Apr 1, 2011 12:00 PM

Panacea or Pandora's box?

By Stephen Liss

Since 2006, taxpayers have won three significant victories related to valuation clauses. Numerous articles have been written on McCord,¹ Christiansen² and Petter,³ explaining both the legal underpinnings of those decisions and touting the advantages provided by valuation clauses when transferring hard-to-value assets.⁴ There's no denying that the estate planning community is steadily adopting valuation clauses, a trend only likely to accelerate in the coming years. With that in mind, it's time to think about the consequences that taxpayers will have to face when a valuation clause is actually implemented. That is to say, what happens when we get the value wrong and adjustments need to be made? Unfortunately, the answers aren't always clear.

Valuation clauses take several forms, but all attempt to mitigate the consequences of an inaccurate valuation. Imagine that John Jones wants to give $6 million worth of property to the Jones Family Trust (JFT), an intentionally defective grantor trust (IDGT), and he wants to give some other property to charity. If he wanted to give General Electric (GE) stock, it would be a simple matter because GE is a publicly traded company and readily valued. If John wants to give non-voting interests in a limited liability company (LLC) that owns $10 million of marketable securities, however, it's a more difficult exercise. If we hired three appraisers to determine what percentage of the non-voting LLC interests were worth $6 million, we would almost certainly end up with three different numbers. A non-voting interest in an LLC is a so-called “hard-to-value” asset and is therefore … well … hard to value. Honest people disagree. The solution is a valuation clause.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

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50 Years Ago This Month

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

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