Greenberg Traurig Alert
Courts Give New Guidance and Go-Ahead for Discount Family Limited Partnerships
By Diana S.C. Zeydel, Greenberg Traurig, Miami Office
View or download the PDF version of this Alert here.
The use of family limited partnerships as part of a comprehensive estate plan has
increased dramatically since the issuance of Revenue Ruling 93-12 permitting valuation
discounts for intrafamily transfers of closely held business interests. The opportunity to
reduce significantly the transfer tax consequences of a variety of estate planning
techniques through the use of closely held entities has caused heightened IRS scrutiny of
transactions using family controlled entities. The result has been a steady stream of
cases and rulings as well as a lively academic debate about the availability of valuation
discounts for transfers involving family limited partnerships in a variety of
circumstances, particularly, if the partnership consists largely of marketable securities.
Several recent cases provide favorable guidance for taxpayers in this area. The most
favorable is an unreported case, Estate of Church v. U.S., in which the decedent
and her children formed a family limited partnership consisting primarily of marketable
securities. The decedent and each of her children took back partnership interests
proportionate to the fair market value of the assets each contributed.
The Government made several familiar arguments in its effort to avoid the valuation
discount claimed by the taxpayer. The Government argued that the decedent made a gift upon
formation of the partnership. The amount of the gift would be the difference between the
fair market value of the assets contributed and the discounted fair market value of the
partnership interest included in the decedents estate. Some commentators have argued
that a gift can occur for tax purposes simply by loss of value to the donor, even if that
value cannot be found in the hands of any donee. Fortunately for taxpayers, the court
correctly held that there can never be a gift upon the formation of a business entity in
which each investors interest is proportionate to that investors contribution
of capital. Proper structuring upon formation of the family limited partnership is
essential to avoid adverse gift tax consequences.
The Government also argued that the decedents interest in the family partnership
should be evaluated as a direct interest in the assets of the partnership, in effect
disregarding the existence of the entity. The Government cited certain statutory authority
that it has consistently interpreted to support its position. The court unequivocally
stated that it could find no basis in the law to disregard the partnership agreement and
the relationships that it created among the parties under State law.
The Government, apparently overconfident, did not submit any valuation evidence.
Accordingly, plaintiffs expert carried the day, resulting in a greater than 50%
discount from net asset value for the taxpayer.
In Kerr v. Commissioner, the taxpayers formed two family partnerships and made
gifts of limited partnership interests to their children and in trust for their
grandchildren. The partnership was funded with bonds, stock and real estate. The
Government argued that certain restrictions on a limited partners ability to
withdraw from the partnership should be ignored for valuation purposes. The Government has
consistently asserted that the Internal Revenue Code expressly authorizes its position.
The court analyzed the legislative history of the relevant provision and found that the
Governments position was inconsistent with its own regulations. The court held that
the statutory provisions apply only to restrictions on the ability to liquidate the entire
partnership, not the ability of a limited partner to withdraw from the partnership. If
those restrictions are more restrictive than state law, they may be ignored for valuation
The Tax Court did issue a word of caution, however, in Estate of Reichardt v.
Commissioner. In Reichardt, the decedent formed a family limited partnership in
which his revocable family trust was the general partner and he was the limited partner.
Decedents children were co-trustees of the family trust, but did not perform any
functions as trustees. The decedent transferred his residence and essentially all his
other assets to the partnership. He gave his children each a 30.4% limited partnership
interest in the partnership.
Decedent continued to control and manage the assets of the partnership in the exact
same manner as he had prior to forming the partnership. He continued to occupy the
residence as before without paying rent to the trust or the partnership for use of the
residence. He made distributions to himself from the partnership accounts without making
distributions to the other partners.
The court found the fact that the decedent conveyed nearly all his assets to the
partnership suggested an implied agreement with his children that he could continue to use
those assets. Accordingly, the entire partnership was held to be includible in the
decedents estate for estate tax purposes, notwithstanding the lifetime gifts to his
children of limited partnership interests.
The foregoing cases demonstrate that substantial estate planning opportunities continue
to exist through the appropriate use of family controlled entities. The desired objectives
will not be achieved, however, without careful planning and on-going administration.
We believe we can provide the sophisticated advice and judgment our clients need to
make effective use of the opportunities available. Greenberg Traurig has designed a number
of innovative techniques designed to take advantage of the law in this important area. We
have successfully sustained substantial valuation discounts for properly structured family
entities, even when those entities consist primarily of marketable securities. Our
shareholders Diana Zeydel and Norm Benford have written an in-depth article that discusses
not only the law on valuation, but also tax penalties and the effective use of valuation
experts entitled "Valuation Principles and Recent Developments: Practical Guidance
for the Estate Planner". This article was presented at the Philip E. Heckerling
Institute on Estate Planning and published in ACTEC Notes and the summer 1999 issue
of the ABAs Real Property, Probate and Trust Journal. Copies are available upon
© 2000 Greenberg Traurig
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.