Sunday, October 7, 2012

Sometimes even with bad partnership documents, estate tax discounting may be possible

In a recent 5th Circuit case, Thomas Lane Keller et al. v. U.S., 110 AFTR 2d 2012-5312 (09/25/2012) affirmed the district court and held that even though certain documents were not completed by her death, a decedent capitalized a family limited partnership (FLP) before her death. A refund of over $315 million to the estate was the result.  The refund was principally the result of a valuation discount for the FLP interest.

By way of background, assets are often transferred to FLPs in the hope of achieving lack of marketability discounts and lack of control discounts. These discounts can result in substantial estate tax savings and in Keller, huge savings!   The area of FLP Law is often hotly contested by the IRS.  In Keller,  the FLP had been formed but the assets (bonds in this case) had not been transferred on the date of Decedent's death on May 15, 2000.  But, under Texas law, the Court ruled that Decedent's intent to transfer bonds into the FLP transformed those bonds into partnership property, eventhough she never formalized her intent.

Moral of the story - be sure to get competent legal counsel when engaging in transactions of this type.

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