The Keller (Keller is the executor of the estate of Maude Williams) case is back. I have been following it since the earliest days of my tax blogging. It is a really amazing family limited partnership case. It illustrates two of my favorite sayings. One is from the movie Schindler’s list.
My father was fond of saying you need three things in life – a good doctor, a forgiving priest, and a clever accountant
The other is from the Ferengi rules of acquisition.
Rule 255 – A wife is a luxury, a smart accountant a necessity. (It’s not canonical, but I still love it.)
Ms. Williams actually had two clever accountants, Rayford L. Keller and his son Lane Keller. They provided the family with comprehensive service:
The extent to which the Kellers and their careers as accountants and advisors share an identity of interests with the Williamses was best stated by Lane Keller, when asked to describe the services that he provides for the family: “We provide all types of accounting services. We do all of their accounting, all of their tax work, all of their tax planning. We handle all of their investment portfolio management. We pay all of their bills, we pay all the bills of all the entities. We provide a lot of personal service to the clients. Almost anything that they might want to have done by what would typically be a family office, we would provide that service as well.”
They had helped Ms. Williams set up a family limited partnership. As I have frequently mentioned, the key to having a family limited partnership work is good execution. A lot of care went into setting up Ms. Keller’s partnership. Perhaps in retrospect, they regretted that they had not cut some corners, because she passed away before they process was complete. That was a bummer. So they sold some bonds that were slated to go into the FLP and paid 147 million in estate tax.
A year later, Lane attended a continuing education seminar where he got the notion that maybe, under Texas law, the partnership had been far enough along that it should be respected even though the formalities of transfer had been incomplete. So they went back and completed the steps. The transfer that was used to pay the estate tax was restructured as a loan and an amended return was filed. Appropriate discounts were taken because of the assets being in partnership solution and interest on the loan was deducted as an administrative expense.
They won in district court in 2009. In 2010, they had a small set back, losing on the deductibility of the value billing that the Kellers made to the estate. The government appealed the 2009 decision. The Fifth Circuit has upheld the district court’s decision in favor of the taxpayers. The final numbers do not appear to have been determined. When the case was filed in 2001,the estate was claiming a refund in excess of 40 million.
This case illustrates the power of family limited partnerships and how friendly the courts have been to them. The ones where taxpayers have lost have generally had egregiously poor execution. The clock is ticking on the life time exclusion remaining at $5,120,000. The leverage of a family limited partnership might allow the transfer of as much as seven or eight million dollars of assets using that exclusion. What are you waiting for ?
Playing out the possible fallout from the upcoming election makes the case for acting soon on a megagift fairly compelling. If we have gridlock, the exclusion drops to one million. A Romney sweep might mean repeal of the estate tax, but during the year without an estate tax, we still had a gift tax. So will both the estate tax and the gift tax be repealed ? What if the estate tax is repealed with the gift tax left in place, with who knows what lifetime exemption ? How long will the estate tax stay repealed. Until we go a very long time without an estate tax, lifetime gifting will make sense. Finally there are intermediate proposals perhaps an exemption of $3,500,000, but possibly with no valuation discounts. You might not be able to use a family limited partnership to leverage the exemption, whatever the exemption might be, next year.
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Originally published on Forbes.com on September 30th, 2012