FLP Assets Part of Decedent’s Estate
The partnership agreement stated that the FLP had three general purposes, “(1) to make a profit, (2) to increase the family’s wealth, and (3) to provide a means whereby the family members can become more knowledgeable about the management and preservation of the family’s assets.”
The Turners gave their three children and two of Jewell’s children limited partnership interests in the FLP on December 31, 2002 and January 1, 2003. The total fair market value of the partnership interest transferred at these times was $1,652,315 and $474,315, respectively.
Clyde died in February of 2004, and his estate filed a gift tax return in October of the same year. The estate characterized the FLP assets as being outside of the estate, the IRS challenged this characterization, and the case was sent to the Tax Court.
The Tax Court in Estate of Turner v. Commissioner, T.C. Memo. 2011-209 (2011), held that a decedent’s gross estate includes the value of any interest property he or she held at the time of death. The court specifically referenced Section 2036(a) when making its determination. Generally, when an individual transfers assets to an FLP, the individual must establish a “legitimate and significant nontax reason” for the transfer.
The court dismissed the three general purposes for creating the FLP under the partnership agreement, stating that the listed purposes did not necessary reflect the couple’s actual reason for making the transfers to the FLP. The court also stated that consolidated asset management can be a legitimate nontax purpose for an FLP formation, but not where an FLP is “a mere asset container.”
See William Byrnes and Robert Bloink, How to Build a Foolproof Family Limited Partnership, Advisor One, Sep. 17, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for brining this article to my attention.