| Estate planning attorneys and their clients are aware of the risk of an audit. Despite knowing this risk, they seek certainty. Business valuation is as much art, as it is science. Estate planning attorneys have devised techniques to hedge the aforementioned risk and provide their clients with a greater degree of certainty. One such technique utilized by estate planners is the use of Formula or Defined Value Clauses. The merit of defined value clauses seeks to mitigate audit risk, while providing the client with the certainty of knowing, at the date of transfer, their ultimate gift tax liability. While defined value clauses seem to be the “magic bullet” of providing certainty to clients, they have long been loathed by the IRS, and have been a “red flag” leading to an audit. This article discusses the use of defined value and formula clauses in high net worth estates. |
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