In Uncategorized on 10/24/2018 at 17:30

The late Frank D. Streightoff, before becoming the late Frank D. Streightoff, put a bushelbasketful of marketable securities and cash into a family limited partnership, the greatest part of whose limited partnership interests he kept for himself. His daughter, subsequently his executor, set up an LLC as general partner, which she ran. The assets were managed by a professional manager.

The limited partnership never held meetings or votes. The late Frank D.’s children were minuscule limited partners, with no power to combine to do anything.

The late Frank D attempted to assign an assignee’s interest in his limited partnership interest to his self-settled revocable trust, of which said daughter was trustee, rather than the whole enchilada. But he gave away too much, so when he became the late Frank D it turns out the trust had the partnership interest itself, and not an assignee’s interest.

This meant there’s no lack-of-control discount available to the late Frank D’s estate, and the discount for lack-of-marketability must be computed based upon a shorter lock-out period, due to the trust’s greater control over the limited partnership interest and thus the limited partnership.

At least Judge Kerrigan so holds in Estate of Frank D. Streightoff, Deceased, Elizabeth Doan Streightoff, Executor, 2018 T. C. Memo. 178, filed 10/24/18.

The issue, of course, is exactly what the assignment from Frank D to Frank D’s trustee (Elizabeth) assigned: the limited partnership interest itself or an interest in the limited partnership interest less than the whole interest.

“The agreement provided that decedent made an ‘assignment’ of all of his limited partnership interest in [the LP].  It provided that decedent transferred ‘[his] interest in the above described premises, together with all and singular the rights and appurtenances thereto in anywise belonging, unto the said Assignee, its beneficiaries and assigns forever’ and that he bound himself and ‘[his] heirs, executors, and administrators to * * * provide any further documentation or  execute any additional legal instruments necessary to provide the assignee all the rights the Assignor may have had in the property.’  The agreement provided that the revocable trust “by signing this Assignment of Interest, hereby agrees to abide by all the terms and provisions in that certain Limited Partnership Agreement….” 2018 T. C. Memo. 178, at pp. 8-9.

Oh, that boilerplate!

While State law defines interests in property, “(T)he doctrine that the substance of a transaction will prevail over its form has been applied in Federal estate and gift tax cases. In particular, we have indicated a willingness to look beyond the formalities of intrafamily partnership transfers to determine what, in substance, was transferred.” 2018 T. C. Memo. 178, at p. 16. (Citations omitted).

And Judge Kerrigan is willing, ya betcha!

“The agreement provided that decedent made a transfer to the revocable trust of ‘[a]ll of * * * [his 88.99%] limited partnership interest’ in [limited partnership].  It further stated that decedent transferred with the interest “all and singular the rights and appurtenances thereto in anywise belonging”. Although the transfer was labeled an ‘[a]ssignment’, the agreement states that the revocable trust is entitled to all rights associated with the ownership of decedent’s 88.99% limited partnership interest, not those of an assignee.  All ‘rights and appurtenances’ belonging to decedent’s interest include the right to vote as a limited partner and exercise certain powers as provided in the partnership agreement.

“The agreement provided that decedent was bound to provide any documentation or execute any legal instruments necessary ‘to provide * * * [the revocable trust] all the rights * * * [decedent] may have had’ in the limited partnership interest.  Decedent’s rights in the limited partnership interest were those of a limited partner in the partnership.  The agreement satisfied all the conditions for the transfer of decedent’s limited partnership interest and the admission of the revocable trust as a substituted limited partner.” 2018 T. C. Memo. 178, at pp. 17-18.

Finally, “Ms. Streightoff signed the agreement as manager of [limited partnership]’s general partner and gave consent to its terms, which provided for the transfer of all of decedent’s rights in the limited partnership interest to the revocable trust.  The parties have stipulated that the transfer was a permitted transfer.  Lastly, the agreement provided that the revocable trust agreed to abide by all terms and provisions of the partnership agreement, and Ms. Streightoff executed the agreement on behalf of the revocable trust.” 2018 T. C. Memo. 178, at p. 19.

Whatever was transferred, there was no difference: Elizabeth as trustee had all the information of a limited partner, and absence of voting rights here is not significant.

Takeaway: Before reaching for the formbook or opening the form file, ask what it is that you’re trying to accomplish.

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