Charitable Lids

Wayne E. Nix (Assistant Professor of Accounting, Jackson State University), Lee G. Knight (Professor of Accountancy, Wake Forest University), and Ray A. Knight (Managing Director of Capstone Planning Alliance LLC) recently published their article entitled New Life for Charitable Lids, Journal of Accountancy, Sept. 2010. The executive summary is below:

• The IRS has opposed “charitable lid” strategies to limit estate and gift taxes, but recent taxpayer victories in the Tax Court and Eighth Circuit Court of Appeals have opened a door for CPAs to at least explore them with clients in their estate plans.
• Defined-value clauses (also known as formula clauses) put a lid on taxes by expressing a gift by reference to a tax exclusion amount. Value-adjustment clauses designate a fair market value of a gift as it is “finally determined” for transfer taxes, ensuring that it will remain constant even if the valuation of underlying units changes as a result of an examination or other development.
• A partial disclaimer by a noncharitable beneficiary of an interest in excess of a stated amount, with that excess going to a charitable beneficiary, accomplished a similar result in Estate of Christiansen v. Commissioner (130 TC 1, aff’d, 8th Cir. (2009)).
• In Estate of Petter v. Commissioner (TC Memo 2009-280), the donor allocated gifts among charitable and noncharitable donees with defined-value clauses that were upheld by the Tax Court. The court’s opinion provides some indications of best practices to follow in such plans that could lessen the likelihood that they will be successfully challenged by the IRS.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.