Background – Wandry (donor) transferred gifts of specific dollar amounts of membership units in a limited liability company (LLC). Pursuant to gift documents, units of the donors’ LLC were transferred to their children and grandchildren. The documents specified that the fair market value of the units was unknown at the time of the transfer, but the donors were transferring the number of units required to equal certain specified amounts.
In addition, the document stated that if the IRS challenged the eventual valuation of the units, the number of units transferred would be adjusted so that they still equaled the specified amounts. An independent appraiser determined the value of the LLC, and the donors’ CPA used the appraisal to report the number of units transferred on the donors’ gift tax returns.
Because the gift tax returns were consistent with the gift documents, the donor’s intent to transfer a specific dollar amount was established. Furthermore, there was no evidence that the LLC’s capital accounts reflected gifts of a specific percentage interest, as opposed to a set amount. In any case, capital accounts do not control the nature of gifts. Moreover, under the terms of the gift documents, the children and grandchildren were always entitled to a predefined number of units, which was expressed in terms of a specific amount. When the value of the units was increased, under the adjustment clause, the number of units that the children and grandchildren were entitled to decreased, but that did not alter the transfer. Instead, the adjustment clause corrected the allocation of membership units so that they accurately reflected the fair market value. Finally, formula clauses are not against public policy. Thus, the donors were not liable for a gift tax deficiency.
This allows for gifting of dollar amounts when the donor does not yet know the value of each unit (say, the units are valued after year end and the gifting occurs December 31 and January 2). This is a great win for estate and gift tax planning and allows for full useage of annual gift exclusions.
For more information or advice, please contact David R. Lingler at Cassady Schiller. firstname.lastname@example.org or 513.483.6640.