Beneficiary Responsibility for Estate Tax Liability
The role of personal representative of an estate includes numerous responsibilities, which include inventorying assets of the estate, identifying liabilities, and paying debts. Generally, the personal representative will make distributions to beneficiaries in accordance with their interest after the satisfaction of all obligations of an estate. However, it is not uncommon for a beneficiary to directly receive assets outside of the probate, such as in the case when jointly titled on a financial account or a parcel of real estate. The decedent’s interest in the assets passes directly to the surviving joint account holder. In those cases, the personal representative did not have possession or control over the assets because it bypassed the probate estate. However, those assets may still be included in the decedent’s gross estate for estate tax purposes.
Included in the responsibilities of a personal representative of an estate is the liability for the payment of federal estate taxes.1 This liability is not limited to assets of the probate estate. It extends to estate taxes attributable to those assets not in the possession or control of the personal representative, such as when a beneficiary or transferee directly receives assets included in the decedent’s gross estate.
In the absence of an appointment of a personal representative to an estate, any person in actual or constructive possession of any property of the decedent is required to pay the entire tax to the extent of the value of the property in the individual’s possession.2
If a personal representative fails to pay estate tax when due, the Internal Revenue Service (IRS) has the option of also proceeding against transferees under a special lien statute for the collection of any unpaid taxes with respect to property included in the gross estate.3 Under Internal Revenue Code (IRC) section 6324, unless estate tax due is paid, a lien for the tax is imposed on the assets of the decedent’s gross estate. The term “transferee” includes donees, heirs, devisees, and distributees, as well as anyone who is personally liable for estate tax under the terms of the special estate and gift tax lien statute.4 By its definition, the term “transferee” includes beneficiaries of an estate. The transferee of property is liable for payment of the estate and gift tax to the extent of the value, at the time of the decedent’s death, of the property received.5 The statute of limitations is 10 years from the date of the decedent’s death. However, if no gift tax return for the applicable year was filed, then the statute of limitations will not start running for that particular gift.
The South Dakota United States district court case in U.S. v. Ringling6 is an example of the IRS using IRC section 6324 to individually pursue beneficiaries for the liability of an estate’s unpaid federal estate tax, penalties, and interest. In Ringling, the court granted the United States’ motion for summary judgment, finding that the estate’s beneficiaries were personally liable for the estate’s tax obligations under IRC section 6324(a)(2) as transferees or beneficiaries of property included in an estate.
Below is a summary of the Ringling facts. The estate at issue in the case was of Harold Arshem. His wife was predeceased, and Mr. Arshem died with a will in 1999. The will bequeathed several properties to his descendants. Prior to Mr. Arshem’s death, he jointly titled various assets with his descendants, engaged in multiple real estate and farm equipment transactions with his grandson, and arranged for certain life insurance policies to be paid directly to descendants.
The estate was probated in South Dakota over several years. A dispute involved the valuation of property. Eventually, a special administrator appointed by the circuit court established fair market values. The estate tax return was filed several years late reflecting net estate tax due of $28,939.00, but no payment was included. The IRS assessed estate tax, penalties, and interest totaling $65,874.80. Over several years the IRS attempted unsuccessfully to collect the assessment from Mr. Arshem’s estate. Over time the beneficiaries made some modest payments. Eventually the IRS sought to collect the outstanding liabilities of Mr. Arshem’s estate by naming the defendants as beneficiaries and transferees of the assets in a court action. The United States cited IRC section 6324(a)(2) as the underlying authority for each defendant’s liability. In order to meet the standard to establish liability under IRC section 6324(a), the government must prove: (1) the estate tax was not paid when due, and (2) the transferee, surviving tenant, or beneficiary received property in the gross estate under IRC sections 2034 to 2042.
The district court granted the United States’ motion for summary judgment. The court found no genuine issue of fact on the issue of personal liability of the defendants for the estate’s tax liability. The court determined that the estate tax liability was not paid when due and then described in detail how each defendant received property includible in Mr. Arshem’s estate. Finding that each defendant lacked an affirmative defense, the court ordered the United States to file a proposed order quantifying the total outstanding amount due, including penalties and interest, divided in proportion to the property each defendant received from the gross estate.
The Ringling case is an example of how the IRS can hold beneficiaries of an estate liable when the personal representative does not pay an estate’s tax obligations. In Ringling, the reach of the liability extended for several years after the decedent’s death and filing of the estate tax return. The failure of the personal representatives to timely file the estate tax return and pay the estate tax resulted in a collective liability to the beneficiaries that exceeded the original net tax due. A beneficiary’s direct receipt of an estate’s assets, such as a payment from a life insurance company or joint titling on an account, does not release the beneficiary from a proportional share of the estate tax obligation when the personal representative fails to pay the tax.
The purpose of this article is merely to provide general information and may not be construed as legal advice.
1I.R.C. § 2002; Treas. Reg. § 20.2002-1.
2I.R.C. § 2203; Treas. Reg. § 20.2002-1.
3I.R.C. § 6324; Treas. Reg. § 301.6324-1. There are other statutes that impose transferee liability. This article will just focus on the application of IRC section 6324.
4I.R.C. § 6901(h).
5Treas. Reg. § 301.6324-1.
6123 AFTR 2019-814 (Feb. 21, 2019).
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