New Family Limited Partnership Case - Turner

Turner v. Commissioner is a very interesting case that addresses two legal and tax issues related to lifetime estate planning, including: 

1.  Estate tax inclusion of lifetime transfers of interests in family limited partnerships; and,
2.  Proper drafting and administration of Crummey withdrawal rights in order to qualify indirect transfers to an irrevocable trust as nontaxable gift of a present interest (shelter gifts under the tax-free annual exclusion amount).

Estate Tax Inclusion of Gifts FLP Interests.

In Turner, the Court held that certain lifetime transfers by the decedent of limited partnership interests to children were subject to estate tax inclusion in the decedent's estate under a subsection of IRC Section 2036 (transfer with retained enjoyment).

Certain uncommon and "bad facts" existed that led the Court to this conclusion, demonstrating the importance of proper drafting and administration of family limited partnerships:

The decedent and his wife were the sole general partners, managing and controlling the partnership.  (This is VERY uncommon in the world of properly executed partnership arrangements);

Decedent received an excessive management fee where few if any management services were actually provided;



The partnership operated like an investment account from which withdrawals may be made at will;

The partnership agreement provision that gave decedent and his wife as general partner the right to amend the agreement without consent of the limited partners. (This is VERY uncommon in the world of proper family limited partnership planning, and an important factor in the Court's decision);


Decedent transferred a significant portion of the decedent’s overall wealth to the partnership;


Decedent took distributions from the partnership “at will” ;


Decedent to disproportionate distributions (no distributions were made to any other partners in a year when $86,815 of payments were being made for the decedent and his wife, including the monthly management fees and $46,170 for estimated income taxes);


The decedent used partnership assets for personal expenses and personal uses (such as for making gifts, paying life insurance premiums on policies not owned by the partnership), and paying legal fees for the decedent’s estate planning; and,


The decedent personally paid debts and buying assets for the partnership, and failed to contemporaneously document those transactions as advances to the partnership.

Conclusion:  By avoiding these uncommon "bad facts" and taxpayer pitfalls, one can properly execute and administer a family limited partnership arrangement that should not result in estate tax inclusion for lifetime gifts of limited partnership units.

2.  Crummey Withdrawal Powers

An insurance trust was properly drafted to allow for Crummey withdrawal powers over any and all  "direct and indirect" transfers to the trust.  The taxpayer (decedent in this case) paid the insurance premiums directly to the carrier (never actually transferring te money to the trust) and the Trustee did not make all the Crummey withdrawal power holders (heirs) aware of their powers of withdrawal 

The Court held that the transfers did qualify for the gift tax annual exclusion (a gift of a present interest), even though some of the power holders weren't even aware of their withdrawal right!   Very interesting!  For decades, attorneys have been cautioning their clients to make sure those notices go out, otherwise risk losing the availability of the annual exclusion, and thus triggering a taxable gift on the insurance premium payments.   

Conclusion:  Taxpayers are still well-advised not to rely solely on this ruling, and to continue to issue Crummey notices to all power holders, to ensure the transfer (directly or indirectly) will qualify for the gift tax annual exclusion.