Full Value of Assets Transferred to Partnership Included in Gross Estate (Powell Est., TC)

CCH Tax Day Report

In a court-reviewed opinion, the Tax Court found that the full value of assets transferred to a limited partnership (LP) was includible in a decedent’s gross estate. One week prior to the decedent’s death, the decedent’s son transferred cash and securities from the decedent’s revocable trust to the LP. In exchange, the decedent received a 99-percent limited partner interest. The son, as general partner, had the sole discretion to determine the amount and timing of partnership distributions. With the written consent of all partners, the LP could be dissolved. After the decedent was declared incapacitated, the son, acting on her behalf under a power of attorney, transferred the LP interest to a charitable lead annuity trust (CLAT). The transfer to the CLAT was reported on the decedent’s gift tax return. The amount of the gift of the CLAT remainder interest to the decedent’s sons was computed based on the value of the trust principal, which was the 99-percent LP interest. The LP interest was based on an appraisal that applied a 25-percent discount for lack of control and lack of marketability.

As in A. Strangi Est., Dec. 55,160(M), 85 TCM 1331, TC Memo. 2003-145, aff’d CA-5, 2005-2 ustc ¶60,506, the decedent’s ability to dissolve the LP with her son was a right in conjunction with another to designate the person who should possess or enjoy the transferred property within the meaning of Code Sec. 2036(a)(2). Similarly, the decedent retained the right, through her son, who was her attorney-in-fact, to determine the amount and timing of distributions. Any limitations imposed by the son’s fiduciary duties by reason of being the sole general partner were illusory and were owed almost exclusively to the decedent as the 99-percent limited partner. If the decedent made a valid gift of her LP interest to the CLAT, the value of the assets would be includible in her gross estate under Code Sec. 2035(a) because it was a transfer occurring within three years of death.

Under Code Sec. 2035(a) or 2036(a)(2), as limited by Code Sec. 2043(a), the amount includible in the decedent’s gross estate was the value of the 99-percent LP interest, less any applicable discounts. The full value of the transferred property would only be includible in the gross estate if the transfer to the CLAT was void or revocable. Because the son, acting under the power of attorney, did not have the express authority as required under applicable state (California) law to transfer the LP interests to the CLAT, the gift was either void or revocable. As a result, the value of the gross estate included the excess of the date-of-death value of the cash and securities transferred to the LP over the value, as of the date of the transfer, of the 99-percent LP interest. Furthermore, because the transfer to the CLAT was void or revocable, the date-of-death value of the 99-percent LP interest was includible in her gross estate.

In a concurring opinion, Judge Lauber opined that the court unnecessarily analyzed Code Sec. 2043(a) to limit the amount includible in the decedent’s gross estate under Code Sec. 2036(a). Judge Lauber stated that the decedent’s LP interest had no value separate from the cash and securities transferred to the LP. Because of her retained rights under Code Sec. 2036(a)(2), the full value of the property was includible in her gross estate.

N.H. Powell Est., 148 TC —, No. 18, Dec. 60,901

Other References:

Code Sec. 2033

CCH Reference – FINH ¶4640.45

CCH Reference – FINH ¶4640.678

Code Sec. 2035

CCH Reference – FINH ¶4845.845

Code Sec. 2036

CCH Reference – FINH ¶4980.30

Code Sec. 2038

CCH Reference – FINH ¶5170.56

Code Sec. 2043

CCH Reference – FINH ¶5875.41

Tax Research Consultant

CCH Reference – TRC ESTGIFT: 15,600

CCH Reference – TRC ESTGIFT: 18,104

CCH Reference – TRC ESTGIFT: 18,400

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CCHTaxGroup

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