Steve Akers' Summary of Estate of Thelma G. Hurford

The Tax Court rejected an overly aggressive plan for a surviving wife who had been diagnosed with stage three cancer. The plan involved the contribution of all assets owned by Wife (and even assets that belonged to her predeceased husband's estate) into FLPs, and selling the partnership interests to two of her three children for private annuities (with the two children agreeing to share the eventual value with her third child). Wife died only about 10 ½ months after the private annuity transaction. The estate was worth $14 million when Husband died and Wife's estate tax return several years later reported a total gross estate of only $847,000. The court addressed (1) whether §2036 and §2035 applied to the creation of the FLPs (to bring all of the contributed assets back into Wife's estate without a discount) and (2) whether the transfer of partnership interests to the children in return for a private annuity similarly should be disregarded under §§2036 or 2038.

The court concluded that the bona fide sale for full consideration exception to §§2036 and 2038 did not apply to the creation of the partnership or the private annuity transaction. Section 2036(a)(1) coupled with §2035 required the inclusion in Wife's estate of all assets that Wife contributed to the FLPs without a discount because there were various reasons to believe that there was an implied agreement that Wife would continue to enjoy benefits of the contributed assets. (The court's conclusion to apply §2036 to the FLPs is not surprising in light of the terrible facts before the court.) Furthermore, the assets would have been included in Wife's estate because the private annuity transaction did not pass muster under §2036 or §2038.

In light of the extreme facts in the case, the IRS alleged penalties, but the court held that the executor reasonably relied on professional advice and refused to apply penalties.

Please click here for a more detailed analysis of the Hurford case. (The discussion also addresses generally whether a "consideration offset" should be allowed under §2043 if a court decides that §2036 or 2038 applies to a private annuity transaction. It also discusses implications of the court's inclusion of assets that Wife [as trustee] distributed to herself from the "bypass trust" created under Husband's will in apparent violation of the ascertainable standards for distributions that were listed in the trust.)

Posted by Lewis J. Saret, General Editor, Wealth Strategies Journal.