ESTATES AND TRUST LAW

The United States Tax Court recently narrowed its review of Operating Agreements of Limited Liability Companies and Limited Liability Partnerships when determining whether or not a gift of an interest in such an entity is a gift of a “present interest” so as to qualify for the annual gift tax exclusion provided in Section 2503(b) of the Internal Revenue Code.  That Section excludes from taxable gifts the first $11,000 of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year.  In the case of Christine and Albert Hackl v. Commissioner, 118 T.C. No. 14, decided March 27, 2002, the Tax Court ruled that the gifted LLC interests made by Mr. and Mrs. Hackl in the year 1996 were gifts of future interests because the gifted units did not have “immediate and unconditional rights to the use, possession or enjoyment of property or income from the property.”  The Tax Court based its decision primarily upon the LLC Operating Agreement provisions which restricted the members’ rights to withdraw their capital accounts, to sell their interests to outside parties and to compel distribution of their interests from the Managing Member.  With this decision, the Tax Court has added weight to the growing line of cases that have well settled opinions on the issue of present interest gifts.  From those cases and from the Hackl case, it has become abundantly clear that for any gift, whether in trust, outright, direct or indirect, to qualify as a “present interest” in accordance with the language set forth in Section 2503(b), the gift must confer upon the donee not just the vested rights but a substantial present economic benefit by reason of use, possession or enjoyment of either the property itself or the income from the property.  Finally, the Tax Court emphasized in its opinion that, while State law defines property rights, it is the Federal law which determines the appropriate tax treatment of those rights and that the application of the provisions of Section 2503(b) is appropriate to determine the issue of present interest gifts.

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