In 1994, an eighty-five year-old widow transferred California beachfront property into a family limited partnership (FLP)—but failed to transfer the underlying mortgage.  Even though she remained personally liable on the debt, the FLP made substantial monthly payments on the loan as well as her other living expenses, but failed to debit her partnership account until after her death in 1997.  These are just some of the “bad facts” of Estate of Bigelow v. Comm’r (9th Circuit, September 17, 2007), the most recent in an ever-growing string of cases that casts doubt on the viability of FLPs as an estate planning tool.

Notably, the Bigelow estate tried to fit within the IRC §2036(a) exception by asserting that the transfer of property to the FLP was a “bona fide sale for full and adequate consideration.”  The Commissioner argued that the estate couldn’t make that claim and also claim discounts for marketability, too, but the Ninth Circuit declined to adopt the “per se” rule.  That is, it followed the Third and Fifth Circuits and the Tax Court, which hold that “the dissipation of value resulting from the transfer of marketable assets to a closely held entity will not automatically constitute inadequate consideration” (emphasis added).  Instead, the criteria for the “bona fide sale” exception are interrelated with the inquiry into the FLP’s “legitimate” (non-tax) business purpose.  For a copy of an abstract of Bigelow, click here.  The full-text court opinion is available to subscribers of BVLaw™, the most comprehensive database of BV-specific case law—over 2600 cases to date, and still growing.