Interest in Family Farm Included in Decedent’s Estate

In Estate of Howard V. Moore v. Commissioner, Howard Moore attempted to institute 11th hour estate planning, but the Tax Court held that his transfer of an interest in a family farm to a family limited partnership (FLP) wasn’t a bona fide sale and that he maintained possession and enjoyment of the farm (within the meaning of Internal Revenue Code Section 2036) after its sale, which rendered the value of the farm includible in his gross estate. 

Trusts and FLP Created

Moore Farms spanned approximately 845 acres in Arizona. In December 2004, Howard was given six months to live after suffering a heart attack and developing heat stroke. After suddenly falling into critical health, Howard decided to commence his estate planning. Four days after being released from the hospital, he established the following entities: (1) Howard V. Moore Living Trust, (2) Howard V. Moore Charitable Lead Annuity Trust (Charitable Trust), (3) Howard V. Moore Children’s Trust (Children’s Trust), (4) Howard V. Moore Family Management Trust (Management Trust), (5) Howard V. Moore Irrevocable Trust No. 1 (Irrevocable Trust), and (6) Howard V. Moore Family Limited Partnership.

Disallowance of Charitable Deduction

Howard transferred all of his real and intangible personal property to the Living Trust (including Moore Farms). He retained control over all assets held in the Living Trust during life, and on his death, the assets would be divided between the Charitable Trust and the Children’s Trust. The amount that the Living Trust would distribute to the Charitable Trust was defined as a fraction of the value of the estate, where the numerator is the smallest amount that, when transferred to the Charitable Trust, will result in the least possible federal estate tax being payable by the estate, and the denominator is the value of the Living Trust. On Howard’s death, the court held that the charitable deduction to his estate was disallowable under this formula because it was unknown at Howard’s death whether the Charitable Trust would receive any assets at all. 

No Bona Fide Sale

Interests in the FLP were divided into the following: (1) 1% General Partner interest to the Management Trust (of which Moore’s children, Virgil and Lynda were trustees), (2) 95% Limited Partner interest to the Living Trust and (3) 1% Limited Partner interests to each of Virgil, Ronnie, Milton and Lynda. Howard contributed 4/5ths of Moore Farms to the Living Trust, which in turn sold such interest to the FLP for its partnership interest, which was later sold to the Irrevocable Trust, a strategy intended to use valuation discounts for lack of control and lack of marketability of the sold partnership interest. 

Several facts led the court to conclude that the Living Trust’s sale of Moore Farms to the FLP wasn’t a bona fide sale. Testimony showed that none of the terms of the FLP were negotiated by any of the children, but rather the children joined the FLP simply because Howard asked them to do so. Howard had begun negotiating the sale of Moore Farms to the neighboring Mellon Farms in September 2004. On Feb. 4, 2005, within five days of the transfer of Moore Farms to the FLP, the sale to Mellon Farms closed. Howard coordinated and controlled the sale from start to finish, notwithstanding the fact that as of the closing date 4/5ths of Moore Farms was owned by the FLP, which was ostensibly managed by Virgil and Lynda as trustees of the Management Trust. The court concluded that, because the creation of the FLP wasn’t done for legitimate, nontax purposes and Howard’s unilateral decision-making, the transfer of Moore Farms to the FLP wasn’t a bona fide sale for adequate and full consideration.

Estate Inclusion

Following the sale of the farm, Howard completed several other tasks, which served as further evidence that the formalities of the FLP being a separate entity weren’t respected.  First, Howard directed payment to the estate-planning attorney who established the above entities and coordinated the transfers—80% of this payment came from the FLP’s share of the proceeds, and only 20% came from the Living Trust. Howard also directed the FLP to issue $500,000 “loans” to each of his children (however, no payment schedule was included with these loans, and no payments of principal or interest were ever made on them. The court subsequently deemed these to be gifts. Finally, Howard directed the FLP to pay $2 million to the Living Trust to cover land sale expenses, Howard’s income tax expenses on the transaction and other miscellaneous expenses. 

After the sale, Howard continued to live on the farm and actively managed and continued farming operations on it. The court concluded that Howard’s continued enjoyment of the property caused the inclusion of the undiscounted value of Moore Farms in his estate at its date of death value, pursuant to Section 2036(a). Further, the court held that the value of consideration (as of Howard’s date of death), which Howard had received in return for the sale of Moore Farms under IRC Section 2033, was includible in his gross estate, but this amount should be reduced (under IRC 2043 and under precedent set in the 2017 Powell case) by the value of such consideration at the time of transfer. As the court notes, this reduction under Section 2043 will cause an end result in which the amount included under the gross estate is simply the amount includable pursuant to Section 2036 (that is, “double inclusion” won’t occur), provided that the value of the consideration received doesn’t increase between the date of transfer and the date of death. Here, as the court notes, Howard’s death occurred only two months after the transfer, so the consideration value should remain the same, resulting in inclusion of the value of the farm at the time of death under Section 2036.