Basically, the decedent had a revocable living trust into which she transferred her home, which was then exchanged for other rental property which, subsequently, was encumbered with debt. In 1994, the trust exchanged those properties for interest in the FLP. The decedent’s children each became limited partners, contributing only $100.00 each.
As in many of these cases, the transfer to the FLP left the decedent without adequate assets for her own support. Initially, she had a monthly shortfall in cash flow of $1200, which later grew to $2700 per month. As is typical in these “wounded animal” cases, the FLP paid some of the decedent’s living expenses. In addition, the partnership made payments on at least one of the loans owed by the trust prior to the transfer of assets into the FLP. The Court also made note of the fact that there were 40 transfers from the FLP to the revocable living trust during a period of just over two years (but not to the other partners). While the FLP subsequently made a distribution to allow the decedent to pay back those advances, nonetheless the Court viewed those as evidence of the decedent’s need for the assets. And, by the time the decedent died, some of the FLP units had been gifted to the children. The FLP was terminated a little over one year after the decedent’s death, but not before the estate claimed a 31% marketability discount on the gifts of FLP interests and a 37% discount on the remaining interests in the estate.
In the findings by the Court, the Ninth Circuit went through the usual suspects, i.e., the decedent’s being left without sufficient assets for her own support which, at the time of the transfer, would have been anticipated to grow worse after her long-term care coverage expired; the multiple transfers from the FLP to the revocable trust and the FLP’s payments on the debt owed by the trust, none of which were not timely reflected as distributions; and the failure to follow partnership formalities.
One important element of the Ninth Circuit’s decision was that it did not break down the “bona fide sale for full consideration” exception into discrete elements as done by other Circuits. Instead, the Ninth Circuit said that “bona fide sale” and “adequate and full consideration” are “interrelated criteria.” It went on to say that the validity of the one “cannot be gauged independently of the non-tax-related business purposes involved in making the bona fide transfer inquiry.” Furthermore, while saying that it agreed with the Third and Fifth Circuits, the Ninth Circuit left open the possibility that the differential between the value of assets transferred to the FLP compared to the FLP interest received in return could be attacked as not being in “full consideration,” even though the transfers were proportional. Interestingly, the Ninth Circuit threw in a phrase which, once used, was never addressed or used again in the opinion. The Court, in addressing the proportionality of interests compared to contributions, said that the estate must show a “genuine” pooling of assets and, more than that, must show that there is a potential for “intangibles stemming from pooling for joint enterprise.” However, once having said that, the Court focused on the lack of good faith, and, specifically, on the absence of non-tax benefits, as a reason to find that the bona fide sale exception does not apply. Nevertheless, practitioners should be wary of this language.
Finally, this is another case where the pre-death gifts were disregarded when the Court ultimately decided to include virtually all of the partnership assets in the estate of the decedent. In other words, even though the decedent owned only 45% of the partnership at her death, all of the assets were includable in her estate.
In conclusion, some of the lessons from the Bigelow case are the same lessons taken from the other cases. Do not impoverish the decedent; do not create a situation where the FLP is paying decedent’s debts, expenses or other obligations; do not have the client or a revocable trust serve as the sole general partner; do not transfer assets that are subject to loans without considering whether the partnership should assume that liability (consider the income tax aspects of that decision); if possible, provide for some pooling of assets; when distributions are made, made them proportionately; and, in all cases, follow partnership formalities.