Using Asset Transfers to Minimze Estate Taxes
Transfers of business interests are a standard estate planning device that seeks to capitalize on discounts for lack of marketability and lack of control. Estate tax liability is reduced by reducing the assets in the estate. The transfer while one is alive can result in substantial tax savings.
Nevertheless, the IRS frequently contests these “inter vivos” transactions, with the ever-present concern that the benefit comes only with a business purpose, not when it is a pretext to circumvent estate taxes.
Timing of Transfers May Be Critical
Timing may be of the essence, and the consequences of errors are substantial.
The decision of the Tax Court in Estate of Fields v. Commissioner of Internal Revenue demonstrates the potential for substantial tax liabilities as a result of timing, retained interests, and procedural missteps in estate planning.
The case also emphasizes the potential financial repercussions of accuracy-related penalties, which were imposed on the estate for underpayment of tax. We examine the facts, procedural history, legal principles, the 20 percent penalty assessment, and the primary implications for estate planning professionals in this article.
Her great-nephew Bryan Milner was granted a power of attorney to manage her financial affairs. Mr. Milner formed AM Fields, LP (a limited partnership) and AM Fields Management, LLC (the partnership’s general partner).
Anne Milner Fields, a Texas resident, built considerable wealth managing an oil business she inherited from her late husband. By 2016, she was 91 years old, battling Alzheimer’s.
Estate Plan of Anne Milner
Acting under his power of attorney, he transferred approximately $17 million of Ms. Fields’ assets—including cash, shares of North Dallas Bank and Trust (NDBT) stock, a tree farm, and interests in two LLCs—into the partnership. Ms. Fields received a 99.9941% limited partnership interest in exchange.
By the time of her death in June 2016, Ms. Fields retained only $2.15 million in assets outside the partnership. The estate’s federal tax return valued the limited partnership interest at $10.877 million, reflecting significant valuation discounts for lack of marketability and control.
The estate reported an estate tax liability of $4.6 million, which it lacked sufficient liquidity to pay. Partnership assets were sold and distributed to the estate to cover taxes and specific bequests.
The IRS audited the estate’s tax return and issued a notice of deficiency. It determined that the full value of the transferred assets, $17.062 million, should be included in the gross estate under IRC § 2036(a), which applies when a decedent retains certain interests in transferred property. Alternatively, the IRS argued that the estate undervalued the limited partnership interest. Additionally, the IRS imposed a 20% accuracy-related penalty under § 6662 for the underpayment of tax due to negligence or disregard of rules.
Timing of Transfers Fatal to Estate Plan
The estate unsuccessfully contested these determinations in the Tax Court, where the court ultimately sided with the IRS. The court included the full fair market value of the transferred assets in the gross estate, rejected the claimed valuation discounts, and upheld the accuracy-related penalty.
The Tax Court’s rationale for the case was the failure to provide for estate tax liabilities, retained rights to use assets and dissolve entities, and the lack of a bona fide sale. The court found no legitimate non-tax business purpose for the transaction, and the estate’s arguments—asset protection, succession management, and streamlined administration—were dismissed as post hoc justifications lacking contemporaneous documentation.
The court found that Mr. Milner and the estate did not exercise reasonable care in determining the proper tax treatment of the AM Fields transfers. They did not rely on informed advice, and the estate reported a gross estate value of $10.877 million for the limited partnership interest, while the court determined the includable value was $17.062 million. Assuming the estate’s marginal tax rate was 40%, the additional tax liability would be approximately $2.5 million. Applying the 20% penalty under § 6662(a), the penalty amount would be $500,000.
Key Takeaways
The Fields case underscores the risks of incomplete estate planning and insufficient attention to retained interests. Beyond the inclusion of transferred assets in the taxable estate, the assessment of penalties added significant financial consequences. To avoid such outcomes, taxpayers and their advisers must prioritize thorough planning, rigorous documentation, and professional oversight. This case serves as a powerful reminder that timing, structure, and compliance are critical in successful estate planning.
IRC § 2036(a) and Retained Interests
Under § 2036(a), transferred property is includable in the estate if the decedent retains rights over the property, directly or indirectly. In this case, retained rights and the lack of a bona fide sale led to the court’s decision.
Accuracy-Related Penalties Under § 6662
The estate’s failure to rely on informed advice or exercise reasonable care triggered the 20% penalty for underpayment of tax.