“It is a truth universally acknowledged that a recently widowed woman in possession of a good fortune must be in want of an estate planner.” So begins the latest Tax Court memorandum opinion (by Judge Holmes) to address the effectiveness of family limited partnerships (FLPs) as an estate planning devices. Estate of Hurford (Dec. 12, 2008) follows the story of the devoted widow Hurford, whose husband died quite suddenly, leaving her to quickly learn estate management. Her burden was accelerated when she was suddenly stricken with cancer. “Two attorneys vied for her attention and she chose [one],” the court said. “She lost her life to the cancer. We must now decide how much of her estate will be lost to taxes.”
Who can resist such an opening? Well, for one, the court’s opinion is 85 pages long. And two, not all bodes well for the Hurford estate—or its attorney, whom the court criticized for many errors, including sloppy drafting of key documents and making “egregiously false” statements on tax returns. Notably, the attorney also declined to retain independent appraisals of the numerous interests at stake—three FLPs funded with a private annuity—bragging to the Hurford heirs that he had “experience obtaining 50 percent discounts in settlements on estates with the IRS.” However, the method he used to pick the discount factors was “haphazard,” according to the court, ranging from 25% to 42%, with no clear basis for the percentages.
The end of the story: At trial, the estate offered two independent experts, “to clean up some of the problems.” Nevertheless, even their testimony—that the discount factors were within acceptable limits—could not save the mess that bad advice and poor execution had made of the widow Hurford’s estate. Suffice to say that under IRC Secs. 2035, 2036, and 2038, the court recovered all of the property that the attorney tried to transfer out of the estate via the FLPs. It further found that the attorney “conjured the partnership discounts out of the air,” and that a “careful attorney” would have had the assets re-appraised at the time of funding. Finally, the court offered a long list of factors by which to assess the non-tax purpose of a proposed FLP, including:
- Adherence to partnership formalities;
- The taxpayer’s dependence on distributions;
- Whether the taxpayer commingled personal funds with partnership funds;
- The taxpayer’s old age or poor health when forming the FLP; and
- Whether the FLP functioned as a business enterprise or otherwise engaged in any meaningful economic activity. Considering the entities in this case, the court found that they existed only to satisfy the Hurfords’ “drive for a discount.”
Look for a complete case abstract of Estate of Hurford in the February 2009 Business Valuation Update™. At the time, the court’s opinion will also be posted to BVLaw™. (Note: Special thanks to Owen Fiore of FioreWealthPlanningConsulting in Kooskia, Idaho for alerting us to the decision. Fiore will soon post his own assessment of Hurford at his website.)
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