The heirs of an estate can be liable to pay the estate or income taxes (and perhaps other obligations) of the estate.
A recent court case involved the estate of the founder of Gulfstream, the aircraft manufacturer. The founder, Allen Paulson, died in 2000 with an estate valued at about $200 million that primarily was held in a living trust.
His widow and surviving children were beneficiaries of the estate and trust. Each of them acted at one time or another as trustee or executor.
The estate tax return was filed, and an election was made to pay the $4.4 million in taxes over 15 years. The estate was able to do pay the taxes in installments because the main asset of the estate was a business.
The IRS said the estate was worth more than stated on the estate tax return and eventually won a court case. The estate owed an additional $6.7 million in estate taxes, which it also elected to pay over 15 years.
Well before the court decision, the estate was fully distributed to the beneficiaries. The estate and trust no longer owned any assets. Several estate tax payments were missed, so the IRS sought to collect the money from the heirs.
A district court sided with the heirs, saying they weren’t responsible for the estate’s tax obligations, but a federal appeals court recently reversed.
The appeals court ruled the tax code imposes personal liability for unpaid estate taxes on successor trustees and beneficiaries of a living trust.
The beneficiaries argued they were liable only if they received property from the trust before its creator passed away or they had control of it on the date of death.
But the court said the law places liability on anyone who received or had an interest in the estate’s property either on the date the estate owner died or any time thereafter.
The heirs were personally liable for the unpaid taxes of the estate.
Trustees and estate executors should be careful before making final distributions of assets. They need to assess the potential that the IRS or state tax authorities might assess additional estate or income taxes.
Until the statute of limitations passes, they might want to retain enough assets to pay any additional taxes. Beneficiaries who receive final distributions from trusts or estates should be aware they might be personally liable for additional taxes of the trust or estate.