Family Limited Partnership Defeats Section 2036 of the IRC

The Stone family created a limited partnership called the Stone Family Limited Partnership (SFLP) as a means to divide their estate. Through this partnership, Mrs. Joanne Stone and her husband divided their partnership interest among their family members. Three years after the SFLP was created, Mrs. Stone and her husband held only a 2% interest in the partnership, 1% each, while their remaining family members owned a 98% interest. The question at issue here was whether the value of the assets that the Stones transferred to their family members should be considered as part of Mrs. Stone’s estate for tax purposes. 

In Stone v. Comm’r, T.C.M. (RIA) 2012-48 (2012), the Tax Court, determined that a limited partnership can prevent the application of Section 2036 if structured properly. The court concluded that a bona fide sale had occurred; therefore, Section 2036 did not apply. The court came to this conclusion for two reasons.

1. First, the court determined that the transfer of the assets to the limited partnership constituted a bona fide sale because it asserted that the Stones did have a non-tax motive in transferring the parcels of the limited partnership. Therefore, the court noted that the precedent established by Liljestrand v. Comm’r, T.C.M. 2011-259 (2011) would not apply here. (Bongard v. Comm’r, 124 T.C. 95, 121 (2005)). Finally, the court argued that other factors support the fact that a bona fide sale occurred. 
2. Second, the court found that the Stones displayed that they received consideration in the transfer of property to the limited partnership, and that the creation of the limited partnership was not a scheme to change the form of the property. 

The court here has sanctioned the use of limited partnerships as a valid estate planning technique.

See David Gaynor, Solid as Stone, Trusts & Estates, Mar. 28, 2012.

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