Eighth and Ninth Circuits Affirm “Charitable Lid” Estate Planning Technique

The United States Court of Appeals for the Eighth Circuit has affirmed the Tax Court in a case involving the “charitable lid” estate planning technique utilized with intervivos defined-value transfers – a technique that effectively caps an estate’s tax liability.  The Tax Court, in a decision filed three weeks after the Eighth Circuit’s opinion, blessed the technique in a gift tax case.   In mid-2011, the Tax Court upheld the concept in another gift tax case. 

The estate planning version of the technique involves an estate plan whereby the decedent leaves a set dollar amount of the estate to the decedent’s children (or specific beneficiaries) with the residuary estate passing to a charitable organization.   The portion passing to the charity qualifies for the estate tax charitable deduction and, thus, puts a “lid” on the amount of estate tax owed.  That could be a particularly useful concept (especially for farm and ranch estates) if the Administration succeeds in its present attempts to eliminate valuation discounts for closely-help business interests or in its attempts to push through the Congress an increase in the federal estate tax. 

Two different variations of the technique were involved in the cases and were unsuccessfully challenged by the IRS.  The Eighth Circuit’s opinion is also the first Federal Circuit Court opinion in over 60 years to deal with the public policy arguments raised against the technique by the IRS.