ESTATE STRIKES OUT ON FLP INCLUSION; CONSOLATION PRIZE IS EXCLUSION OF CRUMMEY GIFTS
In Turner Est. v. Comr., T.C. Memo 2011-209 (8/30/11), Judge Marvell of the Tax Court held that the estate of Clyde W. Turner, Sr., included all the property that he contributed to a family limited partnership upon its formation, even though he gave away a considerable portion of his limited partnership interest before his death in February 2004.
In April 2002, Mr. Turner and his wife contributed stock, cash, and other assets to Turner & Company, a Georgia limited liability partnership. They each received a 0.5% general partnership interest and a 49.5% limited partnership interest. Over the next two years, they made several gifts of limited partnership interests to children and grandchildren, which they reported on gift tax returns. At Mr. Turner’s death, he owned the 0.5% GP interest and a 27.8% LP interest. On the estate tax return, his executor valued these at $30,744 and $1,578,240, respectively.
During his lifetime, Mr. Turner was less than circumspect in his operation of Turner & Co. He made undocumented loans to the partnership, drew a management fee that was unrelated to his efforts, and generally ignored the distinction between personal and partnership assets.
Needless to say, the IRS pounced on the return, issuing a notice of deficiency stating that 50% of the value of the partnership assets, or $4,744,356, was includible in the Turner estate under sec. 2036(a). After discussing the history of Turner & Co., Judge Marvell agreed. First, she found that the partnership property was includible under sec. 2036(a)(1), because Mr. Turner retained the possession or enjoyment of the partnership property. She also held that the property was includible under sec. 2036(a)(2), because Mr. Turner, as a general partner, retained the right to modify the partnership agreement and therefore designate the persons who possessed or enjoyed the partnership property. The estate did not qualify for the bona fide sale exception, the court held, because the 2002 transfer of the property to the partnership did not have a valid non-tax purpose.
The estate, however, came away with one small victory that may help other taxpayers. In 1992, Mr. Turner created a life insurance trust that, at his death, held at least three policies. His son and daughter were the trustees. The trust contained Crummey powers for his children and grandchildren, the beneficiaries of the trust, of up to $20,000 per annum, whenever Mr. Turner made a direct or indirect transfer to the trust.
As with the family partnership, Mr. Turner did not follow directions in dealing with the trust. For years, he paid the insurance premiums directly to the insurer, rather than to the trustees, and the trustees failed to issue Crummey notices. Nevertheless, the estate argued that these were present interest gifts, subject to the annual exclusion, because the beneficiaries retained the right to withdraw an equivalent amount from the trust.
Surprisingly, Judge Marvell agreed. She noted that the withdrawal powers extended to indirect transfers to the trust, and citing Crummey and Estate of Christofani, concluded that actual notice to the power holder was unnecessary. Thus, the estate was permitted to exclude the Crummey gifts.
Harold W. Pskowski
Callegary & Steedman, P.A., Baltimore, MD