NOT ALL DEFINED VALUE CLAUSES ARE EQUAL

Abstract

Defined value clauses, used to value nonmarketable family limited partnership (FLP) interests, create valuation distortions and other public policy issues. This article describes these abuses and proposes the employment of restrictions similar to those applied to pecuniary formula marital deduction clauses.This article explains how pecuniary formula marital deduction provisions created valuation distortions by allowing for undervaluation of the marital share that were remedied by the IRS’s Rev. Proc. 64-19 and the enactment of § 2056(b)(10). Additionally, this article analyzes recent case law expanding the use of defined value clauses into the FLP area and criticizes the courts for not applying the public policy doctrines of Procter and Robinette to those cases. This article also distinguishes defined valuation clauses in the FLP context and shows how all fixed value clauses are not equivalent. Finally, this article proposes solutions for overcoming the valuation distortions that these clauses create.