On March 30, 2005, the Tax Court ruled that a decedent’s transfer of real property to a family limited partnership (“FLP”) and later FLP gifts were includable in the decedent’s estate under Internal Revenue Code Section 2036(a)(1) which recaptures in a decedent’s gross estate certain assets transferred while alive. The Estate appealed. On September 14, 2007, the Ninth Circuit upheld the Tax Court’s decision. Read the Ninth Circuit opinion here.
Virginia Bigelow, the decedent, transferred her 98.3% interest in a single family residence to a trust (“Trust”). (The decedent’s children held the other undivided interests.) The trustees of the Trust were Virginia and her son. The following year, the parties exchanged the property held by the Trust for another rental residence (“Property”) and bought out the children’s undivided interests. Two years later, the Trust and the decedent’s children formed the FLP. The Trust contributed the Property to the FLP and the children each contributed $100. The Trust was the sole general partner. Over the next three years, numerous gifts of FLP interests occurred. At decedent’s death, the decedent owned a 44% limited partner interest in the FLP and her Trust held the sole one percent general partner interest. The 44% limited interest was valued at a 37% discount from the underlying appraised value and the one percent general partner interest was valued at a 35% premium.
In addition, the loans on the Property were retained as liabilities by the decedent. However, the Property served as the ultimate collateral for the loans. Because the decedent was left with insufficient funds to pay off the loans, the Partnership distributed funds necessary to service one of the two loans. No other distributions were made. After Ms. Bigelow’s death, a reduction in her Partnership capital account was made to reflect the loan payment distribution.
The Estate appealed the Tax Court’s decision arguing there was no “implied agreement” for the decedent to use, enjoy or have the right to the income of the Property and that the transfers were completed under the “bona fide sale” exemption of Internal Revenue Code Section 2036.
The Ninth Circuit affirmed the Tax Court’s deficiency determination, finding that Ms. Bigelow and the Bigelow children had an implied agreement that Ms. Bigelow would retain income and economic enjoyment from the transferred asset, and that the inter vivos transfer was not a bona fide sale for adequate and full consideration under Internal Revenue Code Section 2036(a).
To discuss putting an effective family limited partnership in place, please call Mitchell A. Port at 310.559.5259.