   Grandchild D                     11,000

                   Grandchild E                     11,000


Although the number of Units gifted is fixed on the date of the gift, that

number is based on the fair market value of the gifted Units, which

cannot be known on the date of the gift but must be determined after

such date based on all relevant information as of that date.

Furthermore, the value determined is subject to challenge by the

Internal Revenue Service (“IRS”). I intend to have a good-faith

determination of such value made by an independent third-party

professional experienced in such matters and appropriately qualified to

make such a determination. Nevertheless, if, after the number of gifted

Units is determined based on such valuation, the IRS challenges such

valuation and a final determination of a different value is made by the

IRS or a court of law, the number of gifted Units shall be adjusted

accordingly so that the value of the number of Units gifted to each

person equals the amount set forth above, in the same manner as a

federal estate tax formula marital deduction amount would be adjusted

for a valuation redetermination by the IRS and/or a court of law.

In short, while it would be preferrable to get the value before making the gift, a formula clause like the above gives the donor, and other professionals some breathing room.

Of course, one big caveat is to ensure that when the gift tax return is filed that the language on the return matches the language on the gift.  If the return just lists the exact number of shares, units, or percentage interest transferred the donor exposes himself to a potential challenge from the IRS alleging that a formula clause was not utilized.