IRS tax attorneyAre you named as the executor of someone’s estate? Do you expect to be a beneficiary of someone’s estate? If so, keep reading. 

A woman died in December 2003, leaving her estate to her brother, who was also the executor. He transferred all the estate’s property to himself, except for $50,000 he gave to his daughter. He knew the estate owed tax to the IRS because he had been involved in the preparation of the estate tax return and the subsequent audit that resulted in additional taxes due. He tried to work out a payment plan with the IRS. He even made some significant payments on the tax debt, but never completely paid off the balance.

The brother passed away in 2008 leaving his daughter as executrix and sole beneficiary of his estate. She followed her father’s instructions and paid some of the tax due on the original estate, but she did not pay it all. She then distributed her father’s estate to herself, and ultimately used it all up.

Nearly thirteen years after the original estate tax return was filed, the IRS filed suit in federal district court to reduce the assessment to a judgment against both the brother’s estate and the original co-executor. The IRS also sought to hold the estate of the deceased executor and his daughter, the beneficiary of his estate, liable for the unpaid taxes of the original estate.

Can the IRS really do that? Yes, it can, if the facts support the claim.

Beneficiary Liability: The United States Code says that a person who receives property from a decedent’s estate (a beneficiary) is personally liable for any unpaid estate tax based on the value of the property received.

Fiduciary Liability: – The federal insolvency statute provides that when an estate has insufficient assets to pay all of its debts, priority must be given to debts due the United States. A fiduciary, e.g., an executor, may be held liable under this statute for the distribution of funds from the estate that is not, strictly speaking, the payment of a debt. The fiduciary may, for example, be held liable for “stripping” an otherwise solvent estate of all of its assets and rendering it insolvent by providing for the distribution of all of the estate assets to the heirs of the estate. 

The purpose of imposing personal liability on estate representatives is to make those into whose hands control and possession of the debtor’s assets are placed, responsible for seeing that the Government’s priority is paid.

The Court found in favor of the IRS on all four of these claims. What does this mean to current and prospective executors and beneficiaries? Simply this – make sure ALL federal taxes are paid BEFORE doing or accepting a distribution from an estate.

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