In a decision rendered on May 27, 2009, the Tax Court did not challenge an estate’s 35% discount for family limited partnership ("FLP") interests where the underlying assets in the FLP were marketable securities.
In the case of Estate of Valeria M. Miller, Deceased, et. al. v. Commissioner of Internal Revenue, Valeria Miller ("Valeria") established the Miller Family Limited Partnership ("MFLP") in 2002, shortly after her husband’s death. The securities that Valeria transferred to MFLP constituted 77% of her assets; she retained other assets individually so that she would not have to rely upon partnership distributions to pay for her day-to-day living expenses.
1000 FLP units were issued to the partners of MFLP, which included 92% to Valeria and 2% to each of her four children. Her son, Virgil, acted as general partner of MFLP, and he managed the MFLP through his management company, which was compensated by MFLP for its management services.
Valeria died in 2003. Her gross estate, nearly all of which was the 35% net discounted value of her 92% limited partnership interests in MFLP, was reported on Form 706 Federal Estate Tax Return as $2,600,000.
The IRS sought to include the securities in Valeria’s taxable estate at 100% of their fair market value without any discount, on the basis that, among other things, the MFLP was not a functioning business operation; Valeria’s transfer was essentially a testamentary device to avoid estate taxes; and that there were certain delays in the formation, funding and execution of the partnership agreement. The 35% valuation discount was not in dispute.
The estate contended that the transfer of marketable securities were made for a legitimate and substantial non-tax purpose, i. e., to continue the investment philosophy of Valeria’s husband; the securities were transferred to the MFLP and not commingled with the decedent’s personal assets; the transfers were not made for the sole purpose of reducing federal estate tax; and that the partnership formalities were substantially followed.
The Tax Court agreed with the estate. It found that MFLP was not merely holding marketable securities in a passive manner, that there was indeed trading activity; there were legitimate and non-tax business reasons for forming MFLP; and documentation was not delayed for an unreasonable period of time.
The Miller case stands for the proposition that substantial discounts are available for FLP interests in an estate where the underlying assets of the FLP are marketable securities. This is a huge opportunity for estate tax savings. As an example, $5,000,000 of marketable securities in a FLP at death discounted by 35%, or $1,750,000, will generate, at a federal estate tax rate of 45%, an estate tax savings of $787,500.
The holding in the Miller case is not unusual. In the January/February 2009 issue of A Potpourri, we discussed the case of Gross v. Commissioner where the Tax Court approved a 35% discount for gifts of FLP interests where the underlying assets consisted solely of marketable securities.
In the January/February 2006 issue of A Potpourri, we discussed the Estate of Kelley v. Commissioner where the estate tax discount for FLP interests consisting of cash and cash-type assets was in dispute. In that case, the Tax Court approved a 36% discount from face value.
In the September/October 2004 issue of A Potpourri, we discussed the case of Senda v. Commissioner where the Tax Court approved a 40% discount for gifts of FLP interests where the underlying assets consisted solely of marketable securities.
Federal legislation has been introduced to substantially limit the discounts available for assets – marketable securities or other – in a FLP. Please do not hesitate to contact us now if you have any questions about the Miller case or achieving tax savings by establishing a FLP for marketable securities or any other assets.