9. Court upholds defined value clause without any “pourover” to charity. In recent years, several courts have validated an estate planning technique that effectively caps an estate’s tax liability.*28 The technique also is effective for gift tax purposes.*29 The estate planning version of the technique involves an estate plan whereby the decedent leaves a set dollar amount of the estate to the decedent’s children (or other specific beneficiaries) with the residuary estate passing to a charitable organization. The portion passing to the charity qualifies for the estate tax charitable deduction and, thus, puts a “lid” on the amount of the estate tax owed. Until a court opinion in 2012, the technique involved a transfer of a residual interest to charity each time.

In the 2012 case, a married couple gifted units in their LLC in 2004 to their children and grandchildren by means of a formula that fixed the number of LLC units to be gifted as of the date of the gift, with the value to be determined based on the fair market value of the gifted units which would be determined sometime later based on an appraisal, the IRS, or a court. In other words, the dollar value of each gift was established based on gift tax exclusions at the time of the gifts, with the number of LLC units gifted to be based on the fair market value of the LLC as determined later. The IRS challenged the gifts on the basis that they represented the transfer of a fixed percentage interest of the LLC instead of a specified dollar value. The court upheld the formula clause because it simply involved the allocation of LLC units among the parents and the donees. The parents could not re-claim the gifted units once the gifts had been made if a higher unit value was established post-gift — they simply had defined the units gifted as of the date of the gift. The IRS appealed to the U.S. Circuit Court of Appeals for the Tenth Circuit, but the IRS voluntarily withdrew its appeal before the court could rule. Later, the IRS issued a non-acquiescence to the Tax Court’s opinion. So, while the IRS will continue to challenge the technique, it can be a good approach to gifting business interests of large value as well as those interests that are difficult to value — both types of interests which are common in agricultural operations. Wandry v. Comr., T.C. Memo. 2012-88, non-acq., A.O.D. 2012-04, I.R.B. 2012-46.