A recent case illustrates how beneficiaries and recipients of property from a decedent do not receive the property free and clear from estate tax liabilities. If estate taxes are not paid, the IRS can seek collection of the taxes from such beneficiaries and recipients as transferees under Code §6324(a)(2). And it may be a long, long time before the IRS ‘comes a knocking.’
The case illustrates to us that:
a. Transferee liability is not limited to those who receive a gift or bequest pursuant to a last will or disposition of property being administered under a revocable trust. Instead, it extends to recipients of all property included in the gross estate including:
1. Transferees who received lifetime gifts that are included in the gross estate under Section 2035 because made within 3 years of death;
2. Gift recipients whose gift was a discharge of indebtedness to the decedent;
3. Transferees who receive the property as surviving joint tenants;
4. Property passing to remaindermen when the decedent had a life tenancy in the property;
5. Life insurance proceeds on the life of the decedent;
b. The IRS may take a long time before asserting transferee liability. The statute of limitations is 10 years from the date the assessment of tax is made against the estate. Here, the IRS filed suit in the 9th year of that 10 year period (and 19 years after the date of death).
c. The IRS will pursue transferee liability even when the estate tax liability is not that significant. Here, the unpaid tax was $28,939 (but with interest and penalties the amount sought was $65,874.80.
There are numerous Code provisions and procedures for relieving a fiduciary from liability for such taxes - but this is not the case for beneficiaries. Conservative recipients of property may not want to spend their inheritances or received property until they know the 3 year assessment period has expired without an assessment.
U.S. v. Ringling, 123 AFTR2d 2019-XXXX (DC SD 2/21/19)
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