Fifth Circuit Upholds Penalties Associated With Family Limited Partnership Planning

Family limited partnerships can provide a valuable estate planning tool when structured properly. One recent case highlights the importance of advance planning--and having a non-tax purpose for the FLP. In Estate of Anne Milner Fields v. Commissioner,, the Fifth Circuit upheld the Tax Court's decision to include the full value of the FLP's assets in the decedent's estate (rather than a discounted partnership interest). Within one month of her death, the decedent's agent transferred $17 million of her assets into a newly-created FLP. The decedent owned 99.9941% and the remainder was owned by an LLC (the general partner) of which the decedent was the sole member. The IRS relied on IRC Section 2036 (which prevents individuals from gifting assets while retaining control over them to avoid estate taxes) to include the value of the FLP's assets in her estate and assessed a 20% penalty. In agreeing with the Tax Court, the Fifth Circuit held that the estate did not show a bona fide non-tax reason for the transfer--so that the "bona fide sale" exception built into IRC Section 2036 did not apply. The case highlights the fact that so-called "death bed planning" strategies may backfire--not only was the estate unable to take advantage of the FLP benefits, but they were liable for a 20% underpayment penalty. For more information on the rules governing family limited partnerships, visit Tax Facts Online. Read More: Link to Q8939.