Transcript Bailey, Moore, Glazer, Schaefer & Proto, LLP 16 Lunar

Bailey, Moore, Glazer, Schaefer
& Proto, LLP
16 Lunar Drive
Woodbridge, Ct 06525
Tel: (203) 397-7700
Fax: (203) 397-7717
2012 Estate Planning Techniques
Self-Settled Trusts/SLATs/Other
Donor Beneficiary Techniques
By: Michael D’Addio, JD
2012 Gift & Estate Tax Planning
Background
• The 2012 year presents a unique
opportunity:
– Take advantage of the $5,125,000 gift and
estate tax unified credit amount (scheduled to
be reduced to $1,000,000 in 2013, unless
Congress acts); and
– Take advantage of the maximum 35% gift tax
rate (scheduled to increase up to 55% in
2013, unless Congress acts).
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Proto, LLP
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2012 Gift & Estate Tax Planning
Super Wealthy
• For the super wealthy (i.e., single person or
couples with estates of $10 million or more):
– There is a risk that $8,250,000 of their estates will be
subject to tax after 2012 (if Congress does not
increase the unified credit exemption equivalent to
more than the $1 million per person scheduled for
2013), at a 50% or greater rate.
– 2012 may be the last year they can take advantage of
estate reduction techniques.
• NOTE: Even if Congress acts, it is not clear that it will
maintain the $5 million exemption. Democratic proposals set
the exemption level at $2 million or $3.5 million.
• NOTE: Prior to 2011, the gift tax exemption was set at only
$1 million. It is unclear that any legislative increase to the
estate exemption level will also increase the gift tax
exemption amount.
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2012 Gift & Estate Tax Planning
Moderate Estate Problem
• Utilization of the high exemption by the end of 2012
applies even to those with moderately high estates (not
only the super rich).
– Ex: H and W have an estate worth $4,000,000.
• Under 2012 law (and for the past many years) they have no estate
tax problem. The unified credit equivalent more than covers their
combined estates and they can pass assets with zero federal tax.
• If they pass away in 2013, with only a combined $2,000,000 unified
credit exemption, they will have a taxable estate of $2,000,000 and
a tax of about $800,000.
• These persons can find their estates having a substantial tax
problem under scheduled law.
• Anyone with an estate over $1 million or couple with a
combined estate over $2 million face a significant estate
tax problem in 2013 and later.
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2012 Gift & Estate Tax Planning
Moderate Estate Problem
• Those with moderate estates will be less
inclined to make substantial gifts.
– They will need to use assets for their living
needs.
– They will be concerned with transferring
control over the assets which constitute their
wealth.
• Even the superwealthy may look for
mechanisms to get access to transferred
assets.
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2012 Gift & Estate Tax Planning
“Have Your Cake and Eat It” Plans
• Possible solutions for estate reduction techniques
providing donors with some access to transferred assets:
–
–
–
–
Self-Settled Trusts;
Spouse Lifetime Access Trusts (SLATs);
Transfers with Power of Appointment in Trust;
Formula Gifts
• Trusts provide “safety valves” for unexpected
circumstances.
• NOTE: It is not tax efficient to make a completed gift of
assets to a trust and then bring assets back into the
estate at a later date.
– This essentially causes a wasting of the exemption.
– However if the returned assets are consumed, there is no estate
tax harm.
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2012 Gift & Estate Tax Planning
Risk Analysis
• Structuring of a gift tax plan for 2012 involves an
analysis of the technical risks associated with
each plan.
– Each technique carries a different risk of IRS attack.
• Careful drafting is required to minimize these risks.
• Facts and circumstances must also be considered as to how
they color the potential tax results.
• The issue of a gift “clawback” or “recapture”
must be considered before a transfer is made.
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2012 Gift & Estate Tax Planning
Potential Clawback/Recapture
• One concern involves the impact of a reduction
of the gift/estate tax exclusion when the donor
dies at the time when there is a lower exclusion.
– This concern is caused by the way the Form 706
deals with prior taxable gifts.
• They are added to the taxable estate to produce a cumulative
taxable amount under the estate and gift tax systems.
• Once a tax is computed on this combined amount, this tax is
reduced by the unified credit (which is the tax calculated on
the unified credit exemption amount)
– If in 2013 this amount is the tax on a $1,000,000 exemption,
then the deceased will pay tax on the previously nontaxable
gifts.
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2012 Gift & Estate Tax Planning
Potential Clawback/Recapture
• If there is a clawback, this may only equal the
tax that would apply if no transfer had been
made.
– There is no estate tax harm (unless the asset
transferred has decreased in value). However, the
recipient takes an income tax basis under the gift tax
rules (generally the same tax basis as the donor’s)
instead of a fair market value basis.
– Since the assets transferred by gift are not part of the
estate, the estate tax will generally be borne by the
heirs of the remaining estate assets.
• NOTE: It is possible that one could have gifted a large
enough portion of the estate so that the estate taxes exceed
the remaining estate assets.
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2012 Gift & Estate Tax Planning
Potential Clawback/Recapture
• Approach #1 – There is no clawback
– Under old IRC section 2001(b)(2) [scheduled to be revived in
2013], the tentative tax calculated on the taxable estate and prior
taxable gifts is reduced by “the aggregate amount of tax which
would have been payable under chapter 12 [gift tax] …if the
provisions of subsection (c) (as in effect at the decedent’s death)
had been applicable at the time of such gifts.”
– One interpretation treats the tax as what would have been paid
under the law in effect in the year of death (2013 or later).This
eliminates the clawback issue as applying to the credit amount.
• This positive interpretation is based on a return to the old tax law. If
Congress changes the law, this argument will not apply unless the
clawback issue is directly addressed in the law.
• The ABA, AICPA and other tax organizations are aware of this issue
and it is believed that it will be addressed.
– Others interpret this language to apply only to adjust the rates
used to compute the deemed tax on the gifts – but not to account
for the reduced exemption amount. This produces a clawback.
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2012 Gift & Estate Tax Planning
Potential Clawback/Recapture
• Approach #2: Provide for an
apportionment of any increased estate tax
due to prior gifts among the beneficiaries
of the estate and gift donees.
– There are questions as to the effectiveness of
such a provision. There is some authority on
both sides.
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2012 Gift & Estate Tax Planning
Potential Clawback/Recapture
• Approach #3: Structure the transfer as a net gift – so that
the donee assumes the legal responsibility to pay any
estate taxes attributable to the inclusion of the gift in the
estate tax computation.
– Typical net gift obligates donee to pay the gift tax on the transfer,
which normally is readily determinable (though subject to
valuation adjustment).
– Related estate taxes could take years to determine, making the
net gift computation difficult.
• In McCord v Com’r, 461 F3d 614 (5th Cir, 2006), court held that net
gift is reduced by donee obligation to pay additional estate taxes
caused by estate inclusion within 3 years of payment of the gift
taxes under IRC section 2035(b).
• Similar argument can be made her – though a court could conclude
that difficulty of computation makes it impossible to reduce the gift
value.
– Obligation to pay the transfer taxes is deemed consideration to
the donor and can produce income tax consequences.
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2012 Gift & Estate Tax Planning
SLATs
• Spousal Lifetime Access Trust (SLAT)
– Donor can create a family trust for the benefit of the
donor’s spouse and children.
• This is a completed gift into a credit shelter trust.
• Though Donor does not retain any powers over the trust and
is not a permissible distributee, the donor can benefit through
distributions made to the spouse.
– Distributions can be made to the children, who can loan or gift
assets back to the donor.
– The distributions can be subject to trustee discretion or can be
the subject to an ascertainable standard (e.g., for health,
education, maintenance or support).
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2012 Gift & Estate Tax Planning
SLATs
• Spousal Lifetime Access Trust (SLAT)
• Spouse can be given a non-cumulative withdrawal power of
the greater of $5,000 or 5% of annual trust value (a limited or
special power of appointment).
– This provides the spouse additional access to the trust assets
which can potentially benefit the donor.
– The limited power will not cause inclusion of trust assets into
the spouse’s estate.
» If spouse dies at time when the 5-and-5 power is available,
the value of trust assets that can be withdrawn will be
included.
» Trust can provide a limited window (e.g., 30 days) to
exercise or else the power lapses.
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2012 Gift & Estate Tax Planning
SLATs
• Each spouse can create SLATs for the other:
– While both spouses are alive, they potentially,
through exercise of trustee discretion, have access to
all of the assets held by the trusts if the trustee
determines they need it.
– If one spouse dies, then the trust of which they are
the beneficiary will now be held for the other family
members/beneficiaries.
• However the surviving spouse is still the beneficiary of the
trust created for his/her benefit.
• 50% of the assets remain for the benefit of the surviving
spouse.
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2012 Gift & Estate Planning
SLATs
• Drafter of Dual SLATs must avoid the Reciprocal
Trust doctrine.
– If IRS determines that both trusts are reciprocal, then
each spouse will be deemed to be the donor of the
trust created for his/her benefit. IRS will argue that the
trust assets should be included in his/her estate under
IRC sec 2036 or 2038.
• This doctrine applies where trust have interrelated, reciprocal
and substantially identical property interests created by two
persons for the benefit of the other.
• US Supreme Court first enunciated this doctrine in US v
Estate of Grace, 395 US 316 (1969).
– It is not a requirement that each trust be created as a quid pro
quo for the other or that there be evidence of a tax avoidance
motive. The key issues are whether the trusts are interrelated
and leave the transferors in essentially the same economic
position as if the trusts were not created.
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2012 Gift & Estate Planning
SLATs
• In Estate of Levy v Com,r, TC Memo 1983-453: Trust were
considered not to be interrelated where one trust provided for a
power of appointment which was not present in the other trust.
• PLR 2004-26-008: IRS rules that two nearly identical trusts were not
reciprocal trusts where:
– One trust provided a withdrawal right to a spouse and a limited power of
appointment, both contingent on a son predeceasing the power holder
(which did not occur).
• IRS held the existence of the power was sufficient to avoid reciprocal trusts
– even though the contingency which triggered the powers was unlikely to
occur.
• Commentators believe that other differences:
– Payouts to beneficiaries at different ages;
– Payouts to one spouse under an ascertainable standard while payout to
other at trustee discretion
can avoid Reciprocal Trust status.
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2012 Gift & Estate Tax Planning
Power of Appointment to Donor
• As Part of a SLAT or other trust, a power of appointment
can be included to allow the spouse or another person to
redirect trust assets to the original donor.
– Donee spouse cannot be allowed to appoint the trust assets to
his/her estate, his/her creditors, or the creditors of his/her estate.
– Testamentary power to appoint back to the donor-spouse can be
used where the beneficiary-spouse predeceases the donorspouse, who has a need for additional resources.
– HOWEVER there cannot be a pre-arrangement. If there would,
there would be inclusion.
• NOTE: State law issue to be considered is whether such
an exercise could be considered to be a “self-settled
trust” which can permit creditors of the donor access to
the trust assets. This could cause inclusion under IRC
sections 2036 or 2041.
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2012 Gift & Estate Tax Planning
Power of Appointment to Donor
• The transaction becomes riskier from a tax
perspective if additional powers (like this
appointive power is included).
– It raises the specter of an arrangement
between the donor and the power holder.
– The tax advisor must compare the risks to the
ultimate needs of the client.
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2012 Gift & Estate Planning
Self-Settled Trust
• Another possible solution is use of a “self-settled trust”
created in certain jurisdictions [Domestic Asset
Protection Trusts (DAPTs)]
– A trust created by the donor of the property,
– Where the Donor is a potential beneficiary of the trust, at the
discretion of the Trustee,
– There is no Mandatory right to distributions to the Donor,
– Trust contains a spendthrift provision –preventing the trustee
from using trust assets to satisfy the Donor’s creditors.
• This trust can be:
– Created as an off-shore trust (in several foreign jurisdictions with
friendly trust laws); or
– One of seven jurisdictions in the United States which limit the
rights of creditors of a donor.
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2012 Gift & Estate Planning
Self-Settled Trust
• Twelve states have statutes which permit
Domestic Asset Protection Trusts if
statutory requirements are met:
– Alaska
– Delaware
– Nevada
– Rhode Island
– Utah
– Missouri
South Dakota
Wyoming
Tennessee
New Hampshire
Oklahoma
Hawaii
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Self-Settled Trust
Background
• Historically, US courts have not permitted
a person to create a spendthrift trust
where the person is a beneficiary and to
use such trust to protect him/herself from
his/her creditors.
– In part, this plan was seen as an attempt to
defraud potential creditors.
– This follows the rule of the Restatement of
Trusts.
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Self-Settled Trusts
Gift & Estate Tax Consequences
• PLR 2009-44-002 (10/30/09) – IRS addressed gift and estate tax
issue.
– Trustee had power, in sole and absolute discretion, to distribute income
and principal “for the benefit of one or more members of the class”
including the grantor, grantor’s spouse and grantor’s issue.
– State statute permitted creditor protection in a self-settled trust if certain
conditions were satisfied unless:
•
•
•
•
The trust was revocable;
Donor intended to defraud a creditor;
Donor was in default of child support obligation; or
Trust mandates all or part of income or principal be distributed to grantor.
– IRS ruled a transfer to the trust was a completed gift.
– IRS ruled that since none of the 4 factors allowing creditor satisfaction
existed, the trust was not included in grantor’s estate.
– IRS did not rule on whether trustee discretion in combination with other
factors (e.g., pre-existing arrangement or understanding between
trustee and Grantor) would cause inclusion under IRC sec 2036.
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Self-Settled Trusts
Gift & Estate Tax Consequences
• IRC sec 2036 will cause inclusion in the grantor’s estate
where his/her creditors can look to the trust assets to
satisfy claims.
• Mortensen v Battley is an Alaska bankruptcy case in
which a bankruptcy court held that an Alaska self-settled
trust did not protect assets from creditors under federal
bankruptcy law.
– The court found that Mortensen intended to defraud his creditors
since he did not retain sufficient assets after the transfer to trust
to support current and future debts.
– Mortensen filed bankruptcy after the four year state of limitations
look-back under Alaska but within the 10 year federal look-back
statute.
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Self-Settled Trusts
Mortensen v Battley
• Mortensen:
» Used a template, had it reviewed by an attorney who suggested
minor changes.
» Named brother and a personal friend as trustees
» Named his mother as a protector
» Stated purpose of trust was “to maximize the protection of the
trust estate or estates from creditor claims of grantor or any
beneficiary and to minimize all wealth transfer taxes.”
» Transferred Alaska real estate with value of $60,000 and $80,000
of $100,000 received from his mother
» Had other assets of about $73,000.
» Had $49,711 of credit card debt at time of transfer.
» Post transfer, credit card debt increased significantly.
» In August 2009, he filed a petition for bankruptcy having over
$250,000 in credit card debt and $8,140 in medical bills.
• Bankruptcy trustee filed an adversary proceeding to set aside the
trust as a fraudulent conveyance.
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Self-Settled Trusts
Mortensen v Battley
• Bankruptcy Court
» (After first denying summary judgment cross motions) held
for Trustee holding assets available for claims of grantor’s
creditors for ten years under federal bankrupcty law.
» Sec 11 USC 548(e)(1) provides that trustee may avoid any
transfer of an interest of debtor in property made on or
within 10 years before the date of filing of the petition of
bankruptcy, if
a) such transfer is made to a self-settled trust or similar
device;
b) such transfer was made by the debtor;
c) the debtor is a beneficiary of such trust or similar device;
and
d) the debtor made such transfer with actual intent to
hinder, delay, or defraud any entity to which the debtor was
or became, on or after the date that such transfer was
made, indebted.
» This section was added in 2005 to close the “self-settled
trust loophole”.
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Self-Settled Trusts
Mortensen v Battley
• Ruling:
» The trust clearly met the first 3 statutory tests.
» Question was whether there was actual intent to
hinder, delay, or defraud any entity.
» While Mortensen said the purposes of the trust was
to protect and preserve property for his children, the
stated purpose of the trust was to frustrate the claims
of future creditors.
» Court said he created trust after years of below
average income, high credit card debt and financial
troubles from a divorce.
» He did not use the money received from his mother
to pay off debts but to speculate on stock for the
trust.
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Self-Settled Trusts
Mortensen v Battley
• Reaction to Mortensen
– The bankruptcy court case was fact specific in finding
intent to defraud and should not negate estate tax
benefit of all self-settled trusts in DAPT jurisdictions;
• Even DAPT jurisdictions will protect creditor rights if there is
a fraudulent conveyance or intent to defraud.
– If state law has a look back period during which
creditors may make claims against trust assets, some
practitioners question if there may be an estate
inclusion issue during this period.
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Self-Settled Trusts
Mortensen v Battley
• Reaction to Mortensen
– How does a DAPT established in one
jurisdiction apply to a grantor living in a nonDAPT jurisdiction.
• If a judgment is received against the grantor in the
non-DAPT jurisdiction, the full faith and credit
provisions of the US constitution provide that it
must be recognized in the DAPT jurisdiction.
– Some argue that this applies only to the judgment as
against the grantor, who is a different from the trust.
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Self-Settled Trusts
Conflicts of Laws
• Reaction to Mortensen
– It may be better to establish a self-settled trust
offshore, in a jurisdiction not subject to
bankruptcy control.
• Grantor may still be subject. However the assets
may not be directly reachable.
• NOTE: A bankruptcy court may direct grantorbankrupt to direct payment of assets or else hold
grantor in contempt.
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Self-Settled Trusts
Conflicts of Laws
• Commerce Bank v Bolander, 239 Ped 83 (Kan
Ct App, 2007)
– Facts:
» T created a trust in Kansas with self as potential
beneficiary. Kansas was designated as governing law,
named a Kansas successor trustee, and was funded with a
pourover from T’s estate.
» Kansas law follows normal rule that self-settled trust assets
are subject to creditor claims. Additionally, Kansas law
provides that creditor rights are not cut off once the settlor
dies (more controversial rule).
» T’s IRA was payable to the trust. IRA benefits are
statutorily exempt from creditor claims which could not be
reached during T’s life. [If T had named specific
beneficiaries of the IRA, the assets would continue to be
exempt.]
» T spent the last 6 weeks of life in a Texas health-care
facility and received Medicaid from Texas.
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Self-Settled Trusts
Conflicts of Laws
• Commerce Bank v Bolander, 239 Ped 83
(Kan Ct App, 2007)
– Facts (cont):
» Debt arose in Kansas and was secured with T’s real
and personal property.
– Conclusion:
» Since Kansas law did not violate the law of any
jurisdiction having the most significant relation to the
matter at issue (typical conflict of laws test), court
applied Kansas law.
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2012 Gift & Estate Planning
Trustee Removal
• Rev Rul 95-58, 1995-2 CB 191:
– IRS held that grantor’s retention of unqualified power
to remove the trustee and replace with a new trustee
(not the grantor) was not a retained power to
distribute and did not cause inclusion under IRC sec
2036 or 2038, where the trustee power was limited by
an ascertainable standard (health, education,
maintenance, support)
• Some trusts will use a “Protector” to oversee the
trustee and have the power to remove and
replace.
• Combination of these powers can be used in a
self-settled trust or SLAT to assure its proper
operation.
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• A series of cases have given taxpayer
victories with formula gifts.
– Petter v Com’r, 653 F 3d 1012 (9th Cir, 2011),
aff’g TC Memo 2009-280 [using a charitable
trust for the excess]
– Hendrix v Com’r, TC Memo 2011-133 [excess
going to a donor advised fund]
– Wandry v Com’r, TC Memo 2012-88 [excess
going to a marital trust]
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Petter v Com’r, 653 F3d 1012 (9th Cir, 2011),
aff’g TC Memo 2009-280
– Facts:
» T inherited stock in UPS from her uncle sufficiently large
that she was restricted from selling during a lock-up period
related to an IPO.
» T created Petter Family LLC (disregarded entity) and
contributed the UPS stock.
» T created two grantor trusts for children and gave them
LLC interests by a formula referring to the “dollar value that
can pass free of federal gift tax”.
» She assigned under sale documents an amount equal to
$4,085,190 of value as finally determined for federal gift
tax purposes (9 times amount of gift) for 20-year note.
» In both assignments, any excess would pass to two
charitable community foundations.
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Petter v Com’r, 653 F3d 1012 (9th Cir, 2011), aff’g TC
Memo 2009-280 (cont)
– IRS argued:
» Cases like Com’r v Proctor, 142 F2d 824 (4th Cir), revg & remg 2
TCM 429 (1943) held that formula adjustment clauses were not
valid as:
a) against public policy (discourage tax collection);
b) relied on a condition subsequent
– Court:
» Public policy argument is undermined by Com’r v Tellier, 383 US
687 (1966), Supreme Court warned against invoking public policy
exceptions too freely.
» Later audit did not change what donor had given but triggered a
final allocation of the shares donees received.
» Donor who gives away a fixed set of rights with uncertain value
[formula clause] is different from donor who tries to take property
back (savings clause, found in Proctor).
» Did not accept IRS condition subsequent argument – that gift to
charity was subject to IRS audit. The transfers were effective
immediately.
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Proto, LLP
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Hendrix v Com’r, TC Memo 2011-133
– Facts:
» H and W wanted to make S corp stock gifts to family members (nonvoting
shares) and to a donor advised fund at Greater Houston Community
Foundation.
» H & W transferred $20,000 to establish donor-advised fund.
» Independent appraisal firm valued shares, in part based on values used in a
prior year corporate redemption.
» H & W transferred 287,919 shares (each) of nonvoting stock pursuant to a
formula where shares equal to $10,519,136 to benefit of family and
remaining portion to Foundation.
» Assignments required the trusts pay any gift taxes imposed as a result of
transfer and trusts signed promissory notes to H & W of $9,090,000 to each
petitioner.
» 2d set of assignments transferred 115,622 nonvoting shares with share to
family portion of $4,213,710 with note back of $3,641,233.
» Assignments did not allocate the shares. This was left to the transferees
with a dispute resolution and buy-sell agreement. Arbitration was required if
agreement could not be reached.
» Estate attorney represented the trusts and advised trustees to get new
appraisal. They hired same valuation company and sent the new appraisal
to the Foundation.
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Hendrix v Com’r, TC Memo 2011-133 (cont)
– Holding:
» Court accepted the Defined Formula gift to establish the
transferred amounts since the assets were hard to value
and the parties acted at arm’s length.
» Court noted that the case would be appealable to the 5th
Circuit and guided by that court’s decision in McCord v
Com’r, 461 F3d 614 (5th Cir, 2006), reg 120 TC 358 (2003),
which has sustained the use of defined value clauses,
generally.
» Court found there was no collusion, side deal or
understanding which would support the public policy
argument. The mere fact that parties are “close” and that
taxpayer’s estate plan is benefitted does not necessarily
negate existence of arm’s-length deal.
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Wandry v Com’r, TC Memo 2012-88
– Facts:
» In 2001, H & W forms investment LLC with children holding cash &
marketable securities.
» In 2004, H & W made gifts of their interests. Their attorney said it
would difficult to value the interests until a valuation was
completed. He suggested they gift based upon a specific dollar
amount instead of a specific number of shares.
» H & W gave $261,000 of interest to each of their children and
$11,000 to each of their grandchildren.
» Independent appraisal of shares was anticipated – though not
completed until after the transfer.
» Assignment stated that a good faith estimate was being made of
value but could be subject to good faith IRS adjustment. If the
value were adjusted, then the amount transferred would be
adjusted in a manner similar to a marital deduction formula clause
adjustment.
» Gift tax return reflected the dollar amount transferred – but also
showed a percentage interest transferred. The partnership tax
return also reflected such transfers.
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Wandry v Com’r, TC Memo 2012-88 (cont)
– IRS argued:
» Form 709 showed percentages transferred and this was an
admission that these units were transferred [since this
information was included on a signed return]
» The capital accounts of the entity control what was
transferred.
» Transfer documents transfer fixed percentages since the
formula gift was void as against public policy.
– Tax Court:
» While 709 did show percentages, it also showed the
amounts transferred, per the assignment documents.
» The facts and circumstances impact the capital accounts
(not the reverse). IRS had also relied on stock transfer
cases where the amount reflected on the transfer books
evidenced the gift. Those cases dealt with whether there
was a completed gift – not an issue here.
» Formula gift is not void (per McCord, Petter, Hexler cases)
and are distinguishable from formula adjustment clauses.
Bailey, Moore, Glazer, Schaefer &
Proto, LLP
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2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Wandry – important case
– Clear taxpayer victory.
– Establishes validity of Defined Formula Gifts.
– There was no residual beneficiary in this case
• Many practitioners believed it was necessary to
have a residual tax-favored entity (e.g.,charity,
charitable trust, marital trust) to pick up an excess
value.
– This may still be best practice.
• The case dealt with a naked power.
Bailey, Moore, Glazer, Schaefer &
Proto, LLP
41
2012 Gift & Estate Tax Planning
Defined Formula Gifts
• Wandry case:
– This case was appealed by IRS to the 10th Circuit.
• A pro-taxpayer result would be a significant loss to IRS.
– Per the Tax Court website, the IRS has withdrawn its appeal of this
case decision.
• No reason has been provided yet for this change.
• Implications of Wandry could be the elimination of all gift tax
valuation issues.
– It may foster a “swing for the fences” mentality, which may cause courts
to modify the results.
– Remember “bad facts make bad law”.
• Possible statute of limitation question on issue of amount
transferred.
– Since gift is not defined by units, it is possible that IRS will state that
even with adequate disclosure, they can question whether additional
assets are held by the transferor or marital trust.
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Proto, LLP
42