Six ways to ensure successful defined-value clauses

BVWireIssue #112-1
January 4, 2012

After the recent string of taxpayer victories in cases concerning the use of defined value clauses, attorneys George Karibjanian (Proskauer Rose) and Stacey Delich-Gould (Cahill Gordon & Reindel) provided attendees at the most recent ABA Joint Meeting of the sections on Taxation and Real Property, Trust and Estate Law in Denver, Colo., five ways to “draft a (theoretically) successful defined-value transaction”:

  1. All parties, including the “spill-over” beneficiary, should be parties to the purchase and sale agreements.
  2. If the “spill-over” is to pass to another trust, such trust should have a different trustee than the primary trust in the transaction.
  3. All parties should retain separate legal representation or, at a minimum, should be afforded that opportunity.
  4. Professional valuations “are a must,” say the attorneys. Further, the spill-over beneficiary, as a party to the operative agreements, should have the right to challenge the valuation or obtain its own appraisal.
  5. The spill-over beneficiary (or trust) should receive significant value; this will help justify the independent review and approval of the value.

For more guidance, see our report of Estate of Hendrix v. Comm’r, in which the Tax court recently clarified the “arms-length” standard by which to establish an independent “spill-over” beneficiary.

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