Estate of Rector; Estate of Mirowski; Gross v. Comm'r; Holman v. Comm'rEstate of Rector; Estate of Mirowski; Gross v. Comm'r; Holman v. Comm'r
In 2008, there were several important decisions regarding the inclusion of family limited partnerships (FLPs) in the estate of a decedent under Internal Revenue Code Section 2036 and the valuation of gifts of partnership interests. Together, these cases indicate: For the bona fide sale exception of IRC Section 2036 to apply, clients still need a legitimate non-tax purpose for forming the FLP. The
January 1, 2009
David A. Handler
In 2008, there were several important decisions regarding the inclusion of family limited partnerships (FLPs) in the estate of a decedent under Internal Revenue Code Section 2036 and the valuation of gifts of partnership interests.
Together, these cases indicate:
For the bona fide sale exception of IRC Section 2036 to apply, clients still need a legitimate non-tax purpose for forming the FLP.
The more active management required for the assets of the partnership, the better.
Simplifying gift-giving can be a legitimate non-tax purpose for forming an FLP (although it probably shouldn't be the sole purpose).
Formation by one person who received 100 percent of the partnership interests does not preclude application of the bona fide sale exception.
Management strategies for limited liability partnership (LLP) assets should be documented and implemented.
Clients should not use distributions from a partnership to pay for their personal expenses; the partnership should not be treated as a bank account.
If the client serves as the general partner or managing member, the governing document should provide significant restrictions on the authority to make distributions (for example, make distributions mandatory, require the consent of all members, etc.)
Distributions from a partnership to pay estate or gift tax alone may not be enough to show an implied agreement that the client retained possession or enjoyment of the partnership assets, especially if the client's death was not anticipated or the client had other assets that could be contributed (or borrowed against) to pay at least part of such taxes.
If partnership assets may change in value and the donor bears economic risk of retaining the partnership interests prior to the gift, a short time between funding and gifting of interests won't necessarily mean an indirect gift has been made.
Let's look at the issues — 2036 inclusion and indirect gifts and valuation — involved in these cases and the courts' reasoning.
2036 Inclusion
Under IRC Section 2036(a)(1), a decedent's gross estate includes the fair market value (FMV) of transferred assets to the extent that she retained possession or enjoyment of, or the right to income from, the assets for her life or for any other period that does not end before her death. In order not to have a retained...
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