Attorney-at-Law

TO HAVE AND HAVE NOT – REDIVIVUS

In Uncategorized on 06/04/2012 at 18:08

Readers of my blogpost “To Have and Have Not”, 8/31/11, will remember the sad tale of Clyde W. Turner, Sr., who had when he should have had not, and thereby torpedoed his estate plan. But a happier fate befalls the Estate of George H. Wimmer, Deceased, George W. Wimmer, Personal Representative, in 2012 T.C. Mem. 157, filed 6/4/12.

George I and wife Ilse set up a Family Limited Partnership, ostensibly to invest in land and stocks. George I and Ilse, general partners, never bought land, but they bought some good dividend-paying, publicly-traded stock. And the trust instrument provided “…partnership profits are allocated to the partners according to their proportional partnership interests. All distributions of net cash flow are also shared among the partners in proportion to their partnership interests. Distributions must be made in cash pro rata. The partnership agreement, as amended, provides that the primary source for distributions is distributable cash derived from partnership income.” 2012 T.C. Mem. 157, at p. 6 (Footnote omitted).

Now the trust George I and Ilse set up for the grandchildren was a limited partner, the grandbabies had the right to annual distributions from the trust corpus, and the trust did get its dividends along with everybody else.

As usual, the initial limited partners were George I and Ilse, and they gifted out partial limited partnership interests every year, staying under the $10,000 (now $13,000) per head radar. Also as usual, transfers of the limited partnership interests, otherwise than interfamily, were strongly restricted.

Judge Paris didn’t seem sure whether any extrafamily transfer required 70% or 100% approval by all limiteds. “The transfer of limited partnership interests requires, among other things, the prior written consent of the general partners and 70% in interest of the limited partners. Upon satisfaction of the transfer requirements, the transferee will not become a substitute limited partner unless the transferring limited partner has given the transferee that right and the transferee: (1) accepts and assumes all terms and provisions of the partnership agreement; (2) provides, in the case of an assignee who is a trustee, a complete copy of the applicable trust instrument authorizing the trustee to act as partner in a partnership; (3) executes such other documents as the general partners may reasonably require; and (4) is accepted as a substitute limited partner by unanimous written consent of the general partners and the limited partners.” 2012 T. C. Mem. 157, at p. 3. Then again, the limited partnership agreement isn’t crystal clear, either.

Howbeit, every limited partner was entitled to receive net cash distributions, and they did, every year, in proportion to their respective limited partnership interests.

George I shuffles off this mortal coil, and IRS claims the limited partnership interests George I and Ilse gifted to the family are not gifts of present interests, therefore not excludable from gross estate of George I.

Now a present interest is an unrestricted right to the possession, use and enjoyment of property or the income therefrom. “The terms ‘use, possess or enjoy’ connote the right to substantial present economic benefit, that is, meaningful economic, as opposed to paper, rights.” 2012 T. C. Mem. 157, at pp. 8-9 (Citations omitted).

But limited partnership interests may or may not be present interests. The interests the grandbabies and other limited partners got might not differ from what they would get if they were beneficiaries of a trust. Here, however, Judge Paris finds that, although the donees of the limited partnership interests did not get an unrestricted right to those interests, they sure got the right to the income.

Judge Paris: “…the estate must prove, on the basis of the surrounding circumstances, that: (1) the partnership would generate income, (2) some portion of that income would flow steadily to the donees, and (3) that portion of income could be readily ascertained.” 2012 T. C. Mem. 157, at p. 10 (Citation omitted).

Well, the limited partnership held dividend-producing, publicly-traded stock, so there should have been income (and there was), it would flow steadily (the generals were fiduciaries under State law and the limited partnership agreement said they had to distribute net cash), and the amount was readily ascertainable (just check the dividend history of the corporations whose stock was held).

Result: the grandbabies and the other limited partners had, and George I’s estate had not, so the gifts were properly excluded from George I’s estate.

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