In Estate of Purdue, T.C. Memo. 2015-249, the United States Tax Court denied an IRS attempt to disregard lifetime estate planning implemented by Barbara and Robert Purdue (the “Purdues”). MPBA attorneys, primarily Alan L. Montgomery and George W. Akers, advised Mr. and Mrs. Purdue with respect to the lifetime planning, and also represented Mrs. Purdue’s estate (the “Estate”) at the Tax Court. The Estate of Purdue decision is discussed briefly below, as well as in the linked materials.
Prior to their deaths, Robert and Barbara Purdue transferred jointly-owned community property investment assets to their Family Partnership, a Washington member-managed limited liability company (the “FLLC”). In exchange, each received a 50% interest in the FLLC. Mrs. Purdue (who survived Mr. Purdue) made lifetime annual gifts of FLLC interests to an irrevocable trust for the benefit of her family members, valued at discounts on gift tax returns. After the death of Mrs. Purdue, her remaining approximately 25% personally-owned FLLC interest was valued at a discount on her federal estate tax return. In the audit of Mrs. Purdue’s estate tax return, the IRS asserted that the alternate valuation date fair market value of the underlying FLLC assets attributable to her original transfer (50% of the combined community property), was included in her gross estate under § 2036(a), including those underlying assets attributable to the FLLC interests gifted by her during her lifetime. Because the FLLC assets had appreciated substantially since the dates of transfer, the IRS’s asserted deficiency was significant.
The Court’s Opinion
In ruling for the Estate, the Tax Court determined that the value of the assets transferred by Mrs. Purdue seven years prior to her death to a family limited liability company was not included in her gross estate under IRC § 2036(a) because the bona fide sale for adequate and full consideration exception to § 2036(a) applied.
The Court’s ruling was dependent, in part, on the following factors.
- The record established legitimate and significant nontax reasons for creating the FLLC
- The Purdues were not financially dependent on FLLC distributions
- The Purdues did not commingle personal funds with FLLC funds
- The FLLC maintained clear records and entity formalities were respected
- The assets were timely transferred to the FLLC
- The Purdues were not in poor health at the time of the transfers to the FLLC
The Estate of Purdue decision illustrates that with proper planning and careful execution, taxpayers can avoid significantly increased estate taxes on assets transferred during life. If you have any questions or wish to implement a family gift program, please contact the Estate Planning attorneys at MPBA.