Tax Facts Q: 495. What items are includable in a decedent's gross estate for federal estate tax purposes?
T.C. Memo 2012-48
When there is a properly documented nontax business reason for a transfer of property, the Tax Court recently found that property transferred into a family limited partnership during the life of a decedent was not included in her gross estate. The court stressed the importance of the legitimate nontax purpose for the transfer, which the court found occurred via a bona fide sale for adequate consideration.
Generally, IRC Section 2036 will include transfers of property made during life in the gross estate of a decedent when the transfer is testamentary in nature, unless the transferor relinquishes all interests in the property through a bona fide sale for adequate consideration.
In this case, the decedent and her spouse created a family limited partnership (the FLP) to hold certain real property that they and their children hoped to develop and sell in the future. The decedent and her spouse initially each owned a 1 percent general partnership interest and a 49 percent limited partnership interest in the FLP. The general partnership interests gave them significant control over the FLP, including the right to determine whether property could be sold, manage the daily operations of the FLP, and make any distributions to partners.
Over the course of years, the decedent and her spouse slowly transferred all of the limited partnership interests to their children and grandchildren, retaining only the general partnership interests.
The first issue the Tax Court examined was whether the property was transferred via a bona fide sale to the FLP. In the case of a family limited partnership, this requirement is met when there is a valid nontax purpose for transferring the property into the FLP.
Even though giving gifts to the decedent's family was a motivation in this case, the court found that the desire to manage the property for eventual development and sale was a sufficient nontax purpose that satisfied the bona fide sale requirement. The purpose was properly documented so that it was proven in the court proceedings
Next, the court looked to the issue of full and adequate consideration. Again, the court stressed the fact that because there was a legitimate nontax purpose for the transfer, the sale was not merely an attempt to change the form in which the property was held. The court found this sufficient to satisfy the requirement that there be full and adequate consideration despite the fact that no money changed hands in the transfer.
The important point that emerges from this case is that, in order to exclude property from a decedent's estate using a family limited partnership, it is essential to have a legitimate nontax purpose for forming and maintaining the partnership.
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|Title Annotation:||Monthly Round-up|
|Publication:||Tax Facts Intelligence|
|Date:||Apr 1, 2012|
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