[WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

[Diane J. Kiepe]

James,

I would advise filing as the PR could become personally liable to the tax man.  There is no way I would not file in these circumstances.  The beneficiaries should celebrate the fact they got something!  Good Luck!

Under 31 USC section 3713(b), the executor is personally liable for any unpaid taxes of the decedent to the extent of the value of other debts paid by the executor over the outstanding priority claims of the United States. A debt for this purpose includes a distribution of a bequest or a portion of the residuary estate to the named beneficiaries under the decedent's will or under the law of intestate distribution. This personal liability attaches even where there may be a beneficiaries' agreement to pay the unpaid tax, or where the executor is contractually indemnified by the beneficiaries. (There are federal reimbursement statutes that may be applicable as to property subject to estate tax that passes outside of probate; see IRC sections 2204-2207.) The liability amount is based on the excess value of the transferred property over the unliquidated claim for taxes, plus penalties and interest, as of the date of the offending transfer. Interest is then added to such amount from the applicable transfer date. The statute of limitations is six years.

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From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of James W. Spencer
Sent: Friday, November 16, 2018 10:36 AM
To: WSBA Probate & Trust Listserv
Subject: [WSBAPT] Unpaid Taxes and Fiduciary Duty to Beneficiaries

Greetings Listmates:

I have a... um, theoretical... situation.

The facts are pretty simple (and likely quite common): Decedent dies in 2018. During the administration of Decedent's estate, it is discovered that Decedent hasn't filed annual income tax returns, likely for a decade or two. This is probably not really an issue, as Decedent apparently didn't work and had no W-2 income. However, in 2016, Decedent sold a home, and the proceeds are well outside of the $250,000 individual capital gains tax exemption for the sale of a primary residence. Unpaid capital gains taxes are likely in the $75,000 - $100,000 range (depending on the final determination of the tax basis in the residence). Estate accountant is advising PR that the PR should file a tax return for 2016 and pay the capital gains tax. While beneficiaries have already received some notable portion of the estate, this will (more than) eat up all remaining funds in the estate, leaving nothing else for the beneficiaries.

I would love some opinions on the nexus between the PR's fiduciary duties to the estate's beneficiaries and the PR's responsibility to properly administer the estate, including dealing with taxes. The underlying questions is whether it a breach of fiduciary duty for the PR to file a tax return that will deny the beneficiaries significant funds where there is a very real possibility that the IRS will never come after those taxes if no return is filed.

I have some opinions on this, but would really appreciate some feedback from the hivemind.

Thanks,
James

James W. Spencer
Attorney at Law
Brothers & Henderson, P.S.
2722 Eastlake Avenue East, Suite 200
Seattle, Washington 98102
Phone: (206) 324-4300 x106
Fax: (206) 324-3106
e-mail:  jamess at brothershenderson.com<mailto:jamess at brothershenderson.com>
www.brothershenderson.com<http://www.brothershenderson.com/>
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