Court adopts 47.5% combined discounts in latest FLP case

With the help of longtime financial and legal advisors, a wealthy Texas widow established a family limited partnership (FLP), to be funded with $250 million in corporate investment bonds. Just days after signing the formal papers, however--and before she could transfer the assets--the 90 year-old died, and her advisors “stood down,” believing the failure to fund was fatal to the FLP. A year later, they read Church v. U.S., 2000 WL 206374 (W.D.Tex.), in which an FLP succeeded even though the founder died days before funding. Based on Church, the family advisors completed the transfer of FLP assets, claiming an estate tax refund for its discounted values.

In a resounding victory for the estate and its appraiser Robert Reilly (Willamette Management Associates), the federal district court in Keller v. U.S., 2009 WL 2601611 (S.D. Tex.) (Aug. 20, 2009) approved the FLP and discounted its assets for lack of marketability and lack of control at combined rate of 47.5%. The court also discredited the government’s undiscounted appraisal, finding that it violated the fair market value (FMV) standard by considering “real” (rather than hypothetical) buyers and sellers--and speculating as to subsequent events.

“This was a very fact-intensive decision,” comments Steve Akers (Bessemer Trust, Dallas) for Wealth Strategies Journal 2.0 and the ACTEC. The planner’s “very careful and detailed” efforts to establish the FLP and the decedent’s clear intent to convey the $250 million prior to her unexpected death established a legitimate purpose and adequate consideration. Moreover, “this is now the eighth case in which taxpayers have survived a §2036 attack,” Akers writes, naming Church, Stone, Kimball, Bongard, Schutt, Mirowski, and Miller. By comparison, in Holman (see BVWire™ #69-1), the court approved a mere 12.5% discount to an FLP transfer, because the partnership could buy-out a departing partner’s shares “at some price” between the discounted and market values. (The taxpayers have since appealed, arguing improper application of the FMV standard.)

Where can you get the good and bad FLP cases? The Keller decision now joins all of the leading FLP precedents at BVLaw™.