Beverly Hills Bar Association -- Trusts & Estates Section
Litigation Update (since May 20, 2003)
 

California Court of Appeal

Robert B. v. Susan B.  (H024926)(June 13, 2003) Where fertility clinic implanted embryos belonging to husband and wife into a single woman, who gave birth as a result, husband was the child’s father and single woman was the mother under plain language of Family Code, and wife lacked standing to assert claim as "intended mother."
Cite as 2003 SOS 3126    

(Full text)  http://www.metnews.com/sos.cgi?0603%2FH024926 

Although the intent of this update is to focus on recent case law pertaining to trusts and estates, in light of the dearth of applicable case law this month, we have turned our focus to recent tax decisions that might be of interest.

United States Tax Court

Estate of Strangi (T.C. Memo. 2003-145, 5/20/03)

In 1988, decedent and his wife (“Mrs. Strangi”) decided to move from their Florida home Texas, where his daughter lived. To facilitate this move, decedent executed a power of attorney naming his daughter’s husband (“Mr. Gulig”) as his attorney in fact and thereby authorizing Mr. Gulig, in decedent’s “name, place and stead.”

In 1994, Mr. Gulig attended a seminar provided by Fortress Financial Group, Inc. (Fortress), on the use of familylimited. The following day, Mr. Gulig, as decedent’s attorney in fact, formed SFLP, a Texas limited partnership, and its corporate general partner, Stranco, a Texas corporation, and filed with the State of Texas the respective certificate of limited partnership and articles of incorporation. (Though probative, the substantive provisions of the SFLP have been omitted for brevity’s sake).

Since this opinion is quite long (47 pages), only the salient points will be summarized here.

Circumstances that have been found probative of an implicitly retained interest under section 2036(a)(1) include transfer of the majority of the decedent’s assets, continued occupation of transferred property, commingling of personal and entity assets, disproportionate distributions, use of entity funds for personal expenses, and testamentary characteristics of the arrangement.

A second feature highly probative under section 2036(a)(1) is decedent’s continued physical possession of his residence after its transfer to SFLP. The SFLP/Stranco arrangement also bears greater resemblance to one man’s estate plan than to any sort of arm’s-length, joint enterprise. As in Estate of Harper v. Commissioner, “the largely unilateral nature of the formation, the extent and type of the assets contributed thereto, and decedent’s personal situation are indicative.”

Mr. Gulig established the entities using Fortress documents with little, if any, input from other family members. Moreover, the crucial characteristic is that virtually nothing beyond formal title changed in decedent’s relationship to his assets. Thus, decedent can properly be described as retaining a right to designate who shall enjoy property and income from SFLP and Stranco within the meaning of section 2036(a)(2). With respect to SFLP income and as previously recounted in greater detail, the SFLP agreement named Stranco managing general partner and conferred on the managing general partner sole discretion to determine distributions. The Stranco shareholders, including decedent (through Mr. Gulig), then acted together to delegate this authority to Mr. Gulig through the management agreement. The effect of these actions placed decedent’s attorney in fact in a position to make distribution decisions.  Mrs.  Gulig effectuated such decisions by executing checks to the recipients so designated.

In addition to the rights described above related to income, decedent also retained the right, acting in conjunction with other Stranco shareholders, to designate who shall enjoy the transferred SFLP property itself.  Decedent held the right, in conjunction with one or more other Stranco directors, to declare dividends.

Having decided that decedent retained an interest in the assets transferred to SFLP and Stranco for purposes of section 2036(a), we evaluate whether the statute’s application may nonetheless be avoided on the basis of the parenthetical exception for “a bona fide sale for an adequate and full consideration in money or money’s worth”. Availability of the exception rests on two requirements: (1) A bona fide sale, meaning an arm’s-length transaction, and (2) adequate and full consideration. See Estate of Harper v. Commissioner, T.C. Memo.  2002-121. The situation before us meets neither of these criteria.

First, no bona fide sale, in the sense of an arm’s-length transaction, occurred in connection with decedent’s transfer of property to SFLP and Stranco. Mr. Gulig, as decedent’s attorney in fact, prepared the arrangement using Fortress materials in absence of any meaningful negotiation or bargaining with other anticipated interest-holders. He determined how the entities would be structured and operated, what property would be contributed, and what interests various parties would obtain therein. Hence, decedent essentially stood on both sides of the transaction, a fact unchanged by the manner in which the Strangi children opted to join after the substantive decisions had been made.

Second, full and adequate consideration does not exist where, as here, there has been merely a “recycling” of value through partnership or corporate solution. Decedent contributed more than 99 percent of the total property placed in the SFLP/Stranco arrangement and received back an interest the value of which derived almost exclusively from the assets he had just assigned. Furthermore, the SFLP/Stranco arrangement patently fails to qualify as the sort of functioning business enterprise that could potentially inject intangibles that would lift the situation beyond mere recycling.

“If the decedent retained or reserved an interest or right with respect to a part only of the property transferred by him, the amount to be included in his gross estate under section 2036 is only a corresponding proportion”. Sec. 20.2036-1(a), Estate Tax Regs. Accordingly, caselaw and regulatory authority converge to indicate that the full value of transferred property is includable unless there existed some specific portion of the contributed assets that the retained interest or rights could not reach. Here, the record reveals that no part of the transferred property was exempt from the rights or enjoyment retained by decedent. The relevant documents make no distinction among the various assets contributed, nor does the evidence reflect that Mr. Gulig looked to particular assets in determining whether amounts should be distributed.

Estate of Helen A. Deputy (T.C. Memo. 2003-176, 6/13/03).  Another interesting FLP case.