December 2, 2024 / Newsletters, Publications
Lessons from the Latest IRS Victory in Deathbed Family Limited Partnership Planning – Estate of Anne Milner Fields
In September 2024, the Tax Court ruled that the full date-of-death value of assets transferred into a family limited partnership (“FLP”) shortly before a decedent’s death were includible in her estate and therefore subject to estate tax.
In Estate of Fields,[1] the decedent, Anne Milner Fields (“Anne”), appointed her great-nephew, Bryan Milner (“Bryan”), as her agent under her durable power of attorney. Less than six weeks prior to Anne’s death at age 91, and while Anne was in the “advanced stages” of Alzheimer’s Disease, Bryan consulted with an attorney regarding estate planning for Anne. With the attorney’s assistance, Bryan implemented the following FLP planning, at all times acting in his capacity as Anne’s agent:
- Bryan formed AM Fields Management, LLC (“the LLC”), which would act as the general partner of the FLP. Bryan was the sole member and manager of the LLC.
- Bryan formed AM Fields, LP (the “Partnership”), signing the Partnership Agreement as both the Manager of the LLC and as Anne’s agent.
- The LLC transferred $1,000 to the Partnership in exchange for a .0059% general partnership interest. In its analysis, the Tax Court commented on the “de minimis” and “token” nature of this interest.
- Over a 17-day period, Bryan transferred approximately $17 million of Anne’s personal assets, constituting most of her wealth, to the Partnership, in exchange for a 99.9941% limited partnership interest. Anne retained approximately $2.1 million in personal assets outside of the Partnership. During this 17-day period, Anne was placed on hospice care.
Anne died 10 days after the transfer of her assets to the Partnership was completed. Her 99.9941% limited partnership interest was valued at $10.8 million for estate tax purposes, representing a valuation discount of approximately 36.5%. Anne had retained insufficient liquid assets outside of the Partnership to satisfy certain cash bequests under her Will totaling $1.45 million, so the Partnership distributed $600,000 to Anne’s estate, which was used to satisfy these bequests. In addition, the Partnership liquidated certain securities and distributed the cash proceeds to Anne’s estate in order to facilitate the payment of her $4.6 million estate liability.
The IRS audited the estate tax return and issued a notice of deficiency in which it asserted that all of Anne’s assets that had been transferred into the Partnership were includible in Anne’s estate. The IRS also assessed a 20% accuracy-related penalty under IRC § 6662.
The Tax Court’s Analysis
In an unsurprising result, the Tax Court ruled in favor of the IRS, holding that the Partnership assets were includible in Anne’s estate under IRC § 2036 and upholding the 20% accuracy-related penalty. The Tax Court reasoned as follows:
- Anne retained “possession or enjoyment” of the Partnership assets under IRC § 2036(a)(1). Distributions from the Partnership were within the sole discretion of Bryan (as the sole member and manager of the LLC), while Bryan was also acting as Anne’s agent. As a result of this relationship, Anne was deemed to have the right to all income from her transferred assets.
- The Tax Court found an implied agreement between Anne and Bryan that Bryan would make distributions from the Partnership after Anne’s death to satisfy the specific bequests under her Will and to pay her estate taxes. Anne retained insufficient personal assets outside of the Partnership, so the need for these Partnership distributions was entirely foreseeable.
- Under IRC § 2036(a)(2), Anne retained the right, in conjunction with Bryan, to dissolve the Partnership. Upon dissolution, the Partnership assets would liquidated, with the cash proceeds distributed back to Anne. Therefore, Anne retained the right to reacquire the transferred assets and to determine their disposition.
- The transfer of Anne’s assets to the Partnership was not a “bona fide sale” (which is an exception to IRC § 2036) because there was no non-tax business purpose that was a significant factor motivating the FLP planning. The Tax Court rejected each of the Estate’s alleged business purposes,[2] characterizing them as “theoretical justifications” based on the facts of the case. The Tax Court scrutinized the timeline of Anne’s hospitalization, decline, and death and the overlap of the FLP planning with these events, concluding that the timeline alone cast “significant doubt” that the FLP planning had any purpose other than reducing Anne’s estate tax.
- In upholding the 20% accuracy-related penalty under IRC § 6662, the Court rejected the argument that Bryan acted with reasonable cause and in good faith. Notably, the exception for good faith reliance on professional tax advice was not available, as Bryan engaged an accounting firm to prepare Anne’s estate tax return, and that firm did not advise Bryan regarding the FLP transaction.
Takeaways from Fields
While there is nothing particularly novel or surprising about the Fields case, it serves as an important reminder to both planners and clients of the potential pitfalls of FLP and LLC planning. The takeaways from Fields include:
- Deathbed planning by an agent acting under a durable power of attorney should be approached with extreme caution. In Fields, the Tax Court was troubled by Anne’s lack of personal involvement in the FLP planning. When an agent is involved, someone other than the agent should act as (or control) the general partner of the FLP.
- Create contemporaneous evidence documenting the non-tax business purposes of the planning. In Fields, the only contemporaneous evidence of the purpose of the FLP planning were certain emails referring to “deepening valuation discounts,” which is never a valid business purpose.
- The FLP should be funded with contributions from more than one partner as a pooling of assets, in order to create a true joint investment vehicle.
- The decedent must retain sufficient assets outside of the FLP to comfortably pay all of the decedent’s living expenses, and well as post-death debts, expenses and taxes.
- The decedent should not be permitted to participate in any decisions regarding the dissolution or liquidation of the FLP.
- Taxpayers should seek and document competent, professional tax advice in both the planning stages and later in the estate tax reporting stages in order to reduce the risk of accuracy-related penalties.
[1] Estate of Anne Milner Fields, et al. v. Commissioner, T.C. Memo 2024-90
[2] These alleged business purposes include protection from financial elder abuse and creation of a streamlined management of FLP assets.