Sales to Irrevocable "Grantor" Trusts - Formula Transfer to Mitigate Gift Tax Risks Approved by US Tax Court

By Richard S. Franklin

Selling assets, particularly business interests, to irrevocable "grantor" trusts have become a mainstream estate planning technique. Yet the IRS has become increasingly aggressive in attacking the valuations applicable to intra-family sales of interests in closely held entities. The bone of contention is usually the level of valuation discounts used by the taxpayer for lack of control as to a minority interest and lack of marketability for the interest being closely held, for which there is no ready market. If the IRS could sustain a higher value for the sold interests, it would argue that the seller (usually the parent or grandparent) has made a deemed gift of the additional value and owes gift taxes. Recently, in the context of an intra-family sale of assets, a taxpayer prevailed in mitigating the risk of owing gift taxes by using a so called "formula allocation clause."

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