IRS Reaffirms It Will Challenge Formula Gifts


With December 31st approaching quickly and the large $5,120,000 gift tax exemption disappearing, many clients are scrambling to make year-end gifts.  Our advice has been to make every effort to get appraisals by the end of the year to support any gift.  If a client is unable to get an appraisal in time, one technique being bandied about is to make a “formula gift” which transfers an interest worth a specific dollar amount rather than a set percentage.  Such gifts have traditionally been frowned upon by the IRS in any transfer that does not include a charity, but in the recent case of Wandry the court upheld such a gift to family members.  The IRS initially appealed the decision but recently dismissed its appeal.  However, the IRS announced today that it will not follow the decision in Wandry and will still challenge the use of formula gifts.  Because they have done so, it is uncertain whether year end planning using a formula clause will be successful and it is more important than ever to have appraisals completed before the end of the year.