Lessons of Thompson and Kimbell.

• Author: Howell, III, R. Milton
• Position: Estate of Thompson

In September 2004, the Third Circuit presented the Service with a major victory in its ongoing war on family limited partnerships (FLPs). In Betsy Turner (Est. of Theodore Thompson), 3rd Cir., 9/1/04, aff'gTC Memo 2002-246, the decedent, age 95, transferred substantially all of his assets (primarily, marketable securities and personal notes) to two FLPs. He died two years later. The estate claimed a 40% discount for these partnership interests for lack of control and marketability.

Tax Court's Decision

In 2002, the Tax Court found that, although the partnerships were valid, the transferred assets had to be included in the decedent's estate at their full value, for three primary reasons:

* The transferor retained enjoyment and economic benefit of the transferred assets. For example, partnership distributions were made to him for the purpose of making annual exclusion gifts.

* The transferor's receipt of a partnership interest in exchange for his assets was not full and adequate consideration.

* The transactions were not made for a legitimate business purpose; the only apparent purpose was the reduction of estate tax liability. (For a discussion, see Holtz, Personal Financial Planning, "FLP Issues and Opportunities," TTA, April 2003, p. 223.)

The Third Circuit agreed with the Tax Court's findings that the family had an implied agreement that Thompson would continue to have economic control over the transferred property. This fact alone was enough to pull the transferred assets hack into his estate under Sec. 2036(a)(1).

This case was particularly important for the Service in light of its recent defeat in David A. Kimbell, Sr., 371 F3d 257 (5th Cir. 2004), in which the Fifth Circuit found that the transfer of assets in return for the limited partnership interest was for flail and adequate consideration (preventing the imposition of Sec. 2036(a)(1)). The court noted that Ms. Kimbell received an interest credited to her capital account for the fair market value of the assets contributed, and that she was entitled to distribution of same on partnership termination.

Lessons

The estate planner should keep in mind the following when using FLPs:

1. Ensure that the transferor retains sufficient assets to support himself or herself. In the absence of this, the transfer would be called into question, because it implies that the assets of the transferee entity will be used to pay personal living expenses. In Kimbell, the Fifth Circuit found .that the...