Another Death Bed Limited Partnership Formation Fails to Accomplish Its Objectives

Decedent Nancy Powell, after the Tax Court’s holding in Estate of Nancy H. Powell, now represents another taxpayer who failed to achieve estate tax savings through the creation and funding of a limited partnership. Nancy Powell’s son, Jeffrey, acting with a power of attorney, formed a limited partnership—NHP Enterprises, LP—in August of 2008. He then transferred $10 million worth of cash and securities into the limited partnership. Nancy Powell retained a 99% interest as a limited partner with Jeffrey Powell receiving the remaining 1% interest. The partnership agreement allowed Nancy Powell to determine the timing and amount of distributions. The agreement also allowed her to dissolve the partnership with the consent of her son.

After forming the limited partnership, Jeffrey Powell transferred the 99% interest held by his mother into a charitable lead annuity trust (CLAT). The court held that this gift to the CLAT amounted to the relinquishment of the decedent’s power to dissolve the partnership and control asset disposition. Because the transfer occurred within three years of Powell’s death, an application of Internal Revenue Code (IRC) Section 2035(a) pulled the full value of the previously transferred assets back into the gross estate.

The court’s willingness to apply this section to a scenario in which a decedent only holds a partnership interest makes any retention of any held interest a precarious proposition. It is likely this case will be appealed.

See Another Death Bed Limited Partnership Formation Fails to Accomplish Its Objectives, Lexology, July 18, 2017.

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