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Texas District Court Holds that Estate May Deduct Interest on Loan from Family Limited Partnership To Pay Estate Taxes

“Interest Deduction”

A district court in Texas has held an estate may deduct interest on a loan from a Family Limited Partnership (FLP) used to pay the estate tax.   The decedent, who wanted to protect family assets from former spouses and non-blood relatives, created an FLP.  When the decedent died, her advisor’s believed the FLP had not been completed yet and the estate paid $147.8 million in federal estate tax.

A year later the FLP was completed and funds loaned from the FLP to the estate and family trusts for the estate taxes.  The court gave three reasons why the loan had economic substance, 1) liability was imposed on the family trusts in the event of default, 2) the applicable federal interest rate was used, and 3) millions of dollars of interest was paid to the FLP.  The court also held the loan was necessary to preserve the liquidity of the estate.

Editor’s Comment

Unlike a previously reported case at around this time in the Tax Court, the taxpayer won and was able to deduct the interest on the loan.  It is not uncommon in our judicial system to have different outcomes with cases that are similar.  A slight difference in the facts of a case may turn one from a loser for the taxpayer to a winner.  It should also be noted that the two cases were from different courts, a district court in Texas and the U.S. Tax Court.  Different courts sometimes see facts and interpret the law in different ways.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors