Florida Estate Planning Lawyer & Attorney : Stokes McMillan Maracini & Antúnez : Litigation, Probate, Trust Administration

In reading the United States Tax Court's memorandum regarding the Estate of Gimbel, I could not help but be reminded of just how important it is to have a thorough estate plan in place.  By thorough, I mean that aside from having all the appropriate estate planning documents in order, the estate's assets are arranged so that they systematically and as effortlessly as possible follow the scheme laid out in the estate planning documents.

Georgina Gimbel died owning 3,601,267 shares in Reliance Steel and Aluminum Company, a publicly traded company that had been founded by the uncle of her predeceased husband.  Of those shares (which represented approximately 13% of the company's outstanding stock), approximately 3,548,450 were unregistered.  This, along with the fact that the decedent held such a large number of shares so as to qualify her as an "affiliated person" under federal securities law, meant that the shares could be sold on the public market only under extremely limited conditions.  Taking this into account, the estate argued for a 17% valuation discount, while the IRS was only willing to allow a 9% discount.  Inevitably, valuation experts were hired, disagreements as to the proper method for valuing the stock ensued, and the case wound up before the U.S. Tax Court. 

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Why, when certain circumstances are present, the assets in a family limited partnership can be included in the decedent's gross estate.

Section 2036 of the Internal Revenue Code provides:

"The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer…by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death…the possession or enjoyment of, or the right to the income from, the property."

In Estate of Korby v. Commissioner of Internal Revenue, the Eighth Circuit Court of Appeals held that this provision can, in certain circumstances, also apply to family-created limited partnerships.

In Korby, a married couple created a limited partnership and funded it with a total of $1,888,704.00 worth of assets.  The couple’s living trust obtained a 2% general partnership interest, while the couple itself obtained a 98% limited partnership interest.  The couple proceeded to gift their 98% limited partnership interest to four irrevocable trusts created for their sons. When both husband and wife passed away, neither estate tax return included the value of the estate assets that had been transferred to the partnership, and the IRS issued notices of deficiency as to both of the estates. The IRS argued that the full value of the partnership assets was includable in the gross estate because the couple had retained "for their lives ‘the possession or enjoyment of, or the right to the income from, the property."  The Eighth Circuit Court of appeals agreed with the IRS’s position.

How did the court reach this conclusion?

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In a Private Letter Ruling issued December 8, 2006, the IRS had this to say in response to a taxpayer's inquiry as to whether a net income makeup charitable remainder trust (NIMCRUT) that had been judicially reformed would still qualify as a charitable remainder trust:

"Section 1.664-3(a)(4) of the Income Tax Regulations provides in part that [a charitable remainder trust] may not [emphasis added] be subject to a power to invade, alter, amend, or revoke for the beneficial use of a person other than an organization described in Section 170(c). "

The PLR went on to state that while "[a] modification or reformation of a charitable remainder trust does not violate Section 644 [of the Income Tax Regulations] if the modification or reformation corrects a scrivener's error," the judicial reformation of the Trust in question "was not due to a scrivener's error and would violate Section 664."  Such a trust, the IRS concluded, "will not be treated as a charitable remainder trust."

In sum, reforming a NIMCRUT for reasons other than correcting a scrivener's error will destroy its status as a charitable remainder trust.  But why were the settlors of the NIMCRUT in this case so interested in reforming it in the first place?

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