Left over debt after distributions have been made

[LdiJ]

If the executor refuses to consult lawyers and tax professionals then the executor put himself/herself at risk for being liable to the creditors. Beneficiaries can try to hold the executor accountable to pay bills, but in the end they have to realize that if creditors of the estate come after them for payment they may have to cough up some or all of what they received from the estate. Thus, beneficiaries should not be quick to spend what they get.

My client actually had consulted a lawyer and a tax professional. It was kind of a cluster F. The assets consisted of 400k in a savings account and the house (other minor assets were involved). The executor had set aside all of the tax documents that were mailed to her/her estate without opening them. When he consulted with an attorney and a tax professional he was asked what the source of the 400k was, and he said that he believed it was her savings.

The house had no tax consequences because he was living in it rather than selling it (and he had a stepped up basis anyway), and it appeared that the only tax consequence on the 400k might be tax on the interest income. She had been on disability the year before she died. However, when the envelopes containing the tax documents were opened in front of me, it was discovered that the source of the 400k was her cashing out all of her retirement accounts a few months before she died.

She was fairly young and the death was somewhat unexpected. It never occurred to anyone that she had cashed in all of her retirement funds...and the executor didn't know that she had ever had any retirement accounts.

 

[t74]

How the executor goes after the beneficiaries depends on the applicable state law, and states have varying rules for this.

As for the IRS, it can pursue the beneficiaries up to the full amount amount the beneficiary got, and it has no obligation to go after beneficiaries proportionally. It can collect the tax from the easiest beneficiaries to find and get the money from.

That is good to know. "Equitable distribution" by the executor has it as "its all mine" to date.

I assume if the IRS goes after one beneficiary that that individual can go after the others (and hopefully charge the legal fees to the executor personally). The executor plans to distribute the estate before Jan 31 when the 1099s for the deceased are required to arrive; she has dismissed the suggestion that she wait until the 2019 taxes have been filed so that any amount due or refund can be included in the estate.

 

[t74]

If the executor refuses to consult lawyers and tax professionals then the executor put himself/herself at risk for being liable to the creditors. Beneficiaries can try to hold the executor accountable to pay bills, but in the end they have to realize that if creditors of the estate come after them for payment they may have to cough up some or all of what they received from the estate. Thus, beneficiaries should not be quick to spend what they get.

There have been several questionable financial transactions that were not discovered until after death. Neither the police nor the state will investigate since the "victim" is no longer alive although based on details known they would have prior to death.

 

[t74]

My client actually had consulted a lawyer and a tax professional. It was kind of a cluster F. The assets consisted of 400k in a savings account and the house (other minor assets were involved). The executor had set aside all of the tax documents that were mailed to her/her estate without opening them. When he consulted with an attorney and a tax professional he was asked what the source of the 400k was, and he said that he believed it was her savings.

The house had no tax consequences because he was living in it rather than selling it (and he had a stepped up basis anyway), and it appeared that the only tax consequence on the 400k might be tax on the interest income. She had been on disability the year before she died. However, when the envelopes containing the tax documents were opened in front of me, it was discovered that the source of the 400k was her cashing out all of her retirement accounts a few months before she died.

She was fairly young and the death was somewhat unexpected. It never occurred to anyone that she had cashed in all of her retirement funds...and the executor didn't know that she had ever had any retirement accounts.

So there were likely early distribution and tax consequences of cashing out the retirement accounts that were significant.

It reinforces the point that each of us should have a confidant who is kept informed of estate related issues and who can be TRUSTED to use this information to advise the executor or trustee (if not also the confidant). This is demonstrated in my own family due to deaths the last two years leaving the people trying to sort out the estates searching for essential information. I don't know what you do if you find that the people you thought you could trust are self-serving and dishonest.

I did not mean to hijack OP's thread; the discussion has been quite informative.

 

[Taxing Matters]

That is good to know. "Equitable distribution" by the executor has it as "its all mine" to date.

I assume if the IRS goes after one beneficiary that that individual can go after the others (and hopefully charge the legal fees to the executor personally).

Again that's determined by the applicable state law. However, it is very unlikely that the executor would have to pay the legal fees for an action to which he or she is not a party.

 

[Taxing Matters]

My client actually had consulted a lawyer and a tax professional.

As you know, the advice given by any professional to a client is only as good as the information the client provides to the professional. The executor's failure to open the envelopes with the 1099s and to simply assume what they were was a mistake. Had she followed my basic principle of assume nothing and verify everything she would have opened them promptly, looked at the 1099s and she would have known exactly what the income was from. I ask clients specifically where they got the information they give me. If they are assuming anything I tell them that's not good enough, I tell them to actually verify it. Only when it is not possible to verify the relevant facts are you left with having to make reasonable assumptions.

 

[LdiJ]

As you know, the advice given by any professional to a client is only as good as the information the client provides to the professional. The executor's failure to open the envelopes with the 1099s and to simply assume what they were was a mistake. Had she followed my basic principle of assume nothing and verify everything she would have opened them promptly, looked at the 1099s and she would have known exactly what the income was from. I ask clients specifically where they got the information they give me. If they are assuming anything I tell them that's not good enough, I tell them to actually verify it. Only when it is not possible to verify the relevant facts are you left with having to make reasonable assumptions.

I am not sure that this particular executor would have understood even if he had opened the tax documents promptly. However, he certainly would have given better info to the tax professional he consulted if he had. Honestly, his major error was to not deal with the final tax return before doing distributions. He didn't even understand that he needed to do a final tax return for the deceased. He made the appointment with me to do an estate tax return.

 

[t74]

Again that's determined by the applicable state law. However, it is very unlikely that the executor would have to pay the legal fees for an action to which he or she is not a party.

We have hired an attorney to try to get a copy of the will without having to file to compel production of the will so it can be filed as required. So far the executor has refused to respond to even the attorney. It appears that the attorney has given the assignment to an associate who does not seem very knowledgeable on taxes on estates. The action which would happen next is to file against the executor just for the will. If the estate had been handled properly (per law) at the beginning, everything would have been easy. Executor is known to have made personal purchases not in keeping with her income (she required financial assistance from the deceased in order to pay her household expenses; this is in documents in our possession) since gaining access to the estate's funds both before (as POA) and after death. There were significant resources as recently as 12 months before DOD. Now we cannot determine if debts have been paid in full or if there are funds left as executor refuses to provide accounting and has stated she plans to use (or has already done so when specifically told she is not to do so) the other beneficiary's name while acting as executor. I cannot get a straight answer as to whether she plans to file 2019 income taxes for the deceased although there is taxable income prior to death.

At one point I felt that we would not be liable for the debts; now I am not so sure due to TaxingMatter's comments.

 

[not2cleverRed]

We have hired an attorney to try to get a copy of the will without having to file to compel production of the will so it can be filed as required. So far the executor has refused to respond to even the attorney. It appears that the attorney has given the assignment to an associate who does not seem very knowledgeable on taxes on estates. The action which would happen next is to file against the executor just for the will. If the estate had been handled properly (per law) at the beginning, everything would have been easy. Executor is known to have made personal purchases not in keeping with her income (she required financial assistance from the deceased in order to pay her household expenses; this is in documents in our possession) since gaining access to the estate's funds both before (as POA) and after death. There were significant resources as recently as 12 months before DOD. Now we cannot determine if debts have been paid in full or if there are funds left as executor refuses to provide accounting and has stated she plans to use (or has already done so when specifically told she is not to do so) the other beneficiary's name while acting as executor. I cannot get a straight answer as to whether she plans to file 2019 income taxes for the deceased although there is taxable income prior to death.

At one point I felt that we would not be liable for the debts; now I am not so sure due to TaxingMatter's comments.

My understanding from TM's posts was that the liability only occurs when assets from the estate are distributed to the beneficiaries before paying the taxes. In such a case, the beneficiary has to return what they received, or some part of it, so that the tax can be paid.

If you are named as a beneficiary of the will, but the executor acts as though "it's all mine", distributing nothing to you, and neglects to pays the estates debts (including taxes) - well, the IRS is going after the party that took the estate's assets, not you. You cannot return what you did not receive.

https://law.freeadvice.com/estate_planning/probate/beneficiaries_pay_own_money_estate_insolvent.htm

 

[LdiJ]

My understanding from TM's posts was that the liability only occurs when assets from the estate are distributed to the beneficiaries before paying the taxes. In such a case, the beneficiary has to return what they received, or some part of it, so that the tax can be paid.

If you are named as a beneficiary of the will, but the executor acts as though "it's all mine", distributing nothing to you, and neglects to pays the estates debts (including taxes) - well, the IRS is going after the party that took the estate's assets, not you. You cannot return what you did not receive.

https://law.freeadvice.com/estate_planning/probate/beneficiaries_pay_own_money_estate_insolvent.htm

I can tell you that the IRS will go after the executor FIRST. I personally have never seen the IRS go after a beneficiary who was not also the executor/administrator but I will not disagree that it is possible. I HAVE seen the IRS go after an executor/administrator without going after any beneficiaries.

 

[Taxing Matters]

I can tell you that the IRS will go after the executor FIRST. I personally have never seen the IRS go after a beneficiary who was not also the executor/administrator but I will not disagree that it is possible. I HAVE seen the IRS go after an executor/administrator without going after any beneficiaries.

In general the IRS will look to the estate personal representative (PR) first, but that's not always the case. The IRS generally is going to go after the easiest route to collect what is due. And certainly if it cannot collect from the PR it will turn to the beneficiaries. When I was a revenue officer for the IRS I went after other beneficiaries when it was apparent the PR could not pay.

 

[t74]

In general the IRS will look to the estate personal representative (PR) first, but that's not always the case. The IRS generally is going to go after the easiest route to collect what is due. And certainly if it cannot collect from the PR it will turn to the beneficiaries. When I was a revenue officer for the IRS I went after other beneficiaries when it was apparent the PR could not pay.

What can be done about a PR who has resources but refuses to respond to the IRS or to file tax returns?

 

[doucar]

We have hired an attorney to try to get a copy of the will without having to file to compel production of the will so it can be filed as required.

Then the alleged PR is not a PR until he/she is appointed by the court and has no legal standing to do anything otherwise the OP could go to the court house and get a copy.

 

[Taxing Matters]

What can be done about a PR who has resources but refuses to respond to the IRS or to file tax returns?

If the PR refuses to do the job properly then the other interested parties may file a motion to remove her as PR and get someone as PR who will do it right.

 

[LdiJ]

If the PR refuses to do the job properly then the other interested parties may file a motion to remove her as PR and get someone as PR who will do it right.

I agree but that only works if the assets are still in the estate and have not been distributed.