Liability of executor and beneficiary for unpaid income, gift and inheritance taxes of a deceased


Estate tax advisors are generally aware that the executor or personal representative of the estate is personally responsible for paying federal property taxes not only with respect to the probate estate, but also estate taxes attributable to the estate. other assets included in the taxable estate. [Internal Revenue Code (IRC) section 2202; Treasury Regulations section 20.2002-1]. This obligation applies not only to the entire estate, but also to any unpaid gift tax, whether or not the gross estate contains property that is not in the possession of the executor or the estate. administrator, such as life transfers to trusts, survivor transfers, policyholders under the exercise of appointing power held by the deceased, or life insurance proceeds paid to a named beneficiary other than succession (IRC articles 2035-2042, 2044). For assets passing out of the estate, the will or state law will determine which individuals will be required to bear the economic burden of the tax. Even so, the executor will, in the absence of a liability release issued by the IRS, be held personally liable for the payment of estate tax even if the estate is solvent.

If no executor or administrator is appointed to the estate, any person in actual or presumed possession of property of the deceased is required to pay all tax up to the value of the property in their possession ( IRC section 2203). This “implied executor” is not only struggling with personal liability for tax on the deceased’s transfers, but will generally not be allowed to file a release request with the IRS.

Personal liability of executors

The personal liability of the executor of an estate, the trustee of a trust, or even an officer or director of a corporation to pay debts owed to the government, such as unpaid taxes on a corporation. deceased person, is largely time-barred under the Federal Claims Priority Act. This law provides the United States with a direct cause of action against the trustee, whether an executor or a trustee, to make preferential payments to other creditors or beneficiaries of an estate. or an insolvent trust on tax (or other federal claims) owed to the government.

Under Section 31 USC 3713 (b), the executor is personally liable for any unpaid tax of the deceased to the extent of the value of other debts paid by the executor on outstanding senior debts of the United States. A debt for this purpose includes a distribution of a bequest or part of the estate to beneficiaries named under the deceased’s will or under the Intestate Distribution Act. This personal responsibility attaches even if the beneficiaries agree to the payment of unpaid tax, or when the executor is contractually indemnified by the beneficiaries. (There are federal refund laws that may apply to property subject to inheritance tax that passes outside probate; see IRC sections 2204 to 2207.) The amount of liability is based on the excess value of the transferred property over the unliquidated tax claim. , plus penalties and interest, from the date of the transfer in question. Interest is then added to this amount from the applicable transfer date. The limitation period is six years.

The event that triggers the application of Section 31 USC 3713 (b) is the transfer of property to a beneficiary or creditor of an estate other than the United States, provided that: 1) the estate is insolvent or is made insolvent on the date of the transfer, and 2) the executor had actual or suspected knowledge of the unpaid debt to the IRS. Such liability does not need to have been assessed by the IRS at the time; for example, if a lawyer or accountant working for the estate or an IRS agent informs the executor that there is or may be an assessment for unpaid taxes against the deceased before the distribution of the subject is carried out, the knowledge criterion is satisfied. Actual notice is not required, as long as the executor has received sufficient notice of the claim that would cause a reasonably prudent person to investigate further. The fiduciary liability provision may also apply where the executor or successor executor fails to pay the estate tax installments on restricted business interests under Section 6166 of IRC.

The exposure of an executor to personal liability for the deceased’s unpaid taxes can be mitigated in several ways. First, an executor who is appointed and qualified to act under the law of the state as such can apply for and receive an inheritance tax discharge by written request and advance determination by the IRS of the tax due. The decision must be rendered within nine months of the filing of the declaration, or within nine months of the written request for determination by the executor, whichever is later; when determining and paying the tax, the executor is released. If the payment of tax is extended, IRC Section 2204 (a) allows the executor to receive a discharge after the tax has been determined when providing a bond (if the IRS requires it). The IRS may issue a discharge notice at a later date, releasing the executor or personal representative from responsibility for paying estate tax.

The executor is also responsible for paying any unpaid gift tax due for life transfers made by the deceased. If the IRS provides the executor with copies of gift tax returns under IRC section 6103 (e) (3), and the executor is relying in good faith on these declarations to determine the adjusted taxable donations of the deceased, the executor can be released from all liability for inheritance tax attributable to adjusted taxable donations made more than three years before the death of the deceased and which did not appear on the declarations . Note, however, that such a discharge does not release any part of the estate from a tax lien under IRC sections 6324 (a) (1), 6324 (a) (2) or 6324 (b).

There are other related provisions in IRC Section 6905 and accompanying regulations allowing a trustee to request a prompt assessment of income and gift taxes. It is important to provide prompt notice of termination of the fiduciary relationship also under IRC Section 6903 (a). [see Huddleston v. Comm’r, 100 T.C. 17 (1993)].

Where there are co-executors acting on behalf of an estate, both should be fully informed of their obligations and duties, and both should participate in decisions about paying taxes, filing protests, negotiating settlements, and litigation against the government. In general, one co-executor can bind the other, even when the non-acting co-executor was unaware of the actions taken. When a co-executor plays a passive role, that person can still be held personally responsible for the unpaid federal estate, donations, or income taxes of the deceased.

Responsibility of the assignee

Where the executor fails to pay estate tax, the IRS has the option of also suing the assignees under the special lien laws contained in IRC Section 6324 for the collection of any unpaid tax relating to the property included in gross inheritance. As defined in IRC Section 6901 (h), the term “assignee” includes donees, heirs, legatees and distributors, as well as any person personally liable for inheritance tax under the terms of the special law on inheritance tax and gift tax. The personal liability of the assignee corresponds to the value of this property at the time of the deceased’s death. The limitation period is 10 years; however, if no donation tax return for the applicable year has been filed, the limitation period will not expire. [IRC section 6324(b)].

Executors, trustees, and beneficiaries should seek the advice of a lawyer with extensive experience in this area of ​​tax law to resolve their potential personal liability.

The government can also sue assignees of gifts or estates for unpaid taxes of the deceased under the general assignee liability provision in IRC section 6901. This is called a “procedural” provision and allows the government to simultaneously seek other avenues for the collection of unpaid taxes; see Russell v. United States. [461 F.2d 605 (10th Cir. 1972)]. For example, the government can bring an action in a federal district court for the collection of tax owed under a special lien provision, as previously mentioned, and also pursue an alternative assignee liability remedy under IRC Section 6901.

The limitation period under IRC 6901 will generally expire (unless extended by consent) before the 10-year special privilege laws, as this is one year after the expiration of the limitation period. for valuation against the assignor and an additional year with against an assignee of an assignee. As with other creditors, debtors who attempt to defraud, obstruct, or delay IRS collection efforts allow the agency to enforce the same rights as private creditors under state laws. (as well as federal) on fraudulent assignments.

Protect the interests of the executor

Executors, trustees and beneficiaries should seek the advice of a lawyer with extensive experience and experience in this area of ​​tax law in dealing with their potential personal liability. Indeed, the presence and application of special privilege laws are, in this author’s experience, sometimes overlooked or misinterpreted, both with respect to their application and the amount of potential personal liability. . The benefit of an indemnity or beneficiary agreement can be short sighted, as the case law demonstrates. Indeed, in some cases, the executor may be advised to resign before making distributions to beneficiaries if such distributions would leave unpaid IRS obligations outstanding.

The issues raised above require due diligence to investigate the deceased’s unpaid tax obligations, understand the exact amount of estate tax and the potential for further assessment, advise beneficiaries of any special privileges and exposure to the liability of the deceased. assignee, and attempt to mitigate the personal liability of the executor. by requests for rapid assessment and discharge.

Jerald David August, JD, LLM is a partner, specializing in federal taxation, at Kostelanetz & Fink LLP, New York, NY

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