In Keller, the Fifth Circuit Court of Appeals ruled that an estate was entitled to an estate tax refund for the discounted value of a family limited partnership ("FLP") that was created during the decedent's lifetime but not fully funded until after the decedent's death. The Fifth Circuit concluded that the FLP was "deemed" to be funded as of the decedent's date of death under applicable state law (Texas), where the "intent of an owner to make an asset partnership property will cause the asset to be the property of the partnership."
Following their daughter's divorce, the decedent and her husband created joint revocable trusts due to concerns about preserving their family's wealth and protecting that wealth from creditors. Following her husband's death, the decedent was advised that creating an FLP would provide additional protection for her family's assets. The decedent decided to create and fund an FLP with approximately $250 million of cash and bonds, but did not actually transfer the funds to the FLP during her lifetime. The decedent's advisors, working under the impression that the FLP had not been funded, advised the estate to sell $147.8 million of bonds to pay the federal estate tax due. A year later, the decedent's advisor attended a seminar and learned that under Texas law the FLP may have been considered to have been funded at the time of the decedent's death. As such, the estate proceeded to complete any formalities associated with creating and funding the FLP. Since the bonds were deemed to be FLP property, the advisors retroactively structured the sale and payment of estate tax as a loan from the FLP to the estate in exchange for a promissory note payable to the FLP effective as of the date of the loan.
In addition to the discount applicable to the FLP property owned by the estate, the Fifth Circuit found that the interest payable to the FLP under the promissory note from the estate was a properly deductible expense of the estate. This determination was made by distinguishing a holding by the Tax Court under similar facts in Estate of Black v. Comm'r, 133 T.C. 340 (2009). In this case, unlike in the Black case, the estate did not have to redeem FLP units to satisfy the loan because the estate had sufficient other illiquid assets to repay its debt to the FLP. As a result, the interest payable to the FLP was properly deductible by the estate.