In June 2009, the tax court in the Estate of Miller v. Commissioner, allowed a discount of 35% where marketable securities were transfer into an FLP about 13 months prior to the decedent's death. The court concluded that there were legitimate and significant non-tax reasons for the contributions to the partnership, finding credible the witnesses' testimony.  However, it denied any discounts that were contributed to the same FLP just 13 days before the decedent’s death.

The court emphasized that (a) there was active management of the partnership's assets by the decedent's son as the general partner, (b) there was a change in the investment activity after formation of the FLP and (c) the decedent retained sufficient living expenses separate and apart from the FLP’s assets.  Below is review of this case from Steve Leimberg’s website.

FACTS: H devoted his time following retirement to researching and investing securities and used a specific charting methodology to purchase and sell securities "on the basis of an analysis of their daily high and low values."  H died on February 2, 2000 with a gross estate of about $7.67 million, 99.6% of which was securities held by his revocable trust.

H had taught the oldest son his special charting and securities management process, and W wanted the oldest son to continue managing the family assets using that process after H died. The oldest son actively managed the securities in MFLP (through his wholly owned company). He devoted about 40 hours a week to the management of the partnership assets, including continuing the sale and purchase analysis based on his father's charting system. Before W contributed assets to MFLP, her accounts made very few trades, and "trading activity increased after the securities were transferred to MFLP." However, the actual trading activity was relatively small ("about $3,000 to $4,000 per month"), representing sales and purchases of only about 1% per year of MFLP's securities.

On April 25, 2003, W fell and broke her hip. As with a lot of people in their 80s who suffer broken hips, various serious health problems followed. Within days, W had pacemaker implantation surgery and a subsequent surgery to repair her hip. A week later, W was moved from the hospital to a continuing care facility, but returned to the hospital on May 12, 2003 with congestive heart failure. On May 19, 2003, a CT scan revealed a traumatic brain injury, and W died on May 28, 2003.

Issues and Holdings:  The approximate $4 million of contributions to MFLP in April 2002 (13 months before W's death) qualified for the bona fide sale exception to §2036 because the driving force in the creation of the partnership was to continue H's special approach to investing the securities and not tax savings.

The approximate $878,000 of contributions made in May 2003 (13 days before W's death) did not qualify for the bona fide sale exception because "the decline in her health and the decision to reduce her taxable estate were clearly the driving forces" behind the contribution.  Section 2036(a)(1) was triggered, primarily because of the use of partnership assets to pay W's federal and state estate taxes.

Business Not Required; Marketable Securities Partnership.  The IRS argued that the trades MFLP actually made were not sufficient "to qualify MFLP as a legitimate operation."  Also, it argued that the types of assets (i.e., marketable securities) weigh against the finding of a valid non-tax business purpose.  The court disagreed.  “The non-tax purpose behind formation of MFLP was to continue Mr. Miller's investment philosophy and to apply it to family assets. This goal could not have been met had decedent not transferred securities to MFLP."

Planning Implications from Miller. If possible, include the following in the planning structure: (a). Change the management of the assets in some significant manner. (b) Provide for active management rather than merely passively holding partnership assets. (c) Do not transfer all (or almost all) of the owner's assets to the partnership. (d). Retain assets for living expenses and (e) Retain assets for paying estate taxes (or at least a substantial part of the estate taxes, or make arrangements for other family members to purchase the decedent's interest in the FLP without using the FLP's assets