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Estate planning strategies such as family limited partnerships and gifts to charitable trusts are part of an estate planning professional's toolbox to achieve client goals such as minimizing taxes, effectuating philanthropic plans, teaching younger generations about a family business and passing on wealth. In the best-case scenario, attorneys and their clients have time to review how the plan will work, allow younger generations to evaluate their role in the plan, evaluate the goals it will achieve, and recognize any risks associated with the plan. Whether a client's estate is of a significant amount or of a more modest size, recent experience with COVID-19 highlights the need for individuals to take care of their planning while they have time to consider all issues involved versus rushing to implement a plan when there is a serious illness or fear of one driving their actions. These concerns are magnified, of course, when one must consider federal estate and gift tax issues. A recent memorandum opinion by the U.S. Tax Court provides an example of a last-minute, complex plan that may have been doomed from the start or headed off the rails in its implementation. See Estate of Howard V. Moore v. Commissioner of Internal Revenue, Docket Nos. 21209-09, 22082-09 (U.S. Tax Ct. April 7, 2020).

Background

Howard Moore, the decedent, owned a large amount of property and operated a successful farm. Moore was admitted to the hospital with a critical illness in December 2004 and was discharged to hospice care that same month with advice that he only had a short time to live. Within a matter of days, Moore contacted an attorney who was able to design an estate plan consisting of a family limited partnership (FLP), a living trust, a charitable lead annuity trust, a trust for his adult children, a management trust that acted as the general partner of the FLP and an "Irrevocable Trust No. 1"designed to act as a conduit for the transfer of funds from the FLP to a charitable foundation. The decedent survived for a few months after creating these entities, but succumbed to his illness in March 2005. At the time he died, assuming no taxable gifts during a person's lifetime, the amount excluded from federal estate tax for an individual amounted to $1,5 million. With somewhere between $8 to $20 million in his estate and a top estate tax rate of 47% at the time, the goal of saving estate taxes must have seemed important enough to pay his attorney $320,000 for designing the plan.

The primary thrust of the planning included a transfer of the farm to a living trust and a subsequent transfer of 80% of the farm property to the FLP. A management trust established by the decedent acted as general partner of the FLP, with the decedent's living trust owning 95% of the limited partnership interests and each of the decedent's children each owning a 1% limited partnership interest. The decedent's estate and his family later asserted that the purpose of the FLP was to offer protection against liabilities from the use of pesticides, health risks to workers, creditors and potential bad marriages of the decedent's offspring. Another reason for forming the FLP was to bring the "dysfunctional" family together since they would be required to jointly manage the FLP and its property. The FLP contained transfer restrictions and the limited partners had no right to participate in business management or operation decisions regarding the FLP.

The trust known as Irrevocable Trust No. 1 was nominally funded at the time of decedent's death and thereafter received funds from the FLP. In turn, those funds were transferred to the charitable trust in pursuit of a charitable deduction by the estate. Shortly before the decedent's death, Moore had also used FLP funds to make significant transfers to his children that were designated as loans, as well as making outright gifts to his children and a grandson.

Tax Court Analysis

The decedent's estate filed an estate tax return and a gift tax return after his death. Following review of the returns, the Internal Revenue Service (IRS) issued a notice of deficiency of almost $6.4 million. The tax court, which issued its opinion on April 7, agreed in large part with the IRS findings that the decedent's plan to save estate taxes was ineffective. The court viewed the estate's arguments as one of form over substance, in which the only recognizable goal of the transactions entered into before the decedent's death was to save estate taxes. While the opinion does not specify what caused the IRS to audit the return, it is apparent that the intense planning and creation of various entities within a short time before the decedent's death raised questions.