Valuation discounts are a legitimate planning tool. They are also one of the few areas where the right structure at the wrong moment leaves a family in a worse position than no planning at all. A federal appeals court made that point in June 2026.
What Happened in the Fields Estate
Anne Milner Fields inherited a Texas oil business following her husband’s death in the 1960s. By 2011, she had been diagnosed with Alzheimer’s disease, and her health declined steadily from that point. She named her great-nephew, Bryan Milner, as her agent under a durable power of attorney and as executor of her estate.
Approximately one month before her death, roughly $17 million of her assets were transferred into a family limited partnership. She entered hospice on June 15, 2016, and died eight days later. The estate’s appraiser valued her limited partnership interest at $10.8 million after applying a 36.25% combined discount for lack of control and lack of marketability. That figure was reported on the estate tax return.
Why the IRS Unwound It
The IRS applied Internal Revenue Code Section 2036, which returns transferred property to the gross estate when the person who transferred it effectively retained the benefit. The Tax Court found that Fields had not kept enough outside the partnership to cover her own expenses or the $1.45 million in specific bequests under her will. Her ability to join in dissolving the entity also counted as retained control over who would ultimately enjoy the assets. Section 2036 makes an exception for transfers that qualify as a bona fide sale serving a genuine non-tax purpose, and the court found none here.
The Fifth Circuit affirmed on June 8, 2026, and upheld the accuracy-related penalty of 20% on the deficiency. That last element deserves attention. Aggressive positions now carry meaningful consequences in IRS disputes, rather than a corrected return and a bill for the difference.
Where the Plan Broke Down
Several distinct problems compounded in this case, and each would have been avoidable on its own.
- The entity was funded during terminal decline, making a non-tax purpose difficult to establish.
- Too little was retained outside the partnership to cover her own expenses.
- An agent acting under a power of attorney funded the entity, rather than the principal herself.
- No operating business or genuine management need supported the structure.
- The executor never considered Section 2036, which undermined the good-faith defense.
What Defensible Planning Looks Like
Discounts remain available. Partnerships and limited liability companies withstand review when they are formed well in advance of any need, funded with assets that genuinely require management, operated with real formalities, and supported by a business purpose unrelated to taxes. The current environment also allows most families to proceed deliberately, since the $15 million federal exemption means the substantial majority of estates owe no federal tax at all. That changes the calculation for whether any aggressive position is worth the exposure.
Simpler approaches often accomplish the same objective. Annual exclusion gifting moves value out of an estate year after year without inviting a Section 2036 argument, and the effect compounds considerably over a decade. For assets expected to appreciate sharply, a grantor retained annuity trust transfers future growth on terms the IRS has accepted for decades. Neither approach depends on a court agreeing with an appraiser’s judgment.
An estate tax planning lawyer can assess whether a proposed entity would survive the bona fide sale test, and whether the calendar still allows time to establish one properly. That assessment is considerably less expensive than a deficiency notice and a penalty.
Estate Planning Pros designs transfer strategies intended to be defended, not merely filed. If your estate may approach the federal exemption, or you hold business or real estate interests you expect to discount, speak with an estate tax attorney while the timing still works in your favor. Contact our office to get started.