Roscoe Pound famously wrote, "The law must be stable, but it most not stand still." There is no danger of inactivity in the ever-changing world of estate planning and probate law. The following article aims to inform the reader of important legislation and case law since the beginning of the DCBA’s 2004-2005 campaign. Two significant changes- the Older Adult Services Act and the Pet Trust Act- are covered in detail.
Older Adult Services Act
The Older Adult Services Act (the "Act")1 is designed to implement a dramatic transformation of the elder care system in Illinois. The goal of the Act is to promote a primarily home-based and community-based elder care system, which will enable more Illinois seniors to remain independent and in their communities. This will result in a major shift away from the current, predominantly facility-based elder care system. As the senior population continues to grow, this Act will have a significant impact on how the elderly in Illinois are cared for now and in the future. As described below, the Act has three key elements to accomplishing its objective.
First, the Act provides for the development and maintenance of a statewide inventory and assessment of the services available to seniors.2 This inventory will identify both privately and publicly funded services, the types of services provided and the characteristics of the persons receiving the services.3 After the inventory is completed, the Departments of Aging, Public Health and Public Aid will assess the need for elder care services throughout the State and identify priority service areas, which are currently underserved with respect to elder care services.4 Then, subject to funding availability, monies deposited into a Department on Aging State Project Fund may be used for a broad spectrum of community-based and home-based services, such as adult day care, support and training for family caregivers, transportation, communal or home-delivered meals, and medication reminders, with priority given to expansion of services and development of new services in priority service areas.5
Second, the Act requires the Department of Aging to comprehensively restructure the State’s elder care system.6 The restructuring process will include the development of a long-range plan with priority given to the expansion of services and the development of new services in priority service areas.7 Further, the restructuring will include a wide range of innovative components designed to streamline the elder care system, including the following: (1) a comprehensive case management tool for each individual; (2) a coordinated point of entry, including a toll free number, for the Department of Aging; (3) a public web site for families to identify elder care service providers and resources; (4) the expansion of older adult services that permit seniors to remain in their homes; (5) the incorporation of consumer-directed home services; (6) the integration of acute and chronic care options; (7) a transition program for seniors returning to the community; (8) family caregiver support services; (9) a core set of uniform quality standards for elder care service providers; (10) the development of strategies to attract and retain a qualified workforce for older adult services; (11) the coordination of services to minimize duplication; (12) a plan to overcome barriers to services; (13) the investigation and evaluation of reimbursement procedures; (14) a plan to contain Medicaid costs, including providing basic elder care services to older adults who are likely to require more extensive services in the absence of minimal services; (15) the reduction of Medicaid-certified nursing home beds in areas with excess beds; and (16) the investigation and evaluation of financing options for older adult services.8
Third, the Act provides for a nursing home conversion program, whereby grant money will be appropriated for: (1) the conversion of all or part of a nursing home to an assisted living establishment, supportive living facility, or a special unit for persons with Alzheimer’s disease or related disorders; (2) the conversion of multi-resident bedrooms in a facility into single-occupancy rooms; and (3) the development of other elder care services identified in the restructuring plan that can be provided by a nursing home.9 In order to qualify for a nursing home conversion program grant, a nursing home must have at least fifty percent (50%) of its residents covered by Medicaid, a nursing home must reduce the number of its certified Medicaid beds by at least the number of beds being converted for other purposes, and for ten (10) years after receiving the grant, a nursing home must continue to have at least fifty percent (50%) of its residents covered by Medicaid.10 A nursing home conversion, however, must not force a nursing home resident to involuntarily accept home-based or community-based services rather than nursing home services, diminish the quality of nursing home services or supply of nursing home services below the level of need in the community, or cause undue hardship on individuals who need nursing home care.11
In sum, the Act promises a major overhaul in the elder care system in Illinois. As the Act is implemented, hopefully, its mission of providing seniors the option of remaining independent with home-based and community-based services, while at the same time, continuing to provide access to quality nursing home care when required, will be achieved.
Pet Trust Act
Starting January 1, 2005, The Illinois Pet Trust Act, 760 ILCS 5/15.2, provides Illinois pet owners with the opportunity to plan for the care of their pets if their pets outlive them. Prior to the enactment of the legislation, it was difficult for pet owners to accomplish their goal of providing after-death care for their pets. Although there have always been many people who attempted to provide for their pets through their will, outright gifts to an individual conditioned on the beneficiary taking care of the animal often failed because there was no enforcement mechanism. Moreover, the bequest was subject to loss through death, bankruptcy, divorce, or other action by a creditor.
The Pet Trust Act, which allows for the appointment of both a caretaker and trustee to take care of the designated pet, provides pet owners with a better alternative than a conditional outright bequest. The caretaker is designated as the owner of the animal and takes physical custody it, and the trustee is charged with powers of administration, investment, and distribution of funds. Although the roles of caretaker and trustee may be fulfilled by the same person, appointing separate individuals to the roles might serve as a check and balance to protect the animal. In order to facilitate the role of the trustee and make his or her job as easy as possible, the Pet Trust Act does not require the trustee to make any filing, report, periodic accounting, or registration, or to maintain the trust funds in a separate account, except as provided by the trust instrument or by court order. In addition, the court is entitled to reduce the amount of the property transferred to the trust if it determines that the amount substantially exceeds the amount required for the intended use. This determination would be based on the expected life expectancy of the animal and the expected cost of care. It has been suggested that $25,000 would be more than adequate to provide for the care of a dog during its natural life. A larger amount of money might be appropriate for another type of animal, such as a horse. Finally, the trust is exempt from the rule against perpetuities.
The attorney might want to consider the following issues to increase the likelihood that the pet trust will work properly: First, the pet owner should talk with any possible caretaker or trustee to ensure that he or she is willing to take on the job. In other words, don’t surprise anyone! Moreover, if the pet owner provides detailed instructions regarding the care of the pet, including veterinary information and any medical records, the caretaker will be able to take better care of the animal. The attorney can elicit this information through a comprehensive intake sheet during the initial client interview. Although the caretaker and trustee should love animals and enjoy caring for them, it might not be a good idea to name the caretaker or trustee as the remainder beneficiary of the trust assets because of the inherent conflict of interest. Finally, even though the pet’s descendants cannot be named as remainder beneficiaries, consider appointing the local animal shelter or humane society as the beneficiary of the trust.
Increase in Small Estate Affidavit limit to $100,000.00
Public Act 93-877 increased the gross value of a decedent’s estate that is transferable by Small Estate Affidavit. Specifically, 755 ILCS 5/25-1 (paragraph 6) was amended to provide an increase to $100,000.00. The change was effective on August 6, 2004. The DuPage County Circuit Court Clerk has modified the Small Estate Affidavit (Form 3746) which new form is on-line at www.dupageco.org/courtclerk. Public Act 94-57 clarified that the increased amount applies to Small Estate Affidavits executed after August 6, 2004, regardless of when the decedent died.
Change to Organ Donation Language in Statutory Power of Attorney for Healthcare
Public Act 93-794 revises the anatomical gift section of the Illinois Statutory Short Form Power of Attorney for Health Care under 755 ILCS 45/4-10. The change modifies paragraph 1 of the statutory form and reads as follows:
"Effective upon my death, my agent has the full power to make an anatomical gift of the following (initial one):
_____ Any organs, tissues, or eyes suitable for transplantation or used for research or
_____ Specific organs:__________ ."
Previously, the first choice for organ donation simply read "any organ." It will be important for practitioners to discuss with clients their specific wishes concerning anatomical gifts.
Power of Attorney Act
Effective August 9, 2005, Public Act 94-500 requires an Agent to provide receipts and disbursements if requested by the Office of the Inspector General of the Department of Human Resources during a financial exploitation investigation.
Gifts under Trusts to Beneficiaries who Predecease
Public Act 93-0991 adds a new section (760 ILCS 5.5) to the Trust and Trustees Act regarding the lapsing of gifts to predeceased beneficiaries. Unless the settlor expressly provided otherwise in the trust, this provision will apply to a beneficiary who dies on or after January 1, 2005 and before the gift from an inter vivos trust is to take effect in possession or enjoyment. If the gift is to a descendant of the settlor, the gift will pass per stirpes to the beneficiary’s descendants. The anti-lapsing will also apply to class member beneficiaries. This anti-lapsing does not apply if the gift has become indefeasibly vested. If the predeceased beneficiary is not a descendant of the settlor, then the gift lapses and falls to the residue, assuming the trust does not provide for an alternate taker. This new section of the Trust and Trustees Act aligns the treatment of trust beneficiaries with legacies to deceased legatees under Wills under 755 ILCS 5/4-11.
Gifts to Disabled Beneficiaries
Public Act 93-0695 amends the Trusts and Trustees Act to provide that a trustee may create a trust for the distribution of income and principal if the beneficiary is legally disabled or in the opinion of the trustee is unable to properly manage his affairs because of illness, physical or mental disability or other cause. New section (f) is added to 760 ILCS 5/4.20 effective July 9, 2004. That section provides that the trust must be created prior to the time of distribution and for the sole benefit of the beneficiary. The trustee must separately account for the trust. The trust must be indefeasibly vested in the beneficiary. If the beneficiary dies prior to complete distribution of the trust, the new statute provides that all amounts shall be paid to the beneficiary’s estate. The statute specifically excludes the applicability of section (f) if such application would cause the loss of the federal estate tax marital deduction. Practitioners must carefully review this section in cases of a beneficiary receiving or eligible for governmental benefits, as such application may be very problematic.
Department of Public Aid Withdraws Proposed Rules
On March 18, 2005, the Illinois Department of Public Aid published a notice withdrawing proposed amendments. The proposed amendments, originally published on April 2, 2004, dealt with the treatment of annuities, hardship and spousal impoverishment. The Department indicates the need for further study and additional changes due to the complex nature of the subject matters addressed in the rulemaking. The notice of withdrawal was published in the Illinois Register, March 18, 2005, Volume 29, Issue 12, Pages 4420 and 4421. The Illinois Register is viewable online at www.cyberdriveillinois.com. At press time, the Illinois Department of Public Aid and all elder law attorneys are awaiting federal changes currently under discussion.
Disposition of Remains Act
On January 1, 2006, the Disposition of Remains Act becomes effective. Public Act 94-0561 provides a priority listing of persons to control the disposition of remains, absent a written direction (will, prepaid funeral or burial contract, cremation authorization). The priority listing prevails in the absence of such written direction to both control disposition of remains and liability for the reasonable cost. Practitioners should carefully consider the potential conflict with a Power of Attorney for Health Care. Under the statutory short form Health Care Power of Attorney, the agent has the authority to direct the disposition of the principal’s remains. 755 ILCS 45/4-10(b)(5).
Mandatory Continuing Legal Education
Effective September 29, 2005, the Illinois Supreme Court adopted rules to establish minimum continuing legal education requirements. Supreme Court Rule 759 contains the requirements. Generally, an attorney must complete 20 hours of CLE during the first two-year reporting period ending in 2008 or 2009. 24 hours of CLE are required for the two-year reporting period ending 2010 or 2011, and 30 hours of CLE are required during all subsequent two-year reporting periods. The two-year reporting period begins on July 1 of even-numbered years for lawyers whose last names begin with the letters A through M, and on July 1 of odd-numbered years for lawyers who last names begin with the letters N through Z. A minimum of 4 total hours in each two-year period must be in the area of professional responsibility.
Deductions for College Savings
Illinois Public Act 93-0812 amends the Illinois Income Tax Act as of January 1, 2005 to provide that contributions to a Bright Start program and College Illinois are deductible up to $10,000 per year. The deduction can not be used for amounts rolled over from another plan to a Bright Start or College Illinois Plan. This Act also amends the State Treasurer Act, the Baccalaureate Savings Act and the Illinois Prepaid Tuition Act. As of January 1, 2005, contributions to the Bright Start Program, contributions toward the purchase of the first $25,000 of College Savings Bonds and contributions toward the purchase of an Illinois Prepaid Tuition Contract shall be counted against any financial aid awarded by the Illinois Student Assistance Commission, the State of Illinois or any other state agency.
Investment Partnerships No Longer subject to Illinois Replacement Tax.
For taxable years ending on or after January 1, 2005, investment partnerships are not subject to the 1.5% Illinois personal property replacement income tax. Investment partnerships are defined in 35 ILCS 5/1501(a) (11.5).
A Reminder about Recent Federal Tax Legislation.
Since 2001, three major tax acts were passed, namely: The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), The Job Creation and Worker Assistant Act of 2002 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. There are many important dates and "sunset" provisions in these tax acts to be aware of in your planning with clients. The term "sunset" usually refers to a termination of a tax law. In some cases, when a law terminates, there is no replacement for the law. In other cases, the law reverts back to the tax law in existence before the current law. The following are a few examples of the sunset provisions relating to estate and gift taxes as well as small businesses which were built in these recently enacted laws:
First and most important, the estate and generation-skipping tax exemptions for 2004 and 2005 are $1,500,000. On January 1, 2006, the exemptions are raised to $2,000,000 and remain at that level until January 1, 2009. Then, the exemptions increases to $3,500,000 for 2009. Estate and generation-skipping taxes are eliminated for decedents dying in 2010. On January 1, 2011, the current law sunsets and estate and generation-skipping taxes will be back on the books with a $1,000,000 exemption amount for both estate and generation-skipping taxes.
Second, the step up in basis for assets at death "sunsets" and new carryover basis rules will apply in 2010 and thereafter. The new carryover basis rules are very complex and will require careful studying to apply correctly. Most experienced practitioners realize that the return of carry over basis rules will create a nightmare of accounting issues for the taxpayers and the IRS.
Third, the federal credit for state death taxes has already experienced a "sunset." As of January 1, 2005, this credit has been replaced with a deduction for state inheritance and estate taxes paid. With the elimination of the federal credit for state death taxes, many states have changed their state laws with respect to estate taxes. Few states still have a "pick up tax" based on the federal credit. In Illinois until the year 2009, the state estate taxes are based on the Section 2011 credit for state death taxes, as in existence prior to EGTRAA (the 2001 Tax Act). Even though the credit for state death taxes has expired for Federal estate tax purposes, the state will still charge an amount of taxes based upon that credit. Furthermore, until the year 2009, Illinois’ exemption amount is the same as the federal exemption amount. But in 2009, when the federal exemption goes up to $3,500,000, the Illinois exemption is frozen at $2,000,000. At that point, special drafting may be needed for estate plans of married couples to avoid Illinois estate tax on the death of a first spouse to die.
In Wisconsin, the exemption amount has already been frozen at $675,000. Therefore, decedents who were Illinois residents but who have vacation homes in Wisconsin may be subject to Wisconsin estate tax even if there is a surviving spouse with a marital deduction based on a QTIP formula clause in a will or trust, because the formula is tied into the much larger federal exemption.
Fourth, as of January 1, 2005, there is no family owned business credit. This credit was not used by many taxpayers, so it probably will not be missed.
Fifth, the highest gift tax rate is now 35% and the lifetime exemption amount is frozen at $1,000,000. For gifts after December 31, 2009, the top rate of gift tax is scheduled to be equal to the top individual income tax rate (3.5% in 2010). Code Section 2502(a)(2).
Sixth, the top estate tax rates are going down slowly. In 2005, the top rate is 47. In 2006 the top rate is 46. In 2007, 2008 and 2009 the top rate is 45.
Seventh, the maximum income tax rate of 15% for long-term capital gains for most capital transactions will expire January 1, 2009. (There still remains higher capital gains rates for long-term capital gains on sales or exchanges of collectible or on depreciable real estate that is attributed to prior depreciation deductions.)
Eighth, the maximum income tax rate of 15% for qualified dividends (and 5% for taxpayers with income that would ordinarily be taxed at a 15% or 10% rate) is eliminated January 1, 2009.
Ninth, the increase in IRC Code 170 deduction to $100,000 sunsets after this year. A return to the prior law of a $25,000 deduction will take effect January 1, 2006. Therefore, this is the year small businesses should purchase new equipment that qualifies for this generous first year write off.
Case Law Update
Cameron v. U.S. No 03-1967 (W.D. Pa 10/6/04).
In this refund case in federal district court, the court ruled in favor of the Taxpayer on a Code Section 2033 issue. Two spinster sisters, Grace and Nora lived together their entire lives. Grace, the wealthier of the two, established two revocable trusts. The first trust provided that if Nora survived, she would have an income interest and ability to invade principal for her health and support considering her other sources of income. At Nora’s death, the trust would terminate and be distributed to beneficiaries listed in the trust. The second trust had similar provisions, except that upon the death of the survivor of Nora and Grace, the trust would be distributed according to Grace’s last will. Grace’s will provided that half of her estate would be distributed to Nora. Grace died first in 1992. Nora died in 1999. At the time of Nora’s death, the second trust was worth 3.3 million dollars. Nora’s estate did not include the second trust in her estate because they claimed Nora only had a life estate. The IRS claimed that since Grace’s will provided that half of her assets would go to Nora, that half of the trust estate should be included. The court looked at all of the documents and evidence of Grace’s intent at the time of the establishment of the trust was not to leave Nora 50% of all of her assets. Therefore, the court ruled that 50% of the second trust was not included in Nora’s estate and that the estate was due a refund. It appears that the taxpayer was lucky in this case. If the taxpayers had wanted to assure that the second trust would not have been included in Nora’s estate, the trust should have been more specific as to the beneficiaries upon termination instead of referring to a will.
Smith v. U.S. No 04-20194 (5th Circuit 11/15/04).
In this case, the taxpayer tested the IRS’s position of including 100% of the face value of retirement assets (a thrift plan and a long-term stock plan). The estate initially included the full value of the plans and paid the estate tax due thereon. Then, the estate filed a supplemental return and requested a refund based on the fact that the retirement accounts should have been valued with a 30% discount for the amount of income taxes due on such accounts. The taxpayer lost in district court and on appeal. The Fifth Circuit stated that retirement accounts are Income in Respect of a Decedent and should be valued at their face value for federal estate tax purposes, citing the Estate of Robinson v. Com’r, 69 T.C. 222 (1977). The court pointed out that Code Section 691(c) does provide relief to the beneficiaries of such retirement accounts by giving such recipients an income tax deduction equal to the federal estate tax attributable to that asset.
Estate of True, Jr. v. Com’r, No 02-9010 (10th Circuit) 12/02/04.
This case should be of interest to practitioners who draft buy-sell agreements with valuation formulas which are different than commonly understood "fair market value" to an unrelated willing buyer or seller. In this case the taxpayer, David True set up several closely-held businesses with family members. Each business had its own buy-sell agreement with lifetime restrictions on transfer and a formula valuation clause based on "tax book value" which was not in accordance with GAAP. Under the method used, the companies took advantage of accelerated rates of depreciation and the tax book value ended up being much less than what would have been calculated under GAAP and did not always represent the fair market value of the businesses if they had been liquidated. In other words, the underlying assets owned by the businesses had more value than the tax value used in the buy-sell agreements. The Tenth Circuit affirmed the tax Court and held that the buy-sell agreements for the True family businesses were merely testamentary devices and did not control for federal estate tax purposes. So, even though the estate only received the value set in the agreement, the estate owed federal estate tax on the fair market value of the business without regard to the price set in the buy-sell agreement. The Tenth Circuit followed two other cases in different circuits, namely estate of Gloeckner v. Com’r. 152 F. 3rd 208 (2d. Circuit) and St. Louis County Bank v. United States, 674 F.2d 1207 (8th Circuit 1982) in making its decision and specifically cited the Internal Revenue Regulation 20.2031-2(h) which states that the stated price in a buy-sell agreement will control for estate tax purposes if "(1) the price is determined by the agreement, (2) the terms of the agreement are binding during life and upon death, (3) the agreement is legally binding and enforceable, and (4) the agreement was entered into for bona fide business reasons and is not a testamentary substitute intended to pass on the decedent’s interest for less than full and adequate consideration." The agreements in the True case met the first three prongs of the test, but failed the last prong.
Gilman v. Com’r. TC Memo 2004-286 (12/28/04).
In this case the Tax Court held that an estate could deduct as administrative expenses the interest and closing costs of a loan and could deduct other administrative expenses relating to loan restructuring. This case involved a very large estate with adequate assets with which to pay federal estate taxes. However, some of these assets were illiquid. Instead of liquidating those assets, the estate took out a large loan to pay estate taxes and other administrative costs and expenses. The IRS denied the deduction for the expenses of the loan. The Tax Court noted that the estate could deduct expenses which were allowable under local probate laws and rejected the IRS’s argument that the estate should have put estate assets up for sale to raise the necessary cash.
Davis v. Com’r. No 03-72240 (9th Cir. 1/24/05).
This is a case involving the interpretation of Code Section 2056 and the Marital Deduction and involves sloppy drafting of an amendment to a living trust. The Taxpayer had a revocable trust in place when he was single. Within a year after his marriage, he amended his living trust by inserting his wife’s name in place of his daughter’s name, both as lifetime beneficiary and as trustee. The trust did not change the income interest to become a mandatory payment of income, but rather was discretionary with the trustee based upon an ascertainable standard. This failed the "income only" requirement of 2056 and was treated as a terminable interest. Therefore, it did not qualify for the Marital Deduction.
Com’r v. Banks, 03-892 (S.Ct. 1/24/05) and Com’r. V. Banaitis, 03-907 S.Ct. 1/24/05).
These combined U.S Supreme Court cases have settled the hotly contested issue of whether or not a contingent attorney’s fee is includible in the payor’s income in favor of the IRS and NOT the taxpayer. The Supreme Court reversed both the Sixth and Ninth Circuit decisions and held that in both cases, the contingent fee agreement was an anticipatory assignment of income and the general rule of Lucas v. Earl, 281 U.S. 111 must be followed – that the income must be recognized by the person earning it. The Court rejected the taxpayer’s argument that the attorney was a partner of the plaintiff in the lawsuit. The attorney-client relationship has always been and will always be a principal-agent relationship. The principal must recognize the whole recovery as income. The principal can, however, take a miscellaneous itemized deduction for the attorneys’ fees paid. However, in most cases, the AMT laws eliminate the use of miscellaneous itemized deductions, so the taxpayer, in the end, does not receive the benefit of a tax deduction for attorneys fees paid. It is important to note that the American Jobs Creation Act of 2004 amended the Internal Revenue Code by adding Code Section 62(a)(19) to allow a taxpayer, in computing adjusted gross income, to deduct attorneys fees in connection with recovery from a claim of unlawful discrimination in employment. But that amendment does NOT cover all settlements of lawsuits. For every other settlement or recovery of a lawsuit unrelated to discrimination in the employment area, taxpayers will be bound by this U.S. Supreme Court decision unless further legislation is passed.
Hurst v. Com’r., 124 T.C. No. 2 (2/3/05).
This Tax Court case found in favor of the taxpayer in characterizing a 1997 redemption of stock upon retirement of a shareholder as a complete redemption under Code Section 302(b)(4). The IRS attacked the transaction because of on-going debt held by the shareholder after the redemption with certain cross collateralization clauses, as well as an interest as a landlord in the building rented by the corporation. The Tax Court reviewed the loans from the shareholder and found them to be typical seller financing with arms-length terms and not as a prohibited continuing interest in the corporation. It is noted that since our current tax law has the same low rate for capital gains and dividends (15% in most cases), it would seem that this case is not as important. However, depending on the basis of the terminating shareholder’s stock, it is still important in many cases to make sure the terminating shareholder qualifies for capital gains treatment under Code Section 302 and not for dividend treatment under Code Section 301.
Kimbell v. U.S. 93 AFTR 2004-2400, (5th Circuit, Filed May 20, 1994).
The taxpayer prevailed in this case and secured a 49% valuation discount. The 96 year old taxpayer transferred cash, securities and oil and gas interests to a limited partnership in exchange for a 99% limited partnership interest. She also transferred 20,000 to an LLC in exchange for a 50% interest in the LLC. The LLC has two other owners – her son and daughter-in-law, who each contributed $10,000 in exchange for a 25% interest. When the taxpayer died, she held the 99% limited partnership interest and the 50% LLC interest. The estate claims discounts for lack of control and lack of marketability. The issue to be decided was whether the assets in the limited partnership should be included in the decedent’s estate under Code Section 2036(a) because it was a transfer with a retained interest. An exception to 2036(a) is a transfer for bona fide consideration. The Fifth Circuit reversed the lower court and held that the transfer to the partnership of assets was "not a disguised gift or sham transaction" and had a "genuine business purpose." The business purposes included advantages of limited partnership ownership of oil and gas interests as apposed to fractionalize ownership of such assets for centralization of management and protection against creditors.
Senda v. Comr 2004 T.C.Memo 160, Filed July12, 2004.
In this case, the IRS prevailed in asserting that necessary formalities of partnership formation and operation were ignored with two simultaneous formed and funded family limited partnership funded with one block of stock. The taxpayers did not sign assignment of limited partnership interests or in any other way, except in tax returns prepared after the fact, evidence the transfers of limited partnership interests. In effect, the taxpayers lost this case due to their failure to abide by the formalities of the transaction at hand. Therefore, valuation discounts were ignored and the transfers of stock to the partnership and then to the children was deemed to be an indirect gift of the stock to the children, so no valuation discount was applied.
Turner, Executrix of the Estate of Thompson v. Comr. KTC 2004-241 (3rd Cir. Filed 9/1/2004).
This case was a victory for the IRS, but is also based on "bad facts." The taxpayer, who was 95 years old, transferred over 95% of his wealth to a family limited partnership in exchange for a 99% interest therein. He asked for assurances that he could withdraw funds from the partnership to continue to make lifetime gifts. The Court referred to the transfer to the limited partnership as a mere "recycling of value" and that "nothing beyond formal title changed in decedent’s relationship to his assets." The Court further found similarities between this case and the Strangi case (85 T.C.M. 1344) and the Harper case (83 T.C.M. 1641 (2002), both of which involved taxpayers who transferred almost their entire wealth to the partnership and then proceeded to use the assets from the partnership for personal reason.
1 The Act was signed into law on August 27, 2004 and is codified at 320 ILCS 42/1 et seq.
2 320 ILCS 42/20(c).
3 320 ILCS 42/20(c).
4 320 ILCS 42/20(d).
5 320 ILCS 42/20(f).
6 320 ILCS 42/25.
7 320 ILCS 42/25(1).
8 320 ILCS 42/25(2)-(17).
9 320 ILCS 42/30(a)-(b).
10 320 ILCS 42/30(d)-(f).
11 320 ILCS 42/30(h).
Denise King Garvey, J.D., University of Illinois, 1993; Cynthia Hayes Hutchins, Law Office of Cynthia Hayes Hutchins, P.C., J.D. Northwestern University School of Law, 1987; Kirsten L. Izatt, Law Office of Kirsten Izatt, P.C., J.D. University of Illinois, 1996; and Susan Reedy Williams, Faermark, Mindel & Williams, L.L.C., J.D., Loyola University, 1985.