A ‘great facts’ case could help appraisers understand DLOM and other FLP issues

During the 1990s, the decedent executed a will that made specific gifts of real estate and stock to each of her three grown children, dividing any residual equally among them. Over time, the value of the bequests changed, and the assets became exposed to greater liability—but by then, the decedent was suffering from Alzheimer’s. Without knowing the contents of the will, the three children (who all managed the family businesses) agreed to divide their mother’s estate equally and petitioned the probate court to become her co-guardians. When they discovered the unequal bequests—which would require the recipients to issue disclaimers to effectuate an equal division—the children approached an estate planning attorney.

Ultimately, the attorney’s plan called for the decedent to establish a family limited partnership (FLP) for each child, funded with an equal amount of assets, and a corporation to act as general partner (GP), for which it received a market-determined management fee. Importantly, the decedent retained sufficient funds to pay her personal expenses. Equally important: The children continued to actively manage the businesses and observe all partnership formalities, including crediting the decedent’s contributions to her capital account. When she died in 2005, the IRS asserted a deficiency of over $2.2 million, arguing that her gross estate should include the value of the FLP assets. The Tax Court disagreed. “The decedent’s primary motives were to ensure effective property management and equal distributions among the children—not minimization of tax consequences,” the court held. Further, the nature of the assets in this case “would lead any prudent person to manage [them] in the form of an entity.” Read the complete digest of Estate of Kelly v. Commissioner,T.C.Memo 2012-73 (March 19, 2012) in the nextBusiness Valuation Update; the Tax Court’s opinion will be posted soon at BVLaw.