Fifth Circuit Upholds Penalties Associated with Deathbed FLP Planning

Family limited partnerships (FLPs) are utilized by estate planning attorneys for a variety of reasons, including, the efficient transfer of wealth and asset protection. FLPs, when done right, can also position an estate for valuation discounts which may reduce or eliminate federal (or state) estate tax. 

After Anne Milner Field became incapacitated, her agent and great-nephew transferred $17 million of her assets into an FLP.  The transfers to the FLP occurred within one month of Anne’s death. Ownership of the FLP was 99.9941% Anne (as a limited partner) and .0059% a limited liability company (as the general partner), of which Anne was the sole member. After Anne’s death, the estate tax return filed for her estate valued the estate’s interest in the FLP at $11 million. The IRS applied I.R.C. § 2036 (its favorite weapon in attacking FLPs) to include the value of the FLP’s assets in the estate rather than a discounted partnership interest and assessed a 20% underpayment penalty. The Tax Court affirmed and the estate appealed to the Fifth Circuit Court of Appeals.

On June 8, 2026, in the Estate of Anne Milner Fields v. Commissioner, the historically taxpayer friendly United States Court of Appeals for the Fifth Circuit upheld the decision by the Tax Court in favor of the Commissioner. The Fifth Circuit held that the estate failed to show a non-tax purpose for establishing the FLP and thus the bona fide sale exception of I.R.C. § 2036 did not apply. Moreover, the estate failed to show that it was not negligent or that it acted with reasonable cause and in good faith. 

While the estate advanced several non-tax reasons for the formation of the FLP, the Tax Court and the Fifth Circuit were not persuaded. This case illustrates that death bed planning may heighten the risk of a § 2036 attack and may be “too good to be true.” Here, the taxpayer not only lost the case and received no benefit from the planning but was also liable for penalties.