Presenting a live 90-minute webinar with interactive Q&A Structuring Defined Value Clauses in Trust Transfers: Formula Allocations and Price Adjustment Clauses TUESDAY, JULY 18, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Paige K. Ben-Yaacov, Partner, Baker Botts , Houston Patrick J. Duffey, Attorney, Holland & Knight , Tampa, Fla. Jonathan J. Rikoon, Partner, Loeb & Loeb , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-961-9091 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.
Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you email that you will receive immediately following the program. For CPE credits, attendees must participate until the end of the Q&A session and respond to five prompts during the program plus a single verification code. In addition, you must confirm your participation by completing and submitting an Attendance Affirmation/Evaluation after the webinar and include the final verification code on the Affirmation of Attendance portion of the form. For additional information about continuing education, call us at 1-800-926-7926 ext. 35.
Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to “Conference Materials” in the middle of the left - • hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon. •
Background | Why Use a Formula Clause? Client wants to transfer hard-to-value assets to beneficiaries • Assets selected for growth potential compared to current appraised value Some of that is due to real business potential but with a trade-off in volatility and risk • • But some of it may be due to a depressed valuation: ― Market conditions ― Special risks and exposures – regulatory, tax environment. ― Closely held business interest with no control or marketability 5
The Problem | What If the IRS Disagrees on Value? A plain gift may generate unexpected gift tax cost A GRAT avoids the gift tax risk but - Mortality risk: all in estate if grantor does not survive term • Liquidity risk: GRAT has rigid formula for paying annuity • • Inter-generational gifting: Not readily available for generation-skipping planning A leveraged (installment) sale to a grantor trust can reduce gift tax cost without the mortality or liquidity risk of a GRAT . - But the risk of additional gift tax remains unchanged (same as a gift) and unaffected by the leverage of the installment note. Exception to the extent use of the note saves gift tax exemption to be available as an audit cushion 6
Solution | Can a Formula Save the Day? We know formulas work in some contexts: - Marital deduction/credit shelter legacies - GST exemption legacies - Disclaimers - Size of annuity/unitrust amount for charitable split interest trusts (CLATs, CLUTs, CRATs, CRUTs) Why not just give (or sell) so much of the asset as is worth $X (e.g., gift tax exemption), whatever percentage that turns out to be? Alternative: formula allocation clause – transfer entire asset but allocate the transfer between completed-gift transferee (by gift or sale) and non-taxable transferee. Or, sell the asset (or X% of it) for a price equal to its fair market value, whatever that turns out to be? 7
No Surprise | IRS Hates Formula Clauses in Gifts or Sales Public Policy (takes away incentive to audit, requires courts to decide moot cases) Technical arguments (condition subsequent: gift is already complete by the time clause kicks in) Potential for gamesmanship or collusion Encourages overly aggressive appraisals – no down side? IRS won some early cases but has been losing lately as practitioners learn lessons 8
The First Clause | (it didn’t work ) Procter (4 th Cir. 1944 ) Trust document said that if a court later determines that any part of this transfer is subject to gift tax, then that portion “shall automatically be deemed not to be included in the conveyance . . . and shall remain the sole property of” the transferor. Court: that’s a condition subsequent and the gift was already made and taxable before we rule, too late to reverse gift. Violates public policy; “ trifling with the judicial process. ” Discourages collection of tax. • • Decision of court would deprive the court of jurisdiction: once the final judgment fixes the gift tax liability, the gift (and the tax) disappears. End-run around the prohibition on declaratory judgments for tax cases. • 9
Proctor’s Progeny | Proctor Was Followed (for a while at least) Ward (TC 1986) • Gift of 25 shares of closely held stock, with the number of shares of the gift to be adjusted if the finally determined fair market value is other than $2,000/sh, such that each gift turns out to be $50,000. Donors argued they intended to give $50,000 worth of stock and the 25 shares was just • “representative of the value. ” But that’s not what the documents said. 2 of 3 Proctor public policy arguments still applied: no incentive for IRS to challenge valuation, • and the donor cannot be compelled “to reclaim a portion of the property” which would thus escape gift and estate taxation. Distinguishes King (below) as an arms-length sale, no donative intent; plus in King the clause • “operated to insure that no unintended gift was made” while here the agreement “purports to retroactively alter the amount of an otherwise completed gift. ” Does that mean if the gift had indeed been “so much stock as is worth $50,000 ” it would have Q: been OK? Form over substance – but a critical drafting point. 10
Proctor’s Progeny | Proctor Was Followed (for a while at least) McLendon (TC 1993) • Private annuity sale agreement in closely held business provided for adjustment of fixed dollar purchase price if final gift tax valuation differs from appraisal. • Analysis closely follows Ward . • Formula stated that if value "changed through a settlement process with the Internal Revenue Service, or a final decision of the United States Tax Court, the purchase price hereunder shall be adjusted accordingly." If the sale price had been a King- style “whatever the fair market value is” formula rather than a Q: fixed dollar price to be subsequently adjusted, would that have been OK? 11
Turning the Corner | What About a Price Adjustment Clause? King (10 th Circuit 1976): • Sale price of closely held stock to family trust used formula of similar sales to stock option plan. Ordinary course of business. Sale agreement provided: "if the fair market value . . . as of the date of . . . [the agreement] is • ever determined by the Internal Revenue Service to be greater than the fair market value determined in the . . . manner described above, the purchase price shall be adjusted to the fair market value determined by the Internal Revenue Service." Trial court had found that the parties really intended to pay FMV but they recognized that it was • difficult to ascertain. ― Actual price adjustment had real financial effect. ― No donative intent. • Distinguished Proctor based on these facts. ― Plus: no diminution of seller’s estate ― Unlike clauses where a contingency would “alter , change, or destroy the nature of the transaction. ” 12
A New Contender | Formula Allocation Clauses Used to limit gift or estate tax liability by: transferring a fixed or "defined" value portion of the asset to one or more taxable donees, and • allocating the rest of the asset to one or more non-taxable donees • Examples of non-taxable donees include charities, marital trust, etc. If the value going to the taxable donee is a fixed or "defined" amount, then: • an increase in the value of the asset on audit does not change the value passing to the taxable donee • only the value transferred to the non-taxable donee is adjusted, meaning no additional gift or estate tax should be due. 13
Recommend
More recommend
