Estate of Turner, et al. v. Comr., T.C. Memo., 138 T.C. 306 (2012), on reconsideration from, T.C. Memo. 2011-209

(decedent, president of lumber company who had invested heavily in bank and stock appreciated highly in value, transferred assets to FLP; transfer not bona fide sale, but done primarily for tax reasons and no legitimate non-tax reason existed for transfers, thus, included in gross estate under I.R.C. Sec. 2036(a); decedent retained possession and enjoyment of assets transferred to partnership via implied agreement; commingling of personal and partnership assets present; payment of premiums on life insurance policies for benefit of children and grandchildren via Crummey-style trusts were gifts of present interests eligible for annual exclusion even though payments were paid directly to the insurance company instead of the grantor transferring the premium payments to the trust and the trust remitting the proceeds to the insurance company with the trustee providing notice to the beneficiaries of their withdrawal rights simultaneous with the contributions of the premium amounts to the trust; to have present interest gift treatment, court noted that key question is whether beneficiary had "legal right to demand" withdrawal; under trust terms, beneficiaries had absolute right and power to demand withdrawals after each direct or indirect transfer to the trust; thus, indirect funding irrelevant to demand right; lack of notice did not affect "legal right to demand" withdrawals, and was not a problem in Crummey case; IRS has not conceded issue, and it remains important to properly contribute premium amounts to trust and notice of withdrawal right be given to beneficiaries; on reconsideration, estate claimed that under decedent's will, assets pulled back into estate via I.R.C. §2036(a) passed to surviving spouse and because surviving spouse had right to pecuniary marital bequest that allowed surviving spouse to receive assets equal to amount necessary to reduce estate tax to zero, marital deduction resulted in no estate tax deficiency; court held that marital deduction not available for FLP interest or FLP assets gifted during decedent's lifetime; Treas. Reg. §20-2056(c)-2(a) specifies that property interest passes to surviving spouse only if it passes to spouse as beneficial owner, but decedent’s assets first transferred to FLP and then decedent gifted FLP interests to persons other than surviving spouse; consequently, property passing to person other than surviving spouse cannot also be considered as passing to surviving spouse for purposes of marital deduction; value of transferred assets in decedent’s estate for tax purposes, but are owned by FLP or non-spousal partners and would not be includible in surviving spouse’s estate).