Estate of Thompson: respecting the formalities of the family limited partnership.

Estate planners consistently utilize the family limited partnership (FLP) as an advanced planning technique for qualified clients. Although an estate plan involving an FLP can produce favorable estate and gift tax results (i.e., because of the applicable valuation discounts), as well as beneficial nontax results (i.e., asset protection, consolidation of assets, etc.), FLPs are often scrutinized by the Internal Revenue Service. Such scrutiny is evident based upon the recent flurry of case law addressing the treatment of FLPs for federal estate and gift tax purposes. (1) The Tax Court, in Estate of Theodore R. Thompson v. Commissioner, T.C. Memo 2002-246, recently determined that a decedent retained sufficient possession and enjoyment of property transferred to two FLPs during his lifetime to warrant inclusion of such transferred property in his estate upon his death for federal estate tax purposes. This article discusses the facts and circumstances surrounding the FLPs in Thompson and emphasizes the importance of the proper formation and maintenance t of FLPs for federal estate and gift tax purposes. (2) This article also includes a checklist that can be used by practitioners and their clients to ensure that FLPs are properly maintained.

Facts of Thompson

Theodore R. Thompson executed a durable power of attorney in favor of his children, Robert Thompson and Betsy Turner. (3) In an effort to reduce their father's estate tax exposure, Robert and Betsy consulted with various advisors (4) regarding the establishment of two FLPs on behalf of Mr. Thompson and his two children and their families: the Turner Partnership ("Turner FLP") and the Thompson Partnership ("Thompson FLP").

* Turner FLP

The Turner FLP was established under Pennsylvania law for the benefit of Betsy and her husband, George Turner, and their family. The Turner Corporation was the corporate general partner, owning a 1.06 percent interest in the Turner FLP. Mr. Thompson was a 95.4 percent limited partner and Mr. Turner was a 3.54 percent limited partner. Regarding the Turner Corporation, Mr. Thompson owned 490 shares, Betsy and Mr. Turner each received 245 shares and an unrelated tax-exempt entity received the remaining 20 shares. The Turner FLP and Turner Corporation were formed on April 21, 1993, and were funded in the same year.

The Turner FLP was funded as follows: Mr. Thompson contributed marketable securities with an approximate value of $1,286,000 in addition to notes receivable from Betsy's children. Mr. Turner contributed $1,000 in cash and real property located in Vermont with a value of $49,000. The Turner Corporation issued a non-interest-bearing note in favor of Mr. Thompson for its interest in the Turner FLP.

* Thompson FLP

The Thompson FLP was established under Colorado law for the benefit of Robert and his family. The Thompson Corporation was the corporate general partner, owning a 1.01 percent interest. Mr. Thompson was a 62.27 percent limited partner and Robert was a 36.72 percent limited partner. Regarding the Thompson Corporation, Mr. Thompson and Robert each owned 490 shares and Robert H. Thompson, an unrelated party, received the remaining 20 shares. Like the Turner entites, the Thompson FLP and Thompson Corporation were formed on April 21, 1993, and were funded in the same year.

The Thompson FLP was funded as follows: Mr. Thompson contributed marketable securities with an approximate value of $1,118,500 in addition to notes receivable from Robert's family members. Robert contributed his interest in mutual funds with an approximate value of $372,000 and his Norwood ranch, which was appraised at $460,000.

* Mr. Thompson's Federal Estate Tax Return and Notice of Deficiency

Mr. Thompson died on May 15, 1995. On Mr. Thompson's federal estate tax return, his 87.85 percent (5) limited partnership interest in the Turner FLP was valued at $875,811 and his 54.12 percent (6) limited partnership interest in the Thompson FLP was valued at $837,691. Regarding Mr. Thompson's interest in the Turner Corporation, his 490 shares were valued at $5,190 and his 490 shares in the Thompson Corporation were valued at $7,888. All of the above interests that were reported on Mr. Thompson's federal estate tax return were determined by applying a 40 percent minority interest and lack of marketability discount to the FLP assets. Additionally, Mr. Thompson's federal estate tax return reported $19,324 as his prior taxable gifts. Such prior gifts reflected Mr. Thompson's gifts of Turner FLP and Thompson FLP limited partnership units, the values of which were also determined using the same 40 percent minority interest and lack of marketability discount.

The IRS issued a notice of deficiency in the amount of $707,054. The values of Mr. Thompson's entity interests as reported on his federal estate tax return were adjusted as follows: The Thompson FLP interest was increased to $1,396,152; the value of the Turner FLP interest was increased to $1,717,977; the Thompson Corporation interest was increased to $13,977; and the Turner Corporation interest was decreased to $4,094.

Estate's Position

The estate's position was that the value of Mr. Thompson's limited partnership interests in the Turner and Thompson FLPs was included in Mr. Thompson's estate, not the underlying assets transferred to the FLPs. Additionally, the estate contended that the value of such interests for federal estate tax reporting purposes should be determined by reducing Mr. Thompson's proportionate share of the fair market value of the FLPs' assets at the date of transfer by a 40 percent discount for lack of marketability and control.

IRS' Position

The IRS contended that the full fair market value of the assets contributed to the FLPs should be included in Mr. Thompson's gross estate. Such contention was based upon two theories. The first theory suggested that the FLPs lacked economic substance and should be disregarded. (7) If the FLPs were recognized as valid entities, the second theory suggested that Mr. Thompson's retention of the economic benefit and control over the assets transferred to the FLPs warranted the inclusion of such assets in his gross estate under [section] 2036(a) of the Code.

Tax Court's Opinion

The Tax Court agreed with the IRS that Mr. Thompson retained the enjoyment and economic benefit of the property he transferred to the FLPs. Specifically, the court recognized that an "implied agreement" existed between Mr. Thompson, Betsy, Robert, and Mr. Turner whereby Mr. Thompson would retain the benefit and enjoyment of the assets transferred to the FLPs during his lifetime. (8) Such implied agreement was inferred by the court based upon the following facts.

First, before and after the formation of the FLPs, Betsy and Robert consulted with the financial advisors regarding Mr. Thompson's accessibility to assets in the FLPs for purposes of continuing his practice of gift giving around Christmas time to various family members. Based upon such consultations, distributions were made from the FLPs in 1993, 1994, and 1995 to Mr. Thompson in order for him to continue such gifting practice. (9)

Second, Mr. Thompson transferred the majority of his assets to the FLPs retaining an insufficient amount for his support. Thus, a distribution from the FLPs would be necessary, and was made, to satisfy Mr. Thompson's personal expenses. Emphasizing these distributions to support the determination of inclusion of the FLPs' assets in Mr. Thompson's gross estate, the court reasoned as follows:

[D]ecedent's outright transfer of the vast bulk of his assets to the partnerships would have deprived him of the assets needed for his own support. Thus, the transfers from the partnerships to decedent can only be explained if decedent had at least an implied understanding that his children would agree to his requests for money from the assets he contributed to the partnerships, and that they would do so for as long as he lived. (10)

Third, although assets were "formally" transferred from Mr. Thompson to the FLPs, there was no meaningful change in the composition of the asset portfolio nor in Mr. Thompson's relationship to the assets. Thus, as Mr. Thompson continued to be the "principal economic beneficiary" of the contributed property after such contribution, the court recognized that only a "legal title" change occurred with respect to the property transferred. (11) Specifically, the court stated that:

[T]he general purpose of the statute was to include in a decedent's gross estate transfers that are essentially testamentary--i.e., transfers which leave the transferor a significant interest in or control over the property transferred during his lifetime.... By taxing essentially testamentary transactions, [section] 2036(a) prevents circumvention of federal estate tax by use of schemes which do not significantly alter lifetime beneficial enjoyment of property supposedly transferred by a decedent.... The applicability of [section] 2036(a), therefore, is not controlled by the various niceties of the art of conveyancing, ... but is instead dependent upon the nature and operative effect of the transfer. (12)

The estate contended that [section] 2036(a) of the Code should not apply to Mr. Thompson's transfer of property to the FLPs because such transfer was a bona fide sale for adequate and full consideration. The Tax Court rejected this argument, stating that the property transferred to the FLPs was not required to support a valid business enterprise, but was merely "recycled," meaning that the form of ownership of the property had changed (from individual ownership to entity ownership), but Mr. Thompson's relationship to such assets had not. (13)

Mr. Thompson, in addition to the other family members, engaged in this "recycling" of their assets through the FLPs. The assets contributed to the FLPs were not pooled with the other partner's contributions. Specifically, although the partner transferred property to the FLP, he or she continued to receive the sole benefit of income generated by such property after the contribution rather than having income generated by the FLP property disbursed to the partners in accordance with their partnership percentages. (14)

The Tax Court held in favor of the IRS and summarized the problematic nature of the formation and maintenance of the FLPs as follows:

In the final analysis, neither decedent nor his family conducted the partnerships in a businesslike manner. None of the parties involved in the partnerships joined together with the intent to either form business enterprises or otherwise to conduct any trade or business. The partnerships did not engage in transactions with anyone outside the family; loans (15) and gifts were made to family members only. The lending activities of the partnerships lacked any semblance of legitimate business transactions. This exclusivity might be consistent with decedent's generosity towards his family members, but it was inconsistent with any valid business operation. In reality, these loans continued to be testamentary in nature, using decedent's money as a source of financing for the needs of individual family members, not for business purposes. (16)

Impact of Thompson on Proper Formation and Maintenance of FLPs

When properly established and maintained, the estate and gift tax savings generated by an FLP should be substantial. (17) For example, in Thompson, if the 40 percent discounts applied by the estate were respected, Mr. Thompson's interest in the Turner FLP would have been valued at $875,811, rather than the $1,717,977 asserted by the IRS in the notice of deficiency (a difference of $842,166); Mr. Thompson's interest in the Thompson FLP would have been valued at $837,691, rather than the $1,396,152 asserted by the IRS in the notice of deficiency (a difference of $558,451). (18) Thus, the Thompson decision should be used as a lesson to estate planners and their clients of the importance of the proper establishment and maintenance of the partnership in order to avoid a potential adverse result. The following items, some of which were problematic in Thompson, are crucial for the proper maintenance of an FLP:

1) Maintenance of separate accounts for the FLP and the corporate general partner to promote the business enterprise. Once the FLP and the corporate general partner (the "corporation") are established, each entity should have a separate account and a separate taxpayer identification number. (19) It is essential that assets the limited partners and shareholders of the corporation may have in other accounts (i.e., individual and/or trust accounts) not be commingled with assets in these entity accounts, and vice versa. It is also absolutely critical that assets in these entity accounts not be used for personal purposes. Additionally, for all corporate transactions, the president of the corporation should act (and sign, where applicable) in such capacity on behalf of the corporation. Regarding any FLP transaction, the president of the corporation, general partner of the FLP, should act (and sign, where applicable) in such capacity on behalf of the FLP.

It is crucial for the client to understand that the corporation and FLP are legitimate business enterprises and should be treated as such. In that regard, assets in the corporation and FLP should never be used to satisfy the personal obligations and/or expenses of limited partners and/or shareholders of the corporation. For example, in Thompson, assets in the FLP were distributed to Mr. Thompson to promote his established plan of gift giving to various family members. This was not viewed as a legitimate business obligation warranting a distribution from the FLP. Again, FLP and corporation expenses should be paid from the appropriate entity account; personal expenses should be paid and satisfied, respectively, from nonentity accounts.

2) Distributions from, and additions to, the partnership. The goal of creating an FLP is not to render the assets within it inaccessible. Typically, the FLP's partnership agreement provides that the president of the corporation, the general partner of the FLP, has the sole authority to determine when distributions should be made from the FLP. However, such distributions cannot be disbursed to any individual of the president's choosing. Distributions should be made in accordance with the terms of the FLP agreement. If an FLP agreement requires distributions to be made pro rata to the partners in accordance with their respective partnership percentages, then such distributions must be made pro rata. For example, if there are dividends earned on a stock owned by the FLP that are paid to the FLP (assume the FLP has a 99 percent limited partner and a one percent corporate general partner), and the FLP wants to distribute all or a portion of such dividends to the partners, the limited partner would receive 99 percent of the distribution and the Corporation would receive one percent of the distribution. As previously mentioned, certain distributions from the FLPs in Thompson were problematic because the income generated from specific FLP property was not distributed to the partners in accordance with their partnership percentages but, rather, such income was allocated solely to the partner who initially contributed such income-producing property.

If it is contemplated that additional assets will be contributed to the FLP, such contribution should be made by all of the partners in accordance with their partnership percentages at the time that the additional contribution will be made to the FLP. At such time, each partner's capital account should be adjusted accordingly.

3) Maintenance of corporate books and records. Typically, the bylaws of the corporation provide that an annual meeting of the shareholders of the corporation should be held to elect officers of the corporation for the succeeding year and to discuss other entity business. On an annual basis, minutes should be prepared for the corporation and should be maintained in its corporate book. Such minutes should address the appointment of officers and other pertinent corporate business. The keeping of appropriate books and records for the corporation is essential, as it promotes the corporation's legitimacy and function as a true business enterprise. The corporation's function as general partner of the FLP should also be addressed in the minutes taken at each meeting.

4) Maintenance of FLP books and records and establishment of capital accounts. As previously mentioned, the overall management and control of the business and affairs of the FLP are vested in the president of the corporation, the general partner of the FLP. Regarding the normal day-to-day activities of the FLP, no vote or consent of the limited partners should be required to authorize the corporation to take any action on behalf of the FLP. The FLP's entity agreement should provide the details regarding the rights and duties of the corporation, as general partner.

In certain circumstances, limited partners will have a vote in FLP decision making. Such circumstances typically include the addition or substitution of partners, transfer or assignment of the general partner's interest, dissolution of the partnership (where there is a death, incapacity, etc., of a partner), and the amendment of the FLP agreement. In other words, limited partners will have a "say" when there are decisions to be made that will have a significant impact on the structure and existence of the FLP, but they will have no right to participate in the "day-to-day" management of the FLP's business.

Specifically, the general partner is required to maintain records of all FLP transactions. Written accounts of such transactions should be documented at the time they occur. Additionally, a written account of the FLP activity as a whole should be prepared on an annual basis. It may be beneficial to prepare such written account at the end of each year so that all of the FLP activity for the given year may be reflected in one accounting.

In addition, each partner of the FLP (limited partners and general partner(s)) should have a separate capital account determined and maintained in accordance with the Code and the Treasury Regulations promulgated thereunder. (20) Such capital account should reflect each partner's initial contribution to the partnership and should fluctuate accordingly depending on when distributions and additions to and by the partners, respectively, are made, and as income and deductions are allocated among the partners. The client should consult with an accountant or tax advisor to establish and maintain these capital accounts.

5) Retention of assets outside of the FLP. In Thompson, Mr. Thompson transferred the bulk of his assets to the FLPs, maintaining insufficient assets for his daily support and for purposes of continuing his standard practice of gift giving. As a result, the court held that an implied agreement existed between Mr. Thompson and his children that assumed distributions would be made to Mr. Thompson as necessary for such maintenance and gift giving purposes. (21) In light of this determination, clients who establish FLPs should retain a portion of their assets outside of the FLP scheme (i.e., in their revocable trusts and/or individual accounts) to fulfill their day-to-day living needs, payment of personal expenses, gift giving, etc., in order to avoid the applicability of the implied agreement argument imposed by the Thompson court.

6) Respect of the "business" nature of the FLP. Typically, the FLP agreement provides guidelines as to the types of transactions that may be entered into by the FLP and the parties that may be involved in these transactions. Such FLP transactions should be entered into, and treated, like transactions in the course of the normal operations of a business. In other words, the terms of an FLP transaction should be evidenced in writing and adhered to by all parties involved. For example, if the FLP loans money to an individual, it is crucial that the terms of the loan agreement are respected. This means that interest and/or principal payments should be paid when due pursuant to the terms of the agreement and the appropriate penalties and/or interest should accrue and be paid in circumstances of nonpayment. Most importantly, clients must understand that family members of FLP partners are not exempt from these requirements.

7) Preparation of entity tax returns. The FLP and the corporation, as general partner, are required to file tax returns each year, Forms 1065 and 1120-S (assuming an Selection is made), respectively. Because the FLP is treated as a "flow-through entity," all of the income, gain, losses, etc., incurred by the FLP should be reported on the tax returns of the individual partners. Similarly, the corporation, when an S-election is made, is also treated as a flow through entity. Thus, all of the income, gain, losses, etc., incurred by the corporation should be reported on the tax returns of the corporation's shareholders. Notwithstanding the flow-through nature of these entities, they are still required to file the appropriate tax returns for informational type reporting. The client should consult with his or her accountant or tax advisor to prepare these returns.

8) Maintenance of entity's active status. In order to establish the FLP and the corporation, documents are filed with, and the filing fees paid to, the appropriate department of state (depending on where the entities are formed). Once these initial requirements are met, the entities are recognized as active in their state of formation. However, this initial filing is typically not enough to maintain a permanent active status for the FLP and corporation. Depending on the state of formation, separate annual reports and/or fees may be required to be filed to ensure active status. If such annual reports and/or fees are not timely-filed and paid, respectively, the state may administratively dissolve the entities. If such dissolution occurs, an additional fee must be paid to reinstate the entities to their active status. The client should be-mindful of the status requirements in the entity's state of formation; although they cannot be overlooked, they are typically easy to fulfill.

Conclusion

In light of Thompson, respect for the FLP formality cannot be emphasized enough. Although the FLP typically is formed and funded under the supervision of the estate planning attorney, it will ultimately be the client's responsibility to maintain the FLP as such. Those cases in which the partnership scheme was scrutinized were in circumstances where clients were 1) commingling entity assets with personal assets, 2) paying personal expenses from partnership accounts, 3) distributing assets from the partnership disregarding the partnership percentages, 4) disregarding the maintenance of entity records, and 5) disregarding the creation and/or the maintenance of the appropriate entity accounts.

To assist estate planners and their clients, the authors have formulated a checklist that reiterates the pertinent information relating to the maintenance of the FLP that can be referred to on a regular basis. The checklist should be used as a planning tool for estate planners and is included at the end of this article. If the estate planning attorney advises his or her client to avoid the potential FLP pitfalls, it is likely that such client's goals in creating the FLP will be accomplished.

(1) See, e.g., Strangi v. Comm'r, 115 T.C. 478 (2000), aff'd in part and rev'd in part, 293 F.3d 279 (5th Cir. 2002); Harper v. Comm'r, T.C. Memo 2002-12.

(2) It is important to note that the purpose of this article is to focus on the inclusion of assets transferred to the FLPs in Mr. Thompson's estate under [section] 2036 of the Internal Revenue Code of 1986, as amended (the "Code"). This article does not discuss legal theories the IRS has used in other cases to challenge discounts used in FLPs (i.e., arguments made under [subsections] 2703 and 2704 of the Code). Moreover, there were other issues discussed in the case which are not discussed in this article, as follows: 1) burden of proof; 2) whether the FLPs are recognized for federal estate tax purposes; and 3) the determination of the actual value of Mr. Thompson's adjusted taxable gifts.

(3) Mr. Thompson also executed various other estate planning documents which are not relevant for purposes of this article.

(4) In 1992 or 1993, Betsy and Robert and their respective spouses met with financial advisors and insurance salesmen regarding the implementation of the FLPs. In turn, such advisors introduced Betsy and Robert to the appropriate attorneys to establish the entities.

(5) In 1994 and/or 1995, Mr. Thompson gifted limited partnership units in the Turner FLP and reported such gift on a gift tax return thereby reducing his initial limited partnership percentage from 95.4 percent to 87.85 percent.

(6) In 1994 and/or 1995, Mr. Thompson gifted limited partnership units in the Thompson FLP and reported such gift on a gift tax return, thereby reducing his initial limited partnership percentage from 62.27 percent to 54.12 percent.

(7) This issue was discussed in the case, but will not be addressed in this article. In short, the court held the entities were valid and had sufficient substance to be recognized for federal estate and gift tax purposes.

(8) Thompson, T.C. Memo 2002-246 at 47.

(9) Mr. Turner consulted with the financial advisors regarding how Mr. Thompson could receive assets from the FLPs for purposes of gift giving around Christmas time. In 1993 and 1994, $40,000 was distributed from both the Turner and Thompson FLPs in Mr. Thompson and, in 1995, the Thompson FLP distributed $45,500 to Mr. Thompson and the Turner FLP distributed $45,220 to Mr. Thompson for purposes of such gift giving. These distributions were reflected on Mr. Thompson's Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc., as a distribution for the appropriate year and as a reduction in his capital account.

(10) Thompson, T.C. Memo 2002-246 at 49-50.

(11) Id. at 50; see Estate of Reichardt v. Comm'r, 114 T.C. 144 (2000).

(12) Thompson, T.C. Memo 2002-246 at 51 (quoting Mahoney v. United States, 831 F.2d 641 (6th Cir. 1987) (internal quotation marks omitted).

(13) Thompson, T.C. Memo 2002-246 at 53; see Harper, T.C. Memo 2002-12.

(14) For example, Mr. Turner contributed Vermont property to the Turner FLP. The attorney who established the Turner FLP advised Mr. Turner that the initial capitalization of the FLP might trigger a recognition event pursuant to [section] 721(b) of the Code. Thus, based upon this advice, the Turner FLP agreement was amended whereby all gains and losses from, and distribution of real estate contributed to, the FLP were allocated to the contributing partner. In other words, George Turner, as the contributor of the Vermont property, would have all gains and losses generated by such property allocated solely to him.

(15) For example, the Turner FLP was used to continue Mr. Thompson's practice of lending money to Betsy's children and grandchildren. The terms of the notes were determined by the FLP. Although the terms of the notes provide that interest payments be made on a monthly basis, such interest payments were either late or unpaid with no consequences. Additionally, when a principal payment was made, the loan was often reamortized with a reduction in the income payments. No loans were made to anyone outside the Turner or Thompson families.

(16) Thompson, T.C. Memo 2002-246 at 57 (internal footnote omitted) (exemplary footnotes added).

(17) This assumes that the proper appraisals are obtained to substantiate discounts and the proper formalities in the formation and maintenance of the FLP are respected.

(18) Thompson, T.C. Memo 2002-246 at 35.

(19) It is assumed that a corporation is used as the general partner. One or more individuals or entities (such as a limited liability company) could also serve as the general partner(s).

(20) I.R.C. [section] 704(b); Treas. Reg. [section] 1.704-1(b) (2)(iv).

(21) Thompson, T.C. Memo 2002-246 at 48-50.

Checklist Regarding Maintenance of the Family Limited Partnership

1) Ensure that a separate account is established and continuously maintained in the name of the FLP and the corporation and that the assets in such accounts remain separate from nonentity accounts (such as personal or trust accounts), and from the account(s) in the name of the other entity.

2) The president of the corporation, the general partner of the FLP, should endorse all transactions involving the FLP; the president of the corporation should endorse all transactions involving the corporate general partner.

3) Establish and maintain a separate capital account for each partner of the FLP. Consult an accountant to establish and maintain such accounts.

4) Conduct annual meetings on behalf of the corporation pursuant to its bylaws to elect corporate officers and discuss corporate transactions. Such annual meetings should be documented in corporate minutes prepared and signed by the corporation's secretary.

5) Maintain accurate records of FLP transactions as they occur and prepare an annual account of all FLP transactions for the given year to be maintained with FLP records.

6) Engage an accountant to prepare the appropriate tax returns for the FLP (Form 1065) and the corporation (Form 1120-S; assuming an S-election is made). Although the entities are treated as a "flow-through entities," these returns are informational type returns that are required to be filed accurately and timely.

7) Ensure distributions from the FLP are made to the partners in accordance with their respective partnership percentages. Additions to the partnership should be made by the partners in accordance with their respective partnership percentages at the time of the addition.

8) Ensure personal obligations and expenses incurred by shareholders and/or partners are satisfied from such shareholders' or partners' personal nonentity accounts, never from entity accounts.

9) Ensure each entity remains active in its state of formation. Such active status should be maintained by payment of registered agent fees and satisfaction of any state tax requirements (i.e., payment of franchise tax, filing of annual reports, etc.) on a timely basis.

10) If the FLP agreement requires, ensure the corporation (as general partner) provides the appropriate FLP financial information to the limited partners, such as a balance sheet for the FLP, profit and loss statement for the FLP, federal and state tax returns, etc., as may be reasonably necessary for the limited partners to be advised of the financial status and results of operations of the FLP. Limited partners may have reduced decision-making capacity with regard to the FLP; however, they are generally entitled to be apprised of the operations and maintenance of the FLP.

11) Partners of the FLP and shareholders of the corporation should be advised to retain a portion of their assets outside of the FLP (i.e., in their revocable trusts and/or individual accounts). Such isolated assets should be used for their daily maintenance, expenses, gift giving, etc.

12) Ensure the FLP and the corporation are respected as true business entities. If the FLP and/or corporation engage in business transactions, all parties (family members included) to such transactions are required to abide by the appropriate transaction terms as evidenced in contracts, notes, etc. For example, payments of interest and/or principal on a note should be paid when due and, if not so paid, the appropriate interest and/ or penalties should be calculated and collected.

David Pratt is the founding partner of David Pratt and Associates, P.A., an estate planning boutique law firm with offices in Boca Raton, Boynton Beach, and West Palm Beach. He is board certified in tax and wills, trusts and estates, has an LL.M. in taxation from New York University Law School and is a fellow of the American College of Trust and Estate Counsel.

Jennifer E. Zakin is an associate with David Pratt and Associates, P.A. She received her J.D. from Nova Southeastern University Law School and has an LL.M. in taxation from the University of Miami Law School.

This column is submitted on behalf of the Tax Section, Richard A. Josepher, chair, and Michael D. Miller, Benjamin A. Jablow, and Normaria Segurola, editors.