Kite v. Commissioner is a Major Loss for IRS —Financial Planning

Case Involved $6M in Gift Tax and $5M in Estate Tax; Interest in General Partnership Sold for Private Annuity; Much Planning at the End of 2012

Bruce Givner at Financial Planning reports that U.S. Tax Court Judge Elizabeth Paris handed the taxpayers a victory last Thursday [2/14/2013]  involving a powerful estate tax planning tool: private annuities.   The case, Estate of Kite v. Commissioner, is important, Givner explains, partly because much of the planning was done in a panic at the end of 2012, for fear that the lifetime exclusion would drop from $5.12 million to $1 million per person, and it involved private annuities.  Here’s more:  

This case is more important because practitioners will now be emboldened to use private annuities, and a particular version of them—known as deferred private annuities—even more in the future.

The stakes involved were significant: $6 million of gift tax and $5 million of estate tax. The taxpayer came from a wealthy family that was used to doing sophisticated planning, as evidenced by the fact that there were 70 trusts in existence for the benefit of Virginia Kite and her children.

In 2001, Mrs. Kite, age 74, sold her interests in the Kite Family Investment Co. (“KIC”), a Texas general partnership, to her children, for three private annuity agreements. What was striking about this transaction was that the first payments under the private annuity agreements were not due until 10 years later, in 2011. The IRS has issued guidance regarding deferred payment annuities. However, that authority can be read as being for annuities issued by charities. This case is arguably the first example of a deferred private annuity approved between family members for estate tax planning purposes.

Read more about the specifics of the case and the judge’s ruling here. 

The Tax Court’s Ruling in Kite v. Commissioner Will Likely Boost Financial Planners’ Use of Private Annuities

see also:
T.C. Memo. 2013-43