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It's The Law: Personal Representative Can Have Tax Liability

Question: My Uncle is doing estate planing with his attorney. He asked me if I would be the personal representative of his estate. My wife is worried that I will end up having personal liability for his taxes. Is that possible?

Answer: The bad news is that Title 31, Section 3713 of the United States Code makes a personal representative of an estate or a trustee of a trust liable for payment of any claim of the United States Government. The good news is that liability is limited to the extent the representative has paid any part of a debt of the decedent before paying the government. It would seem simple enough to merely not pay anyone until you are sure the taxes have been paid. Sadly, life is rarely that simple.

Beneficiaries of the estate will be clamoring for distribution. Other creditors of the decedent will want to be paid and may even file suit to force payment. These actions will interfere with best laid plans to wait for distribution until the decedent’s final income tax return has been filed (deadline same as for living individuals) and any estate tax return has been filed (deadline 9 months from date of death, with possibility of 6 month extension).

Tax matters might not be settled by filing a return and paying the tax as established by the return (and the tax paid). The IRS can audit and demand more taxes. Although the personal representative’s tax return will probably be squeaky clean, what if the decedent had been more creative with deductions or forgot about income when filing previous year’s returns?

There are a number of ways to eliminate liability. Timely filing of returns and notices with the IRS is the first part of protection. Filing starts with IRS Form 56, which is a form notifying the IRS that you have been appointed personal representative. After filing this notice, the IRS is supposed to correspond with you concerning the decedent’s taxes. The notice ensures you get that information. You also file Form 56 when you are discharged and, the form itself confirms that when you are discharged you are relieved of any further liability as a fiduciary.

The second form that should be filed is IRS Form 4810. That form is a request for prompt assessment of income and gift taxes. You can generally rely upon the IRS response to that request and may want to defer any disbursement from the estate until you get that response.

You will also want to file IRS Form 5495, which is request for discharge from personal liability for income tax, gift tax, or estate tax. The IRS normally has three years after these returns are filed to assess tax and demand payment of any deficiency. If you file Form 5495, you are discharged from personal liability for deficiency 9 months from date of filing, unless the IRS claims a deficiency prior to expiration of the 9 months of filing Form 5495.

You will still probably have to pay bills and expenses or operating the estate and may want to resolve creditor claims and other matters before you get releases from the IRS. Fortunately, there is more good news. Both Florida and Federal laws establish priorities for payment of expenses of probate and debts of a decedent. If you follow the Florida law, you will be in good shape as the Federal law is actually more liberal.

Under those laws, a personal representative may pay costs and expenses of probate, a personal representative fee, attorney fees and funeral expenses ahead of taxes. You can also pay what is termed as family allowance, which by Florida law is provided for the surviving spouse and descendants of a decedent domiciled in Florida. The family allowance is discretionary with the Court and may not exceed a total of $18,000.00.

The probate process can be a technical minefield for the unweary. For that reason, you should retain an experienced attorney as soon as you start down the probate road. An experienced attorney will be sure you timely file the appropriate forms, guide you through administration and protect you from liability in administration of your Uncle’s estate.

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