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.
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 i
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 bene
Statutes of Limitation:
Under IRC ?6901 and ?6501 the statutory period for assessing personal liability against a Fiduciary tracks the same as the underlying tax. The limitation period is: (i) three years from the date of a tax returns filing or the date the tax return is due (if filed early); (ii) six years if there is a substantial omission (25% or more) of gross income, gift or estate assets; or (iii) no limit if the IRS can prove fraud. Under IRC ?6502(a), once the IRS makes a tax assessment it has ten (10) years to collect the tax.
METHODS FOR REDUCING FIDUCIARY LIABILITY
A Fiduciary may only make a partial distribution to beneficiaries or creditors without concern of personal liability for estate tax deficiencies if sufficient assets are retained to pay all tax liabilities (including potential interest and penalties).
Income and Gift Taxes:
The first step requires the Fiduciary to file IRS Form 4506, Request for Copy or Transcript of Tax Form, with the IRS. The response received from the IRS will educate the Fiduciary as to which tax returns (income, gift, etc.), if any, were filed by the decedent prior to his or her death. The request should include the Fiduciary's letters of administration, if applicable, and a Power of Attorney (IRS Form 2848).
To expedite the process, IRC ? 6501(d) authorizes a Fiduciary to file IRS Form 4810, Request for Prompt Assessment, to request a prompt assessment and review of all tax returns filed by the decedent with the IRS. The Form 4810 must detail the following: (i) type of tax; (ii) tax periods covered
DISCHARGE FROM PERSONAL LIABILITY
IRC ?2204 authorizes a Fiduciary to submit a written request for discharge from personal liability from the federal estate tax. The IRS has nine months from the filing of the request, when filed after the estate tax return, to notify the Fiduciary of any estate tax due. Upon payment of the tax (the IRS will issue form 7990) and expiration of the nine-month period the Fiduciary will be discharged from personal liability for any estate tax deficiency. It is important to recognize that IRC ?2204 only discharges the Fiduciary from personal liability and will not shorten the time for assessment of tax against the estate or any transferee of estate assets.
IRC ?6903 provides that a judicial discharge is insufficient to relieve a Fiduciary of subsequent estate tax liabilities. Only the filing of IRS Form 56, Notice Concerning Fiduciary Relationship, informing the IRS of judicial discharge or other legal termination will terminate the Fiduciary duties. As a protective meas
Estate and Trust Taxes:
Every estate and trust beneficiary (heir, legatee, and devisee) must be appraised of their potential for personal liability for unpaid estate taxes under IRC ?6901(a)(1) (probate estate) and ?6324(a)(2) (non-probate assets included in the decedent's gross taxable estate). Pursuant to IRC ?6901, the liability of a transferee is similar to that of the transferor under ?3713. A beneficiary's transferee liability will be limited to the value of assets transferred to them (Commissioner v. Henderson's Estate, 147 F.2d 619 (5th Cir. 1945)).
Under IRC ?2501, a donor (party making a gift) will bear primary responsibility for paying any tax liability associated with a gift. This will not preclude a donee, under IRC ?6324, from being held liable for the applicable gift tax. Transferee liability will hold the donee personally liable for the applicable gift tax (the donor's tax deficiency), up to the value of the gift, even if the gift received did
FLORIDA PROBATE LAW
Under Florida law, a claim for federal taxes (income, estate or gift) will not be subject to F.S. ?733.702, ?733.710 or the requirement that a creditor claim be filed in probate proceedings (U.S. v. Stevenson, 2001-2 USTC ?50,371 (M.D. Fla. 2001)). The IRS can provide notice of the tax liability to the fiduciary by sending Form 10492. The federal tax obligation will then receive preference over all other claims against and obligations (state inheritance taxes, and other expenses) of an estate (Rev. Rul. 79-310, 1979-2 C.B. 404). As a result, even if the IRS fails to file a claim against an estate, the Fiduciary should actively assert the U.S. Government's priority under IRC ?3713.
Florida Statutes ?733.801 and ?733.802 may be utilized to protect a Fiduciary by limiting the circumstances under which they will be required to either pay or deliver a devise or distributive share to a beneficiary. The limitations include: (i) not earlier than five (5) months after
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