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
1,099,000
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.
