Heirs may be responsible for estate taxes.
Not all estates will require payments of estate taxes.
It is dependent on a number of factors, including the size of the estate and the specifics of the estate plan.
Those who have assets valued in excess of the federal estate exemption threshold and those who live in states with their own estate taxes should prioritize working with an experienced estate planning attorney.
Doing so can reduce your tax liability and simplify asset distribution.
According to a recent Forbes article titled “Heirs Can Be Personally Liable For Estate’s Taxes,” choosing a knowledgeable executor is also key.
Consider the estate of the founder of the Gulfstream aircraft manufacturer.
When he died in 2000, his estate was worth about $200 million.
Most of these assets were titled to a revocable living trust.
The trust beneficiaries included his widow and surviving children.
All of these beneficiaries have served as executors or trustees at some point.
When the estate administrator filed the estate tax return, the estimated estate tax was $4.4 million for the estate.
Because the largest portion of the estate was the business, the estate elected to pay the tax over 15 years.
The IRS reviewed the estate and determined the valuation on the tax return was inaccurate, and estate taxes should include another $6.7 million also elected to be paid over 15 years.
Unfortunately, the estate had been distributed in its entirety to the beneficiaries.
Because the estate no longer owned assets to pay the estate tax bill and because several payments were missed, the IRS demanded the heirs pay the tax.
The heirs chose to fight this in court.
Although a district court found the heirs were not responsible for paying taxes on the estate, the federal appeals court reversed the decision.
The appeals court made a ruling based on the tax code extending personal liability to beneficiaries and successor trustees of a revocable living trust for unpaid estate taxes.
The beneficiaries disagreed.
They stated this personal liability should only apply if they had control of the trust when the trustmaker had died or if they had received assets from the trust prior to the death of the trust maker.
The court disagreed and extended the liability to anyone who received funds from the estate property.
What does this mean?
Estate executors and trustees must be vigilant and cautious when making final asset distributions.
Prior to distributing assets, these representatives should assess the possibility of claims being brought against the estate by the IRS for income taxes or estate taxes.
To avoid the personal liability of heirs for estate taxes, the executor and trustees may choose to leave enough assets undistributed to cover possible claims until the statute of limitations passes.