Trustees Liable for Taxes
A District Court ruled that trustees of an estate were liable for unpaid estate taxes. In the fact pattern, the estate came about when the decedent died in 1992, leaving behind large insurance policies and a hotel. The insurance policies were immediately paid out through the estate, leaving only the hotel as the last remaining asset.
The estate managed the hotel in order to make estate tax payments to the IRS until it eventually defaulted in 2005. Needless to say, the IRS pursued collection options. One problem occurred; by the time the IRS pursued the estate, the estate was insolvent and essentially bankrupt. The IRS then brought the matter to court, in which the District Court ruled that the trustees and the Distributees were liable for the taxes.
While many people are eager to get their inheritance and spend it in a manner they see fit, it is important for both the Trustees and the Heirs to realize that they are both liable in the event the estate defaults. An early distribution, like in this case, can cause a domino effect. Here, since distributions were made early, the heirs would have been foolish to refuse the early distribution because had the estate defaulted, the IRS would have seized that money first, leaving that heir out their inheritance. In this case, the cash in the estate was distributed, taxes were being paid, then the default occurred. Word to the wise; do not make early distributions until the estate taxes have been paid in full to the IRS.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors