Tax News

CCH (cch.taxgroup.com) reports:

  Stock transferred by a decedent to a family limited partnership (FLP) was not includible in the decedent's gross estate under Code Sec. 2036(a) because the transfer was a bona fide sale for adequate and full consideration. The decedent and his advisors decided to create the FLP in order to consolidate and protect his stock holdings in an insurance company, namely by preventing his grandsons from selling their shares of stock and protecting his son's shares from potential claims incident to divorce. The protection from creditors and potential dissipation was a legitimate and significant nontax reason for the creation of the FLP. The creation of the FLP was the result of an arm's-length transaction. Furthermore, the decedent received an interest in the FLP that represented adequate and full consideration because: (1) the participants in the FLP received interests proportionate to the value of the property each contributed; (2) the respective contributed assets were properly credited to the transferors' capital accounts; (3) distributions required negative adjustments to distributee capital accounts; and (4) there was a legitimate and significant nontax reason for formation of the FLP. Consequently, the decedent's transfer of stock to the FLP satisfied the bona fide sale exception.

  The decedent's surviving spouse died less than five months after the decedent, before the marital trust could be funded with shares of the FLP. Pursuant to the decedent's testamentary documents, a pecuniary marital trust was created for the spouse. Because the trust was to terminate on the her death, it was never funded. However, in order to calculate the spouse's gross estate, the value of the trust had to be established. The amount of the pecuniary bequest was not ascertainable until the after the determination of the decedent's estate tax liability, which was not calculated the spouse's death. The executor used the spouse's death as the date in which the trust was funded because that was the last possible date that the funding could occur, as it was not possible to fund the marital trust after the spouse's death. Moreover, if the spouse had survived and requested that the trust be funded with cash, the FLP shares would have been sold for their current fair market value. Accordingly, the executor use of the spouse's date of death when determining the date in which the marital trust was funded was proper.

  The deduction of the interest paid by the spouse's estate to the FLP was not a necessary expense under Reg. §20.2053-3(a). In order to satisfy liabilities of the spouse's estate, which included federal and state estate taxes and a charitable bequest from the decedent's estate, without receiving a large distribution from the FLP, the executor obtained a $71-million loan from the FLP. It was noted that the repayment of the loan would require a sale of the insurance stock attributable to the spouse's interest in the FLP. Therefore, it was determined that the only difference between the redemption of the stock and the loan was that the loan created a $20-million interest deduction, which was offset by a smaller income tax expense to the other partners. Furthermore, the principal beneficiary of the estate was also the majority share holder. Thus, the beneficiary was making interest payments to himself. In addition, when the shares of the insurance stock were sold, only half of the expenses incurred were deductible. In order to repay the loan, a secondary offering of one-third of the insurance stock was made. The spouse's estate's indirect ownership of the stock through the FLP was sufficient to deduct the sale under Reg. §20.2053-3(d)(2). However, it was held that only a portion of the funds generated by the secondary offering were directly used by the spouse's estate. The attorney's fees, administrative costs, and other fees associated with the satisfaction of the decedent's charitable bequest were not deductible by the spouse's estate.

S.P. Black, Jr., Est., Dec. 58,018

Other References:

 
Code Sec. 2036

  CCH Reference - FINH ¶4955.701

  CCH Reference - FINH ¶4955.712

 
Code Sec. 2044

  CCH Reference - FINH ¶5940.05

  CCH Reference - FINH ¶5940.10

 
Code Sec. 2053

  CCH Reference - FINH ¶6120.12

  CCH Reference - FINH¶6140.65

  CCH Reference - FINH ¶6160.53

 
Code Sec. 2056

  CCH Reference - FINH ¶6120.12

  CCH Reference - FINH¶6140.65

  CCH Reference - FINH ¶6850.45

  Tax Research Consultant

  CCH Reference - TRC ESTGIFT: 18,100
CCH Reference - TRC ESTGIFT: 39,150
CCH Reference - TRC ESTGIFT: 42,350