# Deathbed Family Limited Partnerships: Why Late FLPs Fail Under Section 2036

> Deathbed family limited partnerships fail under IRC § 2036. What Strangi, Powell and Fields cost, the facts that sink an FLP, and California property tax rules.

Source: https://ridleylawoffices.com/deathbed-family-limited-partnership/

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

*Part of our [strategies that backfire](https://ridleylawoffices.com/estate-planning-strategies-that-backfire/) series.*

**Estate size this page covers:** $15 million and up for one person, $30 million and up for a married couple, where a valuation discount on a partnership interest saves federal estate tax. The cases below were decided under lower exemptions. The roughly $10 million partnerships in *Strangi* and *Powell* would sit below today’s $15 million exemption on their own, though what matters is the whole estate plus prior taxable gifts. Below the exemption there’s no estate tax to discount, and a partnership is about management, creditor protection and Prop 13. See [high-net-worth estate planning in California](https://ridleylawoffices.com/high-net-worth-estate-planning-california/).

**Short answer –**A deathbed family limited partnership is a partnership or LLC formed in the last months or weeks of someone’s life, funded with most of what they own, so the estate can report a discounted partnership interest instead of the assets. It fails when the facts show the person kept using the assets or had no real reason for the entity other than the discount. IRC § 2036(a) then puts the full value of the assets back in the estate, and the discount is gone. In *Estate of Fields* the partnership was funded with $17 million less than two weeks before death, and the estate owed a $1,828,594 deficiency plus a $270,417 penalty, which the Fifth Circuit affirmed in 2026. Partnerships formed early, for a business reason, with enough kept outside to live on, have held up.

**10 days**

From funding to death in *Estate of Fields* (5th Cir. 2026)

**$762**

Liquid assets Albert Strangi kept after moving over 98% of his wealth into the partnership (417 F.3d at 478)

**$17,062,631**

Included in the Fields estate against $10,877,000 reported for the partnership interest (T.C. Memo. 2024-90)

**20%**

Accuracy-related penalty imposed in *Fields*, IRC § 6662(a)

**$15M**

2026 federal estate tax exemption per person, Rev. Proc. 2025-32

## What is a deathbed family limited partnership?

A deathbed family limited partnership is an entity formed shortly before death and funded with the decedent’s investments, so the estate tax return values a limited partner interest at a discount for lack of control and lack of marketability instead of valuing the investments themselves.

The pitch is the discount. In *Fields* the appraiser took 15% off for lack of control and 25% off for lack of marketability, and the estate reported a $10,877,000 partnership interest for assets the court valued at $17,062,631. In *Kimbell* the estate claimed a 49% discount. The courts describe how these plans arrive. On August 11, 1994, the man running Mr. Strangi’s affairs under a power of attorney attended a seminar that marketed limited partnerships as a way of “lowering\] the taxable value of your estate,” in the opinion’s transcription, and Mr. Strangi died on October 14, 1994. In *Fields*, the planner who drafted the partnership documents sent them to the appraisal firm asking for comments on terms “that might be useful in obtaining a deeper discount.” The Tax Court found no other contemporaneous evidence of why the partnership was formed.

The technique is legal. Partnerships and LLCs are ordinary ways to hold a family business or real estate, and a discount on a minority interest is real when the entity is real. The deathbed version fails because of its facts.

## How section 2036 pulls the assets back into the estate

Section 2036(a) includes in the gross estate any property the decedent transferred, other than in a bona fide sale for adequate and full consideration, while keeping for life the use of the property or a say over who gets it (IRC § 2036(a)).

1. Section 2036(a)(1): keeping the use of the assets The first is “the possession or enjoyment of, or the right to the income from, the property.” Courts find it from an express or implied agreement. In *Strangi* the partnership paid over $100,000 from 1994 to 1996 for funeral expenses, estate administration expenses, specific bequests and his personal debts, and the Fifth Circuit called those payments “strong circumstantial evidence” of an understanding that partnership assets would cover his expenses (417 F.3d at 477). It affirmed on § 2036(a)(1) and didn’t reach (a)(2).
2. Section 2036(a)(2): keeping a say over who gets the assets The second is the right, “either alone or in conjunction with any person,” to designate who will possess or enjoy the property or its income. In *Powell* the partnership agreement allowed dissolution with the written consent of all partners. The Tax Court held that Mrs. Powell’s ability to dissolve it together with her sons was a § 2036(a)(2) right (148 T.C. 392 (2017)).
3. The bona fide sale exception Section 2036 doesn’t apply to a bona fide sale for adequate and full consideration. For family partnerships the Tax Court requires “a legitimate and significant nontax reason for creating the family limited partnership,” plus partnership interests proportionate to what each partner contributed. The reason must be “an actual motivation, not a theoretical justification” (*Estate of Bongard*, 124 T.C. 95, 118 (2005)). The Fifth Circuit frames the same test objectively: a sale is bona fide if it serves a “substantial business \[or\] other non-tax” purpose (*Strangi*, 417 F.3d 468, following *Kimbell*).
4. Section 2043(a) limits the double count *Powell* held that when the decedent received a partnership interest in exchange, § 2043(a) limits the inclusion to the amount by which the transfer depleted the estate: the date-of-death value of the assets less the value of the partnership interest received. Where death follows within days, that’s close to the whole discount.

*Estate of Levine*, 158 T.C. No. 2 (2022), shows where § 2036(a)(2) stops. It involved split-dollar life insurance, not a partnership. The Tax Court distinguished *Strangi* and *Powell* because the person who controlled the policies owed fiduciary duties to all the trust’s beneficiaries, including grandchildren, and not duties he “essentially owed to himself.” When the person who has to agree to a dissolution is an independent fiduciary with real duties to others, the “in conjunction with” theory is harder for the IRS.

## Family limited partnership cases won and lost

The IRS won *Strangi*, *Powell*, *Moore* and *Fields*; estates won *Mirowski* and the holding company in *Bongard*, and *Kimbell* sent the case back for trial under a test that favors well-run entities.

### Cases the IRS won

- ***Strangi v. Commissioner*, 417 F.3d 468 (5th Cir. 2005).** About $10 million moved into the partnership as his health declined. He kept $762 in liquid assets, as the court counted them, stayed in his house, and the partnership paid his expenses and later $3,187,800 of estate and inheritance taxes. The Tax Court sustained a $2,545,826 deficiency, and the Fifth Circuit affirmed under § 2036(a)(1).
- ***Estate of Bongard*, 124 T.C. 95 (2005).** A split decision. The family partnership was included under § 2036(a)(1). The court listed the facts that defeat the bona fide sale exception: the taxpayer standing on both sides of the transaction, financial dependence on partnership distributions, commingling, and never transferring the property to the partnership.
- ***Estate of Powell*, 148 T.C. 392 (2017).** A California decedent. The partnership was formed August 6, 2008, funded with $10,000,752 of cash and securities on August 8, and Mrs. Powell died August 15. The IRS won under § 2036(a)(2).
- ***Estate of Moore*, T.C. Memo. 2020-40.** A hospice doctor had given Mr. Moore less than six months to live. Five days after the partnership received part ownership of the farm, he sold it, and he kept running the farm until he died less than two months later. The court found at least an implied agreement that he’d keep enjoying the property, and no business left for the partnership to run.
- ***Estate of Fields*, T.C. Memo. 2024-90, aff’d, No. 25-60403 (5th Cir. 2026).** The partnership was formed in late May 2016, funded with about $17 million by June 13, and Ms. Fields died June 23. The Tax Court included $17,062,631, imposed the 20% penalty, and the Fifth Circuit affirmed because the estate hadn’t shown a non-tax purpose or reasonable cause.

### Cases the estates won

- ***Kimbell v. United States*, 371 F.3d 257 (5th Cir. 2004).** Mrs. Kimbell was 96 and died in March 1998, two months after the partnership was formed in January. The district court ruled for the government on summary judgment, and the Fifth Circuit vacated and remanded. It pointed to four uncontroverted facts: she kept over $450,000 outside for her own support with no commingling, partnership formalities were followed and the assets were assigned to the partnership, the partnership held oil and gas working interests that needed active management, and there were credible nontax reasons, including liability protection for the working interests. This was a reversal of summary judgment, not a final win on value.
- ***Estate of Mirowski*, T.C. Memo. 2008-74.** The LLC was formed on August 27, 2001, and Ms. Mirowski died September 11. The estate still won, because the court found that no one expected her to die before September 10, she kept about $7,598,000 of personal assets including about $3,308,000 in cash, nothing was commingled, and she had real reasons: joint management by her daughters, keeping the family’s assets in one pool, and equal treatment. The IRS had determined a $14,243,208 deficiency. In *Moore* the Tax Court distinguished *Mirowski* as “a valid and functioning investment operation” with family members in active roles, so it’s a narrow precedent.
- ***Estate of Bongard*, 124 T.C. 95 (2005), in part.** The transfer of company stock to a holding company passed the bona fide sale test because positioning the company for a sale or investment was a legitimate and significant nontax reason.

Timing is evidence, not a rule. *Mirowski* survived a two-week gap and *Kimbell* got a trial after two months. What they had, and *Strangi*, *Powell* and *Fields* lacked, was a reason for the entity that existed apart from the discount and a decedent who didn’t need the partnership to live.

## How much tax was at stake in these cases?

The IRS determined estate tax deficiencies from $2,545,826 (*Strangi*) to $52,878,785 (*Bongard*) in these cases, and courts sustained $2,099,011 of tax and penalty in *Fields*, as the opinions report.

| Case | Amount | What the figure is | Outcome |
| --- | --- | --- | --- |
| Estate of Bongard, 124 T.C. 95 (2005) | $52,878,785 | Estate tax deficiency in the notice of deficiency | Split. Holding company transfer passed the bona fide sale test, and the family partnership was included under § 2036(a)(1) |
| Estate of Mirowski, T.C. Memo. 2008-74 | $14,243,208 | Estate tax deficiency the IRS determined | Estate won: transfers to the LLC were bona fide sales |
| Estate of Powell, 148 T.C. 392 (2017) | $5,870,226 | Estate tax deficiency in the notice (the IRS also determined $2,961,366 of gift tax, which the estate won) | IRS won the estate tax issue under § 2036(a)(2), with inclusion limited by § 2043(a) |
| Strangi v. Commissioner, 417 F.3d 468 (5th Cir. 2005) | $2,545,826 | Estate tax deficiency the Tax Court sustained | IRS won under § 2036(a)(1), affirmed |
| Estate of Fields, T.C. Memo. 2024-90 | $2,099,011 | $1,828,594 deficiency plus $270,417 penalty | IRS won, affirmed by the 5th Cir., No. 25-60403 (2026) |

A determined deficiency is the IRS’s opening number, not the final bill. *Bongard* was split and *Mirowski* was an estate win.

## Facts that sink a family limited partnership

Every item on this list comes from an opinion in which the estate lost.

- The entity is formed or funded after a terminal diagnosis, hospice certification or a hospitalization (*Moore*, *Fields*, *Powell*).
- The person transfers nearly everything and keeps too little to live on (*Strangi*: $762 of liquid assets).
- The partnership pays personal bills, funeral costs or estate tax (*Strangi*).
- The person keeps living in a house the partnership owns, without paying rent at the time (*Strangi*).
- The same person, often an agent under a power of attorney, stands on both sides of the transfer (*Bongard*, *Strangi*, *Fields*).
- Partnership and personal money are commingled, or the assets are never retitled to the entity (*Bongard*).
- The assets are marketable securities or cash that need no management, or the business is sold right after it goes in (*Moore*).
- The agreement lets the partners, acting together, dissolve the entity and the decedent is one of them (*Powell*).
- The only contemporaneous paper about the reason for the entity is about the discount (*Fields*: “obtaining a deeper discount”).

## Worked example: what a late partnership costs when it fails

A hypothetical widow in California has $40 million: $30 million of brokerage accounts and $10 million of other assets. In 2026, after a serious diagnosis, her agent forms a partnership, moves the $30 million in, and the appraiser applies the 15% and 25% discounts used in *Fields*. Applied in sequence, that’s a 36.25% combined discount, and the $30 million is reported as $19,125,000.

| Scenario | Taxable estate | Federal estate tax | Penalty | Total before interest |
| --- | --- | --- | --- | --- |
| No partnership | $40,000,000 | $10,000,000 | $0 | $10,000,000 |
| Partnership respected (36.25% combined discount) | $29,125,000 | $5,650,000 | $0 | $5,650,000 |
| Partnership pulled back in under § 2036(a) | $40,000,000 | $10,000,000 | $870,000 | $10,870,000 |

If the partnership is respected, the federal estate tax drops by $4,350,000. If the IRS proves the *Strangi* or *Fields* facts, the estate pays the full $10,000,000, an $870,000 penalty if the court finds negligence as in *Fields*, and interest from the due date, plus whatever the partnership and appraisal cost. California has no estate tax of its own, so these are federal numbers.

## What works and what fails

| Issue | Facts that held up | Facts that failed |
| --- | --- | --- |
| Reason for the entity | Liability protection for oil and gas working interests (*Kimbell*), joint management by the next generation (*Mirowski*), and positioning a company for investors (*Bongard* holding company) | Discount planning with no business to run (*Moore*, *Fields*) |
| Assets kept outside | Over $450,000 (*Kimbell*) and about $7.6 million (*Mirowski*) | $762 of liquid assets (*Strangi*) |
| Use of partnership money | No commingling (*Kimbell*, *Mirowski*) | Partnership paid personal debts, funeral costs and estate tax (*Strangi*) |
| Timing | Death not expected when the LLC was formed (*Mirowski*) | Funded one week (*Powell*) or ten days (*Fields*) before death |
| Control | Formalities followed and assets assigned to the partnership (*Kimbell*) | Decedent could dissolve the partnership with the other partners (*Powell*) |

**Don’t do this:** don’t form a family partnership after a diagnosis and move nearly everything into it so the estate can report a discount. *Estate of Fields* (T.C. Memo. 2024-90, aff’d 5th Cir. 2026) put the full $17,062,631 back in the estate and added a 20% penalty. *Strangi* and *Powell* did the same on similar facts.

## What to do instead

Form the entity years ahead, while you’re healthy, for a reason you’d explain to a lender: managing a family business or real estate together, keeping a portfolio in one pool, protecting against liability on active assets, or setting rules for the next generation. Keep enough outside the entity to live on for the rest of your life. Run it like a business, with its own accounts, records and distributions that follow the agreement. Have an appraiser value the interests at each gift and disclose the gifts on a Form 709. Have someone other than you control dissolution and distributions, or give that power to an independent fiduciary with duties to others, which is the point *Levine* turned on. See [family limited partnerships in California](https://ridleylawoffices.com/family-limited-partnership-california/) and [holding company LLCs](https://ridleylawoffices.com/holding-company-llc-california/).

If a partnership already exists and was formed late, have it reviewed now, while you can still add assets to your personal side, clean up commingled accounts and document the reasons for the entity. Nothing fixes a missing reason after death.

## What changes in California

California has no estate tax, so the discount is a federal question here. The California issues are property tax and entity law.

- **Prop 13 on the way in.** Putting real estate into a partnership in exact proportion to ownership isn’t a change in ownership (R&TC § 62(a)(2)). The people who own the entity right after that transfer become “original coowners.”
- **Prop 13 on the way out.** Once interests representing cumulatively more than 50% of the entity are transferred by the original coowners, the real estate is reassessed (R&TC § 64(d)). A program of gifts of partnership interests to children counts toward that 50%. A person or entity that gets more than 50% triggers reassessment too (R&TC § 64(c)).
- **The filing deadline.** A change in control or ownership of an entity that owns California real estate has to be reported to the Board of Equalization within 90 days (R&TC §§ 480.1, 480.2). Missing it adds a penalty of 10% of the taxes on the new base year value (R&TC § 482(b)).
- **Prop 19.** The parent-child exclusion covers a family home or family farm, and for this purpose real property doesn’t include an interest in a legal entity (R&TC § 63.2(e)(8)). Transfers of partnership interests don’t get it. See [Prop 19 planning](https://ridleylawoffices.com/prop-19-planning/).
- **Creditor protection.** For a California limited partnership, a charging order is the exclusive remedy of a partner’s judgment creditor, though the court can order the interest foreclosed (Corp. Code § 15907.03). LLCs have a parallel rule (Corp. Code § 17705.03).
- **Formalities and the annual tax.** A California limited partnership pays the annual tax every year until it files a certificate of cancellation (R&TC § 17935). An entity that skips its returns and annual tax looks like a personal account, which is the fact pattern in the cases the IRS won.
- **Community property.** Spouses who fund a partnership with community property should say in writing what character the interests have. A change in character needs an express written declaration (Fam. Code § 852(a)).

*Powell* involved a California decedent, and the Tax Court applied the same federal rules it applies everywhere.

## Who this is for

This page is for families who own an investment portfolio, rental real estate or a family company worth more than the exemption and are weighing a partnership or LLC, families whose adviser has proposed forming one for a parent in declining health, and families who already have one and need to know whether it would survive an audit.

## Working with Ridley Law

I review existing family partnerships and LLCs against the facts the courts use, and I design new ones around a reason that holds up. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. If an estate is already in an audit or in Tax Court, I’ll help you find tax controversy counsel.

The first call is free and runs 30 minutes, by phone or Zoom. [Book my 30-minute call](https://ridley.click/eric-30) or call 805-244-5291.

## Frequently asked questions

### Is a family limited partnership still legal?

Yes. *Kimbell* and *Mirowski* show the courts respect partnerships with a real nontax purpose, assets kept outside, and no commingling. The losses involve entities formed at the end of life that paid the person’s bills.

### How long before death should a family partnership be formed?

No statute sets a number. *Mirowski* survived a two-week gap because the death was unexpected and the reasons were real, while *Powell* lost with one week. Forming the entity while you’re healthy removes the issue.

### What is the bona fide sale exception?

It keeps § 2036 from applying when the transfer had a legitimate and significant nontax reason and each partner got an interest proportionate to what they contributed (*Bongard*, 124 T.C. at 118).

### Can I live in a house my family partnership owns?

Only on the terms a tenant would get, paid when due. In *Strangi* the rent was booked but not paid until more than two years after death, and the court treated his continued occupancy as evidence of an implied agreement.

### What discount can a partnership interest get?

It depends on the appraisal and the entity’s terms. In *Fields* the appraiser applied 15% for lack of control and 25% for lack of marketability, and in *Kimbell* the estate claimed 49%. A discount only matters if § 2036 doesn’t apply first.

### Does putting California real estate in a partnership trigger reassessment?

Not if ownership stays proportional on the way in (R&TC § 62(a)(2)). Later transfers of more than 50% of the interests do (R&TC § 64(d)), and they have to be reported within 90 days.

### What happens if the IRS pulls the partnership back into the estate?

In practice the estate ends up taxed on the full date-of-death value of the assets, and the discount is lost. Under *Powell*, § 2043(a) keeps the partnership interest from being counted twice, but the net result is the undiscounted value. Interest runs from the due date, and a 20% penalty can apply, as in *Fields*.

This page is general information about California and federal law as of its update date. It isn’t legal, tax, or investment advice for your situation, and reading it doesn’t create an attorney-client relationship. The worked example is hypothetical.

**Related reading:** [estate planning strategies that backfire](https://ridleylawoffices.com/estate-planning-strategies-that-backfire/); [family limited partnerships in California](https://ridleylawoffices.com/family-limited-partnership-california/); [estate planning strategies compared](https://ridleylawoffices.com/estate-planning-strategies-compared/); [ultra-high-net-worth estate planning](https://ridleylawoffices.com/ultra-high-net-worth-estate-planning-california/); [estate tax calculator](https://ridleylawoffices.com/estate-tax-calculator/).

Sources

- [U.S. Tax Court, Estate of Bongard v. Commissioner, 124 T.C. 95 (2005)](https://www.courtlistener.com/opinion/4696926/estate-of-bongard-v-commr/) (2005-03-15)
- [U.S. Court of Appeals, 5th Cir., Estate of Fields v. Commissioner, No. 25-60403](https://www.courtlistener.com/opinion/10937945/fields-v-cir/) (2026-07-31)
- [U.S. Tax Court, Estate of Fields v. Commissioner, T.C. Memo. 2024-90](https://www.courtlistener.com/opinion/10258096/estate-of-anne-milner-fields-bryan-k-milner/) (2024-09-26)
- [U.S. Tax Court, Estate of Levine v. Commissioner, 158 T.C. No. 2 (2022)](https://www.courtlistener.com/opinion/6445976/estate-of-marion-levine-robert-l-larson-personal-representative/) (2022-02-28)
- [U.S. Tax Court, Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74](https://www.courtlistener.com/opinion/4559758/estate-of-anna-mirowski-v-commr/) (2008-03-26)
- [U.S. Tax Court, Estate of Moore v. Commissioner, T.C. Memo. 2020-40](https://www.courtlistener.com/opinion/4743120/estate-of-howard-v-moore-virgil-l-moore-and-trustee-v-commissioner/) (2020-04-07)
- [U.S. Tax Court, Estate of Powell v. Commissioner, 148 T.C. 392 (2017)](https://www.courtlistener.com/opinion/4563430/estate-of-powell-v-commr/) (2017-05-18)
- [U.S. Court of Appeals, 5th Cir., Kimbell v. United States, 371 F.3d 257 (2004)](https://www.courtlistener.com/opinion/35227/kimbell-v-united-states/) (2004-05-20)
- [U.S. Court of Appeals, 5th Cir., Strangi v. Commissioner, 417 F.3d 468 (2005)](https://www.courtlistener.com/opinion/791260/albert-strangi-deceased-rosalie-gulig-independent-v-commissioner-of/) (2005-07-15)
- [IRS, Rev. Proc. 2025-32](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf) (2025-10-09)
- [U.S. Congress (via Cornell LII), 26 U.S.C. § 2001](https://www.law.cornell.edu/uscode/text/26/2001) (current)
- [U.S. Congress (via Cornell LII), 26 U.S.C. § 2036](https://www.law.cornell.edu/uscode/text/26/2036) (current)
- [California Legislature (via DingDuff), Corp. Code § 15907.03](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=15907.03) (current)
- [California Legislature (via DingDuff), Corp. Code § 17705.03](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17705.03) (current)
- [California Legislature (via DingDuff), Fam. Code § 852](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=FAM&sectionNum=852) (current)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 17935](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17935) (current)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 480.1](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=480.1) (current)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 480.2](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=480.2) (current)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 482](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=482) (current)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 62](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=62) (current)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 63.2](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=63.2) (eff. 2026-01-01)
- [California Legislature (via DingDuff), Rev. & Tax. Code § 64](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=64) (current)