Probate & Trust Law Section Conference Manual ... - Minnesota CLE

formula disclaimer might renounce “that portion of H’s estate that does not qualify for the
federal estate tax marital deduction, plus the largest pecuniary amount (if any) that can be added
to such amount without incurring state estate tax….” Treas. Reg. §25.2518-3(d), Example 20 is
an example of such a fractional share disclaimer.
A third approach to limiting the amount of the hard-to-value asset transferred to the credit share
would be to disclaim an explicit pecuniary amount of the asset described by a formula. Reg.
§25.2518-3(c) clearly authorizes the disclaimer of a pecuniary amount. A 2012 Tax Court case
providesguidance as to what such a pecuniary formula disclaimer might look like.
A. The Wandry Case
In Wandry v. Commissioner, T.C. Memo 2012-88 (March 26, 2012) the Tax Court approved gifts
of LLC unitsthe taxpayersmade using a formula clause that transferred stated dollar values
(pecuniary amounts) to children and grandchildren. The Wandry decision caused quite a stir
among commentators. By many accounts it was the major estate planning case of the year.
Wandry was a gift tax case. It’s asignificant case because it was the first reported case to hold
that a “formula transfer clause”(as opposed to a “formula allocation clause”) was valid. It also
represented the first time a court had approved a defined value clause gift where a charity wasn’t
involved.
In Wandry the Court held the taxpayers made gifts of a specified dollar value of membership
units rather than of fixed percentage interests in the LLC. Furthermore, the Court held such
aformula transfer clause did not violate the condition subsequent prohibition of Commissioner v.
Proctor, 142 F.2d824 (4 th Cir. 1944). The Court stated that the absence of a charity to take a
portion of the property transferred under the Wandrys’ formula did not render the formula an
impermissible condition subsequent or violate public policy. Even though the Wandrydecision is
significant primarily to those doing gift or sale planning, the conceptual framework approved by
the court is also instructive in the context of disclaimers of hard-to-value assets.
In Wandry the taxpayers’ gifts of LLC units were described on assignments and memorandums
of gift. Notably, the Tax Court recited the language of the gift documents verbatim on page 5 of
its opinion. Each gift document provided:
I hereby assign and transfer as gifts, effective as of January 1, 2004, a sufficient number of
my Units as a Member of Norseman Capital, LLC, a Colorado limited liability company, so
that the fair market value of such Units for federal gift tax purposes shall be as follows:
Name
Gift Amount
Kenneth D. Wandry $261,000
Cynthia A. Wandry $261,000
Jared S. Wandry $261,000
Grandchild A $11,000
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