When someone dies, their estate is controlled by a chosen or appointed executor. The duties of an executor vary greatly and extend to the payment of federal taxes on the decedent’s estate, including the taxes applied to income received after death. The law requires that anyone who inherits the duty of the executor is personally responsible for tax liabilities on a deceased person’s estate. Any improper distribution of the estate could result in problems with the IRS, huge fines or even out-of- pocket costs for the executor or the transferee who inherited the responsibility. This issue is scrutinized more thoroughly where the executors distribute assets are distributed to themselves.
Executor’s Personal Liability
The duties of an executor includes filing taxes for both the deceased and the estate. To establish that an executor has personal liability for his mistakes in distribution, the IRS must prove the following facts:
- First, the evidence must show that the executor/fiduciary actually distributed the assets of the estate.
- Secondly, the distribution rendered the estate insolvent. In other words, the executor is filing taxes for the deceased with no estate left.
- Third, all distribution occurred after the fiduciary had actual or constructive knowledge of the tax liability. Constructive knowledge means that the executor was properly notified of the tax liability, or that any basic investigation would have revealed the issue.
These duties are passed on to new executors of the estate, also known as transferees. In other words, should an executor of an estate die or be removed, the duties are passed on to someone else. The new fiduciary is responsible for any previous unpaid or underreported tax liabilities and equally liable for any improper distribution.
How to Close an Estate with the IRS
Estate tax issues may be resolved with the right advice and proper procedures set up by the IRS. Receiving an estate tax closing letter or an account transcript before distributing the estate is the most common way to avoid liability. An account transcript from the IRS, along with a complete examination of the estate is often substituted for an estate closing letter.
In cases where early partial distribution of assets is necessary, the executor of the estate should enter into an indemnification agreement with the beneficiaries. This means that the distribution of assets to beneficiaries depends on them agreeing that the executor will not be responsible for any overpayments or erroneous distributions. It may also mean that any assets improperly distributed may need to be refunded as well.
Texas inheritance laws can be confusing for new executors or transferees. Any partial distribution of assets is usually left up to the executors themselves. The advice of a professional is crucial to avoid personal liability and unnecessary risk. A Texas estate planning lawyer can help you figure out what taxes need to be filed after a death and how estate distribution can be done without conflict with the IRS.