Beneficiary and Fiduciary Liability Gift and Estate Taxes

On many occasions a Fiduciary may be placed into a position where assets passing outside the probate estate (life insurance, jointly held property, retirement accounts, and pension plans) or trust, over which they have no control, constitute a substantial portion of the assets (real property, stocks, cash, etc.) subject to estate taxation. Without the ability to direct or assume control of the assets the Fiduciary may have both a liquidity problem and lack of means to satisfy the estates tax (income or estate) obligation. For this reason alone, a Fiduciary should be very reluctant to distribute any funds to a beneficiary before all statute of limitation periods expire for the Internal Revenue Service (“IRS”) to assess a tax deficiency. Click the link for 美国报税w2

Liability for Income and Estate Taxes:

Internal Revenue Code (“IRC”) §6012(b) holds a Fiduciary responsible for filing the decedent’s final income and estate tax returns. IRC §6903(a) further establishes a Fiduciary’s responsibility for representing the estate in all tax matters upon filing the required Notice Concerning Fiduciary Relationship (IRS Form 56). Under IRC §6321, when the tax is not paid an IRS lien will spring into being. When an estate or trust possesses insufficient assets to pay all its debts, federal law requires the Fiduciary to first satisfy any federal tax deficiencies before any other debt (31 U.S.C. §3713 and IRC §2002).

A Fiduciary who fails to abide by this requirement will subject themselves to personally liability for the amount of the unpaid tax deficiency (31 U.S.C. §3713(b)). An exception arises when an individual has obtained an interest in the property that would prevail over the federal tax lien under IRC §6323 (United States v. Estate of Romani, 523 U.S. 517 (1998)). When there are insufficient estate or trust assets to pay a federal tax obligation, as a result of the Fiduciary’s actions, the IRS may collect the tax obligation directly from the Fiduciary without regard to transferee liability (United States v. Whitney, 654 F.2d 607 (9th Cir. 1981)). If the IRS determines a Fiduciary to be personally liable for the tax deficiency it will be required to follow normal deficiency procedures in assessing and collecting the tax (IRC §6212).

Prerequisites for Fiduciary Liability:

Under IRC §3713, a Fiduciary will be held personally liable for a federal tax liability if the following conditions precedent are satisfied: (I) the U.S. Government must have a claim for taxes; (ii) the Fiduciary must have: (a) knowledge of the government’s claim or be placed on inquiry notice of the claim, and (b) paid a “debt” of the decedent or distributed assets to a beneficiary; (iii) the “debt” or distribution must have been paid at a time when the estate or trust was insolvent or the distribution created the insolvency; and (iv) the IRS must have filed a timely assessment against the fiduciary personally (United States v. Coppola, 85 F.3d 1015 (2d Cir. 1996)). For purposes of IRC §3713, the term “debt” includes the payment of: (I) hospital and medical bills; (ii) unsecured creditors; (iii) state income and inheritance taxes (conflict between U.S. Blakeman, 750 F. Supp. 216, 224 (N.D. Tex. 1990) and In Re Schmuckler’s Estate, 296 N.Y. 2d 202, 58 Misc. 2d 418 (1968)); (iv) a beneficiary’s distributive share of an estate or trust; and (v) the satisfaction of an elective share. In contrast, the term “debt” specifically excludes the payment of: (I) a creditor with a security interest; (ii) funeral expenses (Rev. Rul. 80-112, 1980-1 C.B. 306); (iii) administration expenses (court costs and reasonable fiduciary and attorney compensation) (In Re Estate of Funk, 849 N.E.2d 366 (2006)); (iv) family allowance (Schwartz v. Commissioner, 560 F.2d 311 (8th Cir. 1977)); and (v) a “homestead” interest (Estate of lgoe v. IRS, 717 S.W. 2d 524 (Mo. 1986)).

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