INTERPLAY OF BEHAVIORAL ECONOMICS AND PORTFOLIO MANAGEMENT WITH THE CURRENT EXAMINATION OF FAMILY PARTNERSHIPS BY THE COURTS, THE

Real Property, Probate and Trust Journal, Spring 2005 by Harrison, Louis S, Janiga, John M

The Kimbell II court stated that "[i]n order for the sale to be for adequate and full consideration, the exchange of assets for partnership interests must be roughly equivalent so the transfer does not deplete the estate."49 This adequate and full consideration requirement can be substantiated by making sure "the transaction was entered into for substantial business and other nontax reasons."50 The court seemed to go a bit further than its Wheeler holding and expressed that there must be substantial nontax and business reasons for the partnership. However, in application and upon examination of the facts in the case, this added requirement is not much of an extension of the Wheeler application of the exception.

Approximately four months later, Thompson significantly diminished any euphoria that estate planners felt after Kimbell //.51 In Thompson the Third Circuit issued a holding contrary to Kimbell II by affirming the Tax Court's holding against the family partnership.52

The taxpayer in Thompson had no better facts than in Kimbell II. The decedent was again elderly (age 95) when the two partnerships were created.53 One partnership involved the decedent and his son.54 The decedent transferred to this partnership $1,118,500 in marketable securities and notes receivable of $293,000.55 The decedent received a 62.27% limited partnership interest. He also received a 49% interest in the corporation that served as general partner. The decedent's son contributed mutual funds of $372,000 and a Colorado ranch (used as the son's residence) valued at $460,000. The son received a 36.72% limited partnership interest and 49% of the corporate general partner, which held a 1.01% general partnership interest.56

The other partnership involved the decedent, his daughter, and his daughter's husband. The decedent contributed $1,286,000 in marketable securities and $125,000 in notes receivable in exchange for a 95.4% limited partnership interest.57 The son-in-law contributed cash of $1,000 and real estate valued at $49,000 and received a 3.54% limited partnership interest. The corporate general partner held a 1.06% general partnership interest. The decedent owned 49% of this corporation, the decedent's daughter owned 24.5%, the daughter's husband owned 24.5%, and an unrelated tax-exempt entity owned 29%.58

In upholding the Tax Court's application of section 2036,59 the Thompson court accepted the Tax Court's finding that the decedent and the other partners had an "implied agreement" that the decedent would retain the lifetime benefits of the transferred assets.60 The court emphasized that without such an understanding, explaining why a 95-year-old person would transfer 95% of his assets to such partnerships and not even retain enough assets to meet his monthly expenses for the term of his life expectancy would be difficult. Further support for this proposition was plentiful: the decedent's children had sought assurances from the financial advisors that the decedent would be able to withdraw assets from the partnership, evidence indicated that the decedent's children would not refuse a request by the decedent for distributions, and with one exception, the partnership did not enter into any transactions with anyone outside the family (although this argument seems strained).61