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

Then, in Estate of Petter v. Commissioner, 15 the decedent inherited a large block of UPS
stock from her uncle in 1982. She transferred the stock to a family LLC. The decedent reserved
a fixed number of ownership units in the family LLC for herself (including all of the voting units),
assigned (through gift and sale transactions) a fixed dollar amount of the remaining units (with
a combined value of about $9 million) to two trusts for the benefit of two of her children, and
gave the remainder to two charities, the Seattle Foundation and the Kitsap Community
Foundation. When the Service determined that the value of the family LLC was higher than first
claimed on the gift tax return that reported the transfers, the Tax Court had to decide whether
to honor the formula clause used by the decedent and allocate more shares to the charities.
The decedent claimed that “she gave stock to her children equal in value to her unified credit
and gave all the rest to charity.” The Commissioner claimed that “she actually gave a particular
number of shares to her children and should be taxed on the basis of their now‐agreed value.”
The court held that the decedent used an effective formula clause, not a void savings
clause. “The plain language of the documents shows that [the decedent] was giving gifts of an
ascertainable dollar value of stock; she did not give a specific number of shares or a specific
percentage interest in the [family LLC]. Much as in Christiansen, the number of shares given to
the trusts was set by an appraisal occurring after the date of the gift.”
As a result of McCord, Christiansen, and Petter, it would appear quite safe for clients to
use a defined value clause when making gifts of “discounted” assets, especially where any
“pour‐over” amount passes to charity. Some practitioners felt that a charitable component was
essential to an effective defined value clause. But the Wandry case changed that.
2. Wandry: The Game‐Changer
In Wandry v. Commissioner, 16 the taxpayers, a married couple, formed an LLC in 2001
that was funded in 2002. On January 1, 2004, they gave interests in the LLC to their children and
grandchildren according to a formula that read as follows:
I hereby assign and transfer as gifts, effective as of January 1, 2004, a sufficient
number of my Units [in the LLC] 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
Jason K. Wandry 261,000
Jared S. Wandry 261,000
15 653 F.3d 1012 (9 th Cir. 2011).
16 T.C. Memo. 2012‐88 (March 26, 2012).
16