Estate planners frequently prepare both life insurance trusts and family limited partnerships. These planning tools are similar in that the client has ongoing administrative and management jobs after the legal work has been completed. With life insurance trusts, clients typically have to manage a new bank account for the trust, prepare and send proper Crummey notices, keep trust records, etc. With family limited partnerships, clients have to make investment and distribution decisions, and manage the partnership as a legitimate business. Lawyers always are concerned about whether a client will properly administer the planning after the legal work has been completed.
In Estate of Turner, a recent Tax Court case (TC Memo 2011-209), the IRS asserted two arguments – (1) that the decedent had not managed his family limited partnership as a legitimate business, and therefore all of the partnership assets were includible in his estate under Code §2036, and (2) that the decedent’s faulty annual exclusion gifts to his insurance trust failed to qualify for the $13,000 per person per year annual exclusion.
The court found for the IRS on the Code §2036 claim, finding that there was no bargaining among the family members in creating the family partnership, that the decedent commingled personal and partnership funds when he used partnership funds to make gifts, pay premiums on life insurance policies and pay legal fees, that the partnership was not funded for at least eight months following the formation of the entity, and that the decedent treated the partnership as his own at-will investment account.
However, the court found for the estate on the issue of annual exclusion gifts. Even though the decedent had paid the insurance premiums from his own funds rather than gifting funds to the trust (which the trustee could then use to pay premiums), and even though no Crummey notices had been sent to the trust beneficiaries, the court found that the premium payments were indirect gifts that qualified as “present interest” gifts for purposes of the annual gift tax exclusion.
Clients who have struggled to follow the administrative requirements of an insurance trust to the letter (and their advisors who have explained it to them) can take heart from the second part of the Tax Court’s opinion in this case. Like the Crummey and Cristofani cases before it, Turner represents another taxpayer victory on the issue of present interest gifts to insurance trusts.