Earlier this year, the U.S. Tax Court in The Estate of Howard V. Moore v. Commissioner reminded every taxpayer that while estate planning is important, to achieve the intended estate tax benefits, traps must be avoided.
The Tax Court’s opinion in Moore starts with the following ominous statement:
“Howard Moore was born into rural poverty but over a long life built a thriving and very lucrative farm in Arizona. In September 2004 he began negotiating its sale, but his health went bad. He was released from the hospital and entered hospice care by the end of that year. Then he began to plan his estate”. (Emphasis added).
After he was released from the hospital in December 2004, Mr. Moore contacted an estate planning attorney, Bradley Hahn, to complete his estate plan and “save the millions of dollars of taxes to protect his family”. Mr. Moore provided the following written estate planning goals to Mr. Hahn:
- I would like to maintain my customary lifestyle. This should include about $150,000 annually after all taxes and gifts. I would also like flexibility built into my plan so that amount can be adjusted to meet future circumstances.
- It is also important to me that the plan allow adequate liquidity for emergencies and investment opportunities. I prefer to keep at least $500,000 in cash readily available and another $500,000 in marketable securities that can be liquidated within 30 days, if necessary.
- I wish to maintain control of my assets during my lifetime.
- There should be cash flow in the plan to allow me to make annual gifts to my children.
- I wish to treat my children equally upon my death. Virgil should receive his residence, Ronnie should receive one half of my interest in RRCH Moore Custom Farming and all of my interest in Yuma Speedway, LLC.
- I would like to manage and preserve the value of my assets, as well as protect my assets from potential creditors and judgments.
- I would like to reduce income taxes, if possible.
- It is of importance that the plan reduce or eliminate federal estate taxes, if possible.
- I would like for my grandson, Chet, to immediately have farming equipment so that he can continue farming, if he desires. Additionally, upon my death, Chet shall receive one-half of my interest in RRCH Moore Custom Farming.
- Upon the sale of the land, I would like my children and my grandson, Chet, to each receive $500,000.
Mr. Hahn came up with what the court called a “quite complex” plan to achieve Mr. Moore’s goals, using a combination of five trusts and a family limited partnership (FLP), to which Mr. Moore contributed most of his farm. Mr. Moore died in March 2005 and the IRS examined the estate’s Form 706 Estate Tax Return. The IRS issued a notice of deficiency for $6.4 million, claiming that the farm should have been included as an asset of Mr. Moore’s estate under section 2036 and disallowing most of the deductions claimed by the estate.
In holding for the IRS on all issues, the court’s 63 page opinion details why Mr. Moore’s planning did not achieve his goals. The court said Mr. Moore was more focused on maintaining control and eliminating his estate tax, instead of the goals stated in the planning documents. The court rejected the estate’s claims that the FLP’s purposes were (1) to bring together a dysfunctional family members to help manage the business, and (2) to protect against liabilities, creditors and bad marriages. The court pointed out that “there was no business to run” because five days after the partnership received part ownership of the farm, Moore sold the farm. In addition, the family hired an investment adviser to manage the liquid assets that remained and there was no evidence that the family took any interest in management of the assets. With respect to liability protection, the family was “unable to testify to any possible creditors and were unaware of any threats of possible litigations”. The court also found that there was an implied agreement under which Moore retained possession and enjoyment over the farm because he continued to live on and operate the farm, he paid personal expenses and made gifts using non-pro rata distributions from the FLP and he unilaterally made all decisions related to the FLP until his death in March 2005. The court was also bothered by the “death-bed” nature of the planning.
As the adage says, “bad facts make bad case law” and Moore is a bad facts case. However, there are some important takeaways from the opinion. First, implementing and completing estate planning on a timely basis is important. The Tax Court continues to be very skeptical about complex “death-bed” planning to reduce the assets of an estate. Second, there must be evidence that supports the non-tax stated purposes for the transfer of assets and creation of entities. Third, formalities of the entities and transfers must be recognized and followed. Although Mr. Moore retained sufficient assets for living expenses, the court noted he continued to use partnership assets for personal expenses, evidencing retained possession and enjoyment of the transferred assets.
For any questions on this or any other tax-related matter, please feel free to contact me at (214) 749-2456 or email@example.com.