It can either be a blessing or a curse to be named as the Personal Agent of a trust estate or trustee (collectively a “trustee”). One of the job’s most over-looked aspects is the fact that the U.S. Government has a “general tax binding” on all estate and trust property when a deceased leaves assessed and unpaid taxes and a “special tax binding” on the death of a deceased.Have a look at Fiduciary Income Tax Returns for more info on this.
Consequently , it is important to inform them when advising a trustee on the process of estate and trust administration that the potential for personal liability also comes with the responsibility.
On many occasions, a trustee may be placed in a position where assets that pass outside the probate estate (life insurance, jointly held property, retirement accounts, and pension plans) or trust that they have no control over constitute a substantial portion of the assets (real property, stocks, cash, etc.) subject to property taxation. Without the ability to direct or assume control of the funds, the trustee will have both a liquidity problem and a lack of means to fulfill the duty to tax the property (income or estate). For this cause alone, a trustee should be very hesitant to transfer certain funds to a recipient before any law of limitation periods expired to determine a tax shortfall for the Internal Revenue Service (“IRS”).
Income and Property Accountability Taxes:
§ 6012(b) of the Internal Revenue Code (“IRC”) holds a trustee to be responsible for filing the final income and tax returns for the deceased.
IRC § 6903(a) further establishes the responsibility of a trustee to represent the estate in all tax matters upon the filing of the requested Notice on Trust Relationship (IRS Form 56). Under IRC §6321, an IRS lien can come into existence unless the tax is not paid. Where an estate or trust has insufficient assets to pay all its debts, federal law requires that the trustee first meet any federal tax deficiencies before any other debt (31 U.S.C. § 3713 and IRC § 2002).
A trustee who fails to comply with this requirement will be held personally liable for the amount of the unpaid tax deficiency (31 U.S.C. § 3713(b)). An exception arises when an individual has acquired interest on the property that would prevail over the federal tax lien under IRC § 6323 (US v. Romani Estate, 523 U.S. 517 (1998)). As a result of the actions of the Fiduciary, where there are insufficient estate or trust assets to pay a federal tax obligation, the IRS may collect the tax obligation directly from the Fiduciary without regard to the liability of the transferor (US v. Whitney, 654 F.2d 607 (9th Cir. 1981)). If the IRS determines that a Fiduciary is personally liable for the tax deficiency, normal procedures for assessing and collecting the tax (IRC § 6212) will be required to be followed.