FLP's full value included in estate.

• Author: O'Driscoll, David
• Position: Family limited partnerships

When he was 95, R transferred $2.8 million in securities and other assets to two family limited partnerships (FLPs) in exchange for pro-rata partnership interests. In FLP 1, R owned 95%, his daughter B owned 4% and a family owned corporation owned 1% as the sole general partner (GP). In FLP 2, R owned 62%, his son A owned 37% and a family owned corporation owned 1% as the sole GE R retained $153,000 in personal assets, and received an annual income of $14,000 from two annuities and Social Security. At the time of transfer, R had annual expenses of $57,202, and an actuarial life expectancy of 4.1 years.

According to R's family adviser, the primary advantages of the FLP plan included: "(1) lowering the taxable value of the estate, (2) maximizing the preservation of assets, (3) reducing income taxes by having the corporate general partner provide medical, retirement, and 'income splitting' benefits for Family members, and (4) facilitating family and charitable giving." He also stated, "[a]ll of the benefits above can be achieved while total control of all assets is retained by the directors of the Corporate General Partner."

R died two years "after forming the FLPs. His estate filed an estate tax return claiming a 40% discount to the value of his FLP interests, for lack of control and marketability. The IRS filed a deficiency under Sec. 2036(a) to include the flail date of death value of the transferred assets. The Tax Court sustained the deficiency, concluding that R retained lifetime control and enjoyment of the transferred assets and that the transfer to the FLPs was not a bona fide sale for adequate and full consideration; see Est. of Theodore R. Thompson, TC Memo 2002-246. R's estate appealed.

Implied Agreement

Sec. 2036(a)(1) returns an inter vivos transfer to a decedent's gross estate if there is an express or implied agreement at the time of transfer that the transferor will retain lifetime possession or enjoyment of, or right to income from, the transferred property; see Regs. Sec. 20.2036-1(a). In this case, the Third Circuit affirmed the Tax Court's finding of an implied agreement between R and his family that he would continue to be the principal economic beneficiary of the contributed property and retain enjoyment sufficient to trigger Sec. 2036(a)(1). R transferred 95% of his assets to the FLP when he was 95 and did not retain sufficient assets to support himself for the remainder of his life, as calculated at the time of...