Summary

In Estate of Kelly v. Commissioner, the Tax Court ruled the underlying assets of four limited partnerships were not includible in a decedent's gross estate for estate tax purposes. The court reached this conclusion despite the fact that decedent owned all stock of the corporate general partner, which was paid a management fee, and despite the fact that the partnerships were created by decedent's children in their capacities as co-conservators.

Extended Summary

The three children petitioned a probate court for a determination that their mother was incapacitated and for their appointment as co-conservators of her estate. Afterwards, the children entered into a written agreement to divide her estate equally, regardless of the literal terms of her will.

The lawyer assisting them in the conservatorship proceedings advised that the agreement might not be enforceable against the heirs of any of the children who might predecease their mother. He referred them to another lawyer, who recommended that the distribution plan could be secured by placing the decedent's assets into limited partnerships, and having the decedent transfer interests in the partnerships to each of the children.

Because the decedent's assets included two active quarries ("high risk assets"), the lawyer advised that four partnerships be created, one for each of the children, and a fourth to hold the quarries. The decedent would hold the stock of a corporate general partner. This plan was approved by the probate court, and over the next three years the decedent, through her children as co-conservators, made gifts of all limited partnership interests to the children, with the result that at her death she held only the stock in the general partner.

The decedent retained $1.1 million outside the partnerships, and all of her living expenses were paid from these funds. Each child was paid a salary as a co-manager of the corporate general partner, but no distributions were made from the general partner to the decedent.

Nonetheless, the Commissioner assessed a $2 million deficiency on the decedent's estate tax return, asserting the transfers of the decedent's assets to the limited partnerships were not for full and adequate consideration. The IRS also alleged the decedent had retained an income interest in the transferred assets, because distributions might have been made to her from the corporate general partner.

The Tax Court rejected both these arguments, finding that the decedent had "legitimate and significant nontax reasons" for creating the partnerships, and that the formalities of the partnership structure had been diligently respected.

CPC Commentary

Estate of Kelly is important, and may well become a bell-weather case in this area, so we suggest charitable planners be aware of further developments.

A financial adviser, lawyer, accountant, trust officer, or development officer cannot be a good charitable planner without taking into account estate tax considerations. This is particularly true with "discount valuation" planning, which is a key tool of the planner in developing an overall charitable estate plan.

At CharitablePlanning.com, we do not seek to provide our readers with "in-depth" analyses of rulings and cases in the estate planning area, but instead to summarize these current events for their relevance to the planning process and easy consumption, referring our readers to other sources for further study. In the area of discounts and valuation, there are numerous authors who write on a regular basis and thoroughly address cases such as the Estate of Kelly. One of the best sources for information and analysis in this area is is Leimberg Services. If you are not a subscriber to Steve's website, we suggest you consider doing so!

Relevant Documents

	Tax Court: Estate of Beatrice Kelly, Deceased, Betty K. Wyatt, William T. Kelly, Claudia K. Cantrell, Executors	3/19/12
	Section 2036: Transfers with retained life estate	3/24/10