# Defined Value Clause: Definition and How It Works in California

> A defined value clause is a formula in a gift or sale document that transfers a stated dollar amount of value instead of a fixed number of shares or units.

Source: https://ridleylawoffices.com/estate-planning-glossary-california/defined-value-clause/

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

A **defined value clause** is a formula in a gift or sale document that transfers a stated dollar amount of value instead of a fixed number of shares or units. If the IRS raises the value per unit, fewer units pass, and the gift stays where the family set it.

## How it works in California

Ridley Law’s [guide to defined value clauses](https://ridleylawoffices.com/defined-value-clause-wandry/) has more. Two cases set the rules most California families rely on. In [*Estate of Petter v. Commissioner* (9th Cir. 2011) 653 F.3d 1012](https://www.courtlistener.com/opinion/222532/estate-of-petter-v-commissioner/), the Ninth Circuit, the federal appeals court for California, upheld gifts and sales of LLC units to trusts in which any value above the stated dollar amounts went to charitable foundations, and it allowed a charitable deduction for the extra units the foundations received after an audit raised the value.

[*Wandry v. Commissioner*, T.C. Memo. 2012-88](https://www.courtlistener.com/opinion/4561801/wandry-v-commr/) went further and involved no charity. The Tax Court upheld gifts of membership units defined by dollar value, and it explained the line between a void “savings clause,” which tries to take property back if the value turns out higher, and a valid “formula clause,” which transfers a fixed set of rights whose value is uncertain.

## Why it matters

Hard-to-value assets are where audits happen. In a hypothetical, a parent gives children $5 million worth of units in a family real estate LLC, appraised at $1,000 a unit. Without a formula, an IRS value of $1,400 a unit turns the gift into $7 million. With a defined value clause, the gift stays at $5 million.

## Common mistakes

Drafting a savings clause that reverses the gift if the value turns out higher, the kind courts treat as void. Defining the gift as a dollar value in the document but recording a fixed number of units on the company’s books and the gift tax return as if the formula weren’t there. And skipping a qualified appraisal on the theory that the clause will fix any error.

## Related terms

- [Intentionally Defective Grantor Trust (IDGT)](https://ridleylawoffices.com/estate-planning-glossary-california/intentionally-defective-grantor-trust/): sales to an IDGT commonly use a defined value formula.
- [Family Limited Partnership (FLP)](https://ridleylawoffices.com/estate-planning-glossary-california/family-limited-partnership/): discounted partnership interests are the assets most often transferred by formula.
- [Grantor Retained Annuity Trust (GRAT)](https://ridleylawoffices.com/estate-planning-glossary-california/grantor-retained-annuity-trust/): a GRAT annuity can be stated as a fraction of value as finally determined, a built-in formula.

Part of the [California estate planning glossary](https://ridleylawoffices.com/estate-planning-glossary-california/). For the full treatment, see [Defined Value Clauses and the Wandry Clause: Formula Gifts That Survive an Audit](https://ridleylawoffices.com/defined-value-clause-wandry/).