Two-Trust Gifting Plan Finesses Tennessee Inheritance Tax and Wandry Formula Concerns
I am currently working with an elderly gentleman who wants to make a gift of $5.25 million of LLC units to a trust for his wife and children. The value of the LLC units is uncertain. We are obtaining an appraisal of the LLC units; however, the IRS may disagree with the appraisal.
In addition to the valuation issue, my client may die within the next two years, which will cause the value of the gift to be added to his estate for Tennessee inheritance tax purposes. Unless the gift qualifies for the Tennessee inheritance tax marital deduction, his estate will owe Tennessee inheritance taxes which could be as much as $400,000. This tax will apply even if he gives his entire estate to his wife.
In order to address the valuation issue and the Tennessee inheritance tax issue, my client will establish a typical family trust, and a Tennessee QTIP Trust. The family trust will receive LLC units equal in value to $1.25 million as finally determined for federal gift tax purposes. The technique of making a gift that depends on the value determined for federal gift tax purposes is known as a “Wandry” formula, based upon a recent Tax Court case involving an analogous gift by Mr. Wandry.
The Tennessee QTIP trust will receive my client’s remaining LLC units that he intends to give which have an appraised value of $4 million. When my client files his 2013 federal gift tax return, he will make a QTIP election for the gift to the Tennessee QTIP trust of whatever amount is necessary to reduce federal gift taxes to $0. This formula marital deduction will ensure that no federal gift tax is payable even if the appraised value of the LLC units is successfully challenged by the IRS.
If my client dies before 2016, the gifts to both trusts will be added to his estate for Tennessee inheritance tax purposes. His estate will make a Tennessee QTIP election for the Tennessee QTIP trust pursuant to T.C.A. § 67‑8‑315(a)(6). By making the Tennessee QTIP election, inheritance tax will be avoided upon his death. If his wife also dies before 2016, the assets of the Tennessee QTIP trust must be included on her Tennessee inheritance tax return. However, if she lives to 2016 or beyond, Tennessee inheritance tax will be totally avoided.