Buyer and Owners of Selling Entity Beware of Partner’s Estate Tax Lien

Kentucky mining mogul Duane Bennett Sr. died in 2006.  The IRS assessed estate tax of $2,783,849.  The estate included a 40% partnership interest in two limited partnerships.  The limited partnerships then sold estate assets including promissory notes from Bennett.  Imagine their surprise when the IRS claimed priority over the partners and the buyer based on its recorded estate tax liens.

Each partner was entitled to a portion of the sales proceeds under the terms of the partnership documents.  Certain limited partners objected to distribution to the estate because the decedent had unpaid loans from the limited partnerships at the date of his death.  The federal district court held that because the promissory notes were sold by the limited partnerships, the IRS had priority over the partners.

The buyer also argued for priority.  It claimed to have had a security interest before the IRS recorded its lien.  The court acknowledged that an IRS lien will not defeat a security interest in existence prior to the recording of an IRS lien.  It then concluded that the buyer was out of luck because the estate was entitled to distribution of the sales proceeds from the partnerships and that the IRS lien attached to these proceeds.  The result was that the IRS won again!

Wise buyers and sellers may want to plan carefully with the assistance of a skillful estate attorney in sales transactions involving a deceased business owner.  Bennett v. Bascom (E.D. Ky. 2018) 2018 WL 1473798

Mom Can Take Child Support from a Bankrupt Dad’s Trust

A divorced California parent, who had created a trust to protect his new condo and business assets, was forced to give his ex spouse access to those assets to repay his five-figure child-support debt and six-figure judgment for spousal support.

At first, the divorced couple was fighting about the kids’orthodontist bills. The case spiraled when the father walked away from mortgage payments on his family’s house and established his own father as the holder of a promissory note on the trust that held his new condo and business assets—all before he declared bankruptcy.

In 2013, the bankruptcy court ordered that the trust’s note be turned over to the ex-wife and ruled that the father’s support obligations were non-dischargeable. It also granted the ex-wife a $452,064 non-dischargeable judgment on the basis that he had fraudulently induced her to waive spousal support.

In October, an appeals court shot down his attempt to reverse the turnover order, finding he was the trust’s settlor and sole beneficiary. This cleared the way for the mother of his children to reach those once-shielded assets to fulfill his support payment and to obtain payment of her judgment notwithstanding the trust’s spendthrift clause “and its purported irrevocability.”

It’s an eye-opener for anyone navigating the complicated nexus where divorce agreements, real estate, and businesses meet—and a reminder to work with an estate planner to set up a legal agreement that everyone—including former spouses and dependent children—can trust.  Marriage of Furie (2017) 16 CA5th 816

John O’Grady leads a full-service estate and trust law firm in San Francisco. His practice includes Estate Planning & Administration, Probate and Trust Litigation.