Here is yet another case that emphasizes the importance of being careful when using a family limited partnership as an estate planning tool.

Lois Lockett's husband predeceased her, and his will established a trust for her benefit.

As part of her estate planning, Lockett created Mariposa Monarch, LLP (MM), an Arizona limited liability partnership. The partnership agreement named Lockett's sons, Joseph and Robert, as general partners and Lockett, Joseph, Robert and the trust as limited partners.

Only Lockett and the trust contributed assets to the partnership. Later, the trust was terminated, and Lockett became the sole limited partner in MM.

When Lockett died, MM's assets exceeded $1 million. On the estate tax return, the estate reported Lockett as the 100 percent owner of MM. The estate valued Lockett's ownership interest in MM at $667,000, applying control and marketability discounts.

The IRS argued that MM was not a valid partnership under Arizona law because there was no association of two or more persons and because it did not operate a business for profit.

The Tax Court, in Estate of Lois L. Lockett, et al. v. Commissioner, TC Memo 2012-123, April 25, 2012, concluded that:

  • MM operated a business for profit.
  • Robert and Joseph at no time held interests in MM.
  • The trust contributed assets to MM and was a limited partner.
  • Lockett and the trust constituted an association of two persons to carry on a business for profit as co-owners.
  • When the trust was terminated, Lockett became the sole partner in MM.
  • The partnership agreement provided that MM would be dissolved upon the acquisition by a partner of all the interests of the other partners. Therefore, Lockett's acquisition of the trust's limited partnership interest caused the dissolution of MM under Arizona law.

As a result, Lockett at her death owned 100 percent of MM's assets - not a partnership interest in MM. And those assets were taxable in her estate at full fair market value.

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