Published on:

Ninth Circuit Reminds Us To Be Careful With Transfers To Family Limited Partnerships

Why do individuals wish to transfer assets to family limited partnerships? The answer is simple: if the assets are held by the family limited partnership, then they’re not held in the estate (i.e, less amounts subject to the estate tax). IRC Section 2036 provides generally that an individual’s gross estate includes property the decedent transferred during his life if he retained for life the possession or enjoyment of the property, or the right to the income from the property. But no inclusion is required if the transfer was a bona fide sale for an adequate and full consideration in money or money’s worth. And further, the transferee (the family limited partnership) must be respected as legitimate. The family limited partnership must be run as a legitimate business, with annual meetings, regularly maintained books and records, and active business activities.
In Estate of Erma v. Jorgensen ((2011, CA9) 107 AFTR 2d ¶ 2011-793 ), a decedent transferred marketable securities to her family limited partnership which held passive investments only and did not maintain books and records. Further, while still alive, the decedent wrote personal checks from the family limited partnership accounts. Before the US Tax Court, the estate claimed that the transfers of securities were bona fide sales for full and adequate consideration (the family limited partnership interest), and that they should not be included in her estate under IRC Section 2036. The Tax Court disagreed, and the Ninth Circuit affirmed the decision of the Tax Court (citing it appeared the amounts transferred to the family limited partnership could be accessed for the personal needs of the decedent at any time).
The key lesson, as noted by the Ninth Circuit: transfers to family limited partnerships are subject to heightened scrutiny; careful planning and attention to detail are a must.