Transfer To Family Limited Partnership In Taxable Estate When Decedent Maintained Control Of Funds
The Tax Court ruled that $4 million in assets transferred to a family limited partnership must be included in a decedent’s estate under I.R.C. Section 2036 because the decedents maintained control over the funds after the transfer and there was no legitimate non-tax reason for the creation of the FLP
The Holiday family formed a family limited partnership (FLP) in November 2006, for the purpose of acquiring interests in business and property. The FLP was created by decedent’s sons three years after she was moved to a nursing home. The capital contribution to the FLP consisted solely of $5.9 million in marketable securities transferred from the decedent’s account. The decedent held an 89.9% limited partnership interest in the FLP until her death in January 2009. On the same day as the marketable securities were contributed to the FLP, the decedent sold all of her membership interest in the LLC that held a 0.1% general partnership interest to her sons and gifted a 10% partnership interest to an irrevocable trust. Decedent’s Estate claimed a 40% combined discount on her federal estate tax return.
The IRS claimed that under IRC Section 2036(a) (1), both the 0.1% general partnership interest and the 10% limited partnership interest should be included in the decedent’s gross estate, in addition to the undiscounted value of the remaining 89.9% limited partnership interest.
The Tax Court agreed with the IRS, finding that the decedent retained use and enjoyment of the property because the partnership agreement provided for the regular distribution of cash to partners but did not make such distributions, and there was an implied agreement allowing the decedent to make use of the funds transferred to the FLP. Partnership formalities were not observed in deciding whether to make distributions and the assets were not actively managed. The only real reason for creation of the FLP was to avoid transfer taxes after the decedent’s death by taking advantage of the valuation discounts afforded by the FLPs.
The Tax Court agreed with the IRS in finding no evidence of the three non-tax reasons claimed by the Estate for the formation of the FLP, which were: (1) protection of the assets from litigator’s claims; (2) protection from under influence on the part of caregivers, and (3) the necessity of an FLP to manage and preserve decedent’s assets. The Court countered each reason: (1) it ruled that the asset protection arguments were not effective because decedent maintained a significant amount of assets outside of the FLP and in any case was unlikely to be sued; (2) it noted that the protection from the undue influence of caregivers was not an issue because the decedent’s sons managed her financial affairs and that this reason was not brought up at the time of the formation of the FLP; and (3) an FLP was not a necessary entity for the management of the decedent’s assets, as a demonstrated by the fact that the assets of her deceased husband were all managed in trusts without difficulty.
See Estate of Holliday, T.C. Memo 2016-51 (March 15, 2016)
Reference: Margery J. Schneider, Esquire, Probate & Trust Law Section Newsletter, Philadelphia Bar Association (June, 2016, N. 142)
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