Federal Gift Taxes on Net Gift Agreement

• Friday, January 17, 2014
• Category: Wills, Trusts and Estate Litigation

In the case of Steinberg vs. Conn, 141 T.C. No. 8 (September 13, 2013), the Tax Court denied the IRS’ motion for summary judgment and ruled that a net gift agreement, in which the donees assumed responsibility for applicable gift taxes and for any increase in federal estate taxes imposed on the donor’s estate under IRC § 2035 (b) relating to the gift, effectively reduces the value of the gift for gift tax purposes. In making this ruling, the Court refused to follow its prior ruling in McCord v. Commissioner, 120 T.C. 358 (2003), which held that a net gift obligation did not reduce the value of the gift for gift tax purposes.

When the 89 year old donor made gifts to her daughters, they agreed to pay the federal gift tax liability and any federal or state estate tax imposed a result of the inclusion of the gifts in the donor’s estate if she died within three years of making the gifts. Her appraiser valued the net gift for gift tax purposes by reducing its fair market value by the gift tax paid by the donees and the actuarial value of their assumption of the potential estate tax. Citing McCord, the IRS argued that the reduction in value should be disallowed because the donee’s assumption of the potential estate tax liability had no value.

The Court held that McCord had been incorrectly decided, and that it was not “too speculative” to determine the amount of an estate tax that may be in effect when a taxpayer died, even if the potential estate tax might never be paid. The Tax Court also rejected the “estate depletion” argument, i.e. that the donee’s assumption of the IRC §2035 (b) tax accrued to the benefit of the donor’s estate rather than to the donor. Rather, it found that the donee’s assumption of the estate tax liability amounted to consideration in money or money’s worth under IRC §2512(b).

Reference: Probate and Trust Law Section, Newsletter No. 134.

Filed Under: Estate Planning: Estate Tax Litigation:

Contact our  Philadelphia Estate Litigation Attorney with your questions, comments or concerns. Pozzuolo Rodden, P.C. Law firm have the experienced lawyers that can help you, call them now!