No tax holiday in Estate of Holliday
Gifted limited partnership interests brought back into gross estate
Don’t expect to minimize estate taxes by simply funding a limited partnership with marketable securities. That’s the message from a recent United States Tax Court opinion. There, a limited partnership was formed with an LLC as the 0.1 percent general partner. Decedent transferred about $6 million in marketable securities to the limited partnership in exchange for a 99.9 percent limited partnership interest and the membership interest in the LLC.
On the same day as the formation, Decedent’s two sons purchased from Decedent all of her membership interest of the general partner for about $3,000 each without any discounts. Decedent also that day gifted a 10 percent limited partnership interest to an irrevocable trust. Decedent may have expected that the gifted 10 percent limited partnership interest would be outside her gross estate and that the remaining 89.9 percent limited partnership interest would be entitled to valuation discounts.
Indeed, on the estate tax return the 89.9 percent limited partnership interest was reported with a valuation discount of about 33.6 percent. However, the estate tax return was selected for audit and the IRS determined a deficiency. The Tax Court ruled that the entire limited partnership interest was includible in the gross estate without any valuation discounts pursuant to IRC §2036 even though Decedent had other substantial assets.
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