May 1, 2007 12:00 PM, By David G. Shaftel, Shaftel Law Offices, P. C., Anchorage, Alaska

By: By David G. Shaftel, Shaftel Law Offices, P. C., Anchorage, Alaska

Whenever a client wants to cap gift tax exposure, planners should consider using a defined-value clause implemented by use of an escrow trust.

A defined-value clause limits the quantity of assets gifted or sold until a final determination of value is made. Because of the Tax Court's 2003 decision in McCord v. Commissioner¹ and recent rulings by the Internal Revenue Service, practitioners are worried that courts might not respect these formula clauses. On the one hand, they might be lumped in with “price-adjustment clauses” — which most courts have condemned as against public policy. On the other hand, a defined-value clause used to limit gift tax exposure in gift and sale transactions may be validated, as are other value definition formulas used in similar tax contexts.

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