Fifth Circuit Rules That Decedent's Intent Was Sufficient To Create Partnership

The Fifth Circuit in Keller v. United States (Docket No. 10-41311) has affirmed the district court's ruling (Docket No. 6:02-cv-00062) that assets of a family limited partnership (FLP) were established before the decedent's death, even though no assets had actually been transferred by that time. As a result, the estate was entitled to a refund of estate taxes based on valuing the FLP interests with discounts of approximately 47.5%. It further determined that interest on a loan from the FLP was deductible under Section 2053.

The case revolved around the decedent's intentions at the time of her death. Following her husband's death in January 1999, the decedent had spent considerable time with her advisers regarding various options for the protection and disposition of some of the assets in two trusts. One trust, for which a qualified terminable interest property election had been made upon her husband's death, consisted of his separate property and his one-half interest in their community property. The other trust consisted of the decedent's separate property and her one-half interest in their community property. The discussion centered on the possibility of creating a series of FLPs for the purpose of holding some or all of the family's real estate, mineral interests and investment assets, with one FLP to be established for each class of assets.

The first FLP was to be formed with approximately $250 million of community property bonds. Each trust was to contribute approximately one-half of that amount in exchange for a 49.95% limited interest in the FLP. A corporation to be formed by the decedent with an initial cash contribution of $300,000 was to own the 0.1% general partner's interest. The decedent intended to sell her interest in the corporation to family members. Various drafts of the documents were circulated during the fall of 1999. In March 2000, the 90-year-old decedent was diagnosed with cancer, but her death was not believed to be imminent. On May 9, 2000, her adviser took the paperwork to her hospital room, and she signed the FLP agreement and various papers for the corporate general partner. The FLP agreement had blanks for the amounts contributed. Her adviser testified that the blank amounts would be filled in when the bonds were actually transferred to the FLP and the values on that date ascertained. He applied for Taxpayer Identification Numbers (TINs) for the FLP and the corporation, discussed opening brokerage accounts for...