The Tax Court has held that (a) assets contributed to a family limited partnership (“FLP”) were includable in a decedent’s gross estate under section 2036(a) of the Internal Revenue Code of 1986, as amended (“I.R.C.”), and (b) premiums paid directly to a carrier on behalf of an insurance trust qualified for the annual gift tax exclusion as present interest gifts.
Decedent and his wife formed a FLP, each taking a 0.5% general partnership interest and a 49.5% limited partnership interest. The assets contributed to the FLP were a mix of cash and marketable securities and included a concentration of one stock, which accounted for nearly 60% of the partnership’s assets. Decedent and his wife subsequently gifted limited partnership interests to children and grandchildren and retained their general partnership interests.
Apart from the FLP, decedent also established an insurance trust for the benefit of his children and grandchildren. The beneficiaries of the trust had a right to withdraw any “direct or indirect” contribution that was made to the trust. Decedent paid insurance premiums on trust policies directly from a joint checking account he maintained with his wife.
After decedent’s death, the IRS argued that the assets decedent contributed to the FLP should be included in his gross estate under I.R.C. § 2036(a), and the Tax Court agreed. The IRS also sought to treat the insurance premiums paid by decedent as adjusted taxable gifts. Here, the Tax Court sided with decedent’s estate and concluded that those premium payments qualified as present interest gifts.
With respect to the estate tax inclusion of FLP assets, the Tax Court first concluded that the bona fide sale for adequate and full consideration exception to I.R.C. § 2036(a) did not apply. In reaching this conclusion, the Tax Court noted that there was not a legitimate nontax reason for forming the partnership. For example, the Tax Court did not find compelling or credible that the FLP was intended (a) to consolidate assets for management purposes, since the property contributed to the partnership was passive investments and included one concentrated stock holding that did not materially change; or (b) to facilitate resolution of family disputes, given that the purported ill will among family members appeared not to be about money or its management but rather conflicts in personality. In addition, the Tax Court found that decedent stood on both sides of the transaction and that decedent created the FLP without any meaningful bargaining or negotiating with his wife or with any other anticipated limited partner. For these and certain other reasons set forth in the opinion, the Tax Court determined that there was not a bona fide sale for adequate and full consideration.
The Tax Court then examined whether decedent retained possession or enjoyment over the transferred property, or had the right to designate the persons who could possess or enjoy that property. Here, the Tax Court concluded that decedent had retained possession and enjoyment over the transferred property because decedent (a) was being paid a management fee from the FLP without any apparent regard for the scope of the management duties being performed and (b) used FLP funds for nonpartnership-related matters. The Tax Court also found that decedent retained the right to designate the persons who could possess or enjoy the property transferred to the FLP, since decedent held a general partnership interest that gave him broad authority to the managed partnership property.
As a result, the Tax Court held that the property decedent contributed to the FLP was includable in his gross estate under I.R.C. § 2036(a) and that such property was not subject to any discount for lack of control or lack of marketability.
As to the premiums paid by decedent for trust-owned policies, the Tax Court noted that the trust agreement gave each of the beneficiaries a right to withdraw “direct or indirect” transfers made to the trust. Thus, the Tax Court determined that it was irrelevant that decedent did not make his contributions directly to the trust. Likewise, the Tax Court found that the fact that some or even all of the beneficiaries may not have known that they had the right to demand withdrawals from the trust did not affect their legal right to do so. The court indicated that lack of such notice was not an impediment to present interest gift treatment. Accordingly, the court concluded that the premium payments made by decedent qualified as gifts of present interests and were not includable as adjusted taxable gifts.