Estate of Lockett: You Cannot Take a 40% Discount on a 100% Partnership Interest

Mrs. Lockett moved into an assisted living facility when her health began to decline. She also formed a family limited partnership at the time. After two years, she used cash and marketable securities from her trust and her personal assets to fund the partnership. When the trust was later dissolved, Mrs. Lockett became the sole owner of the partnership. The two sons were listed as general partners in the agreement, but the sons never contributed any assets, and their interests were listed as 0 in the agreement.

After the funding of the partnership, the partnership made loans to some of the children – many of which were documented in loan agreements with no terms on the principal payment, but with interest payments set up. The partnership also purchased some rental property and Mrs. Lockett kept some assets out of the partnership to care for herself.

When the Estate filed a tax return, it took a 40% discount on the assets within the partnership. At trial, there were two issues to be resolved: 1) whether Mrs. Lockett held the assets individually or in the partnership, and 2) whether the loans were gifts or loans.

In Estate of Lockett, the court found no evidence of property contributed by the two sons or gifts of partnership interest to the two sons. Additionally, after the dissolution of the trust, Mrs. Lockett directly owned 100% of the partnership, and the agreement supplemented that observation because it provided that if a partner acquired all the interests of the other partners, the partnership would dissolve. The Court ultimately found that the assets belonged to the Estate, so no discounts were justified.

The Court deemed the loan notes valid because of the signed agreements, and the fact that some repayments had been made.

See Lance S. Hall, A 40% Discount on a 100% Partnership Interest?, FMV valuation Alert, Apr, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.