Minimizing a Personal Representative’s Personal Liability to Pay Taxes, Part II

In Part II of the article, the authors give advice to a personal representative (PR) on how to minimize personal liability for federal and state tax obligations. They recommend filing tax returns for the years before the decedent’s death, gathering and reviewing the decedent’s tax and financial information, and filing necessary forms with the IRS and FDOR. It is important for the PR to meet with the decedent’s accountant, if any, to discuss tax issues and determine who will prepare the tax returns. If there are concerns about unfiled tax returns, it may be necessary to request transcripts or copies of those returns from the IRS. As a PR handling an estate, it’s important to make sure any past tax returns and gift tax returns are accurate. If they’re not, you need to figure out how to fix any mistakes. You should also estimate how much money the estate needs to pay off debts and taxes, and then raise that money by selling assets if you have to. Keep the money in safe investments, like a money market account. You’ll also want to deal with any federal tax issues early on, because the IRS has a few years to assess any tax deficiencies. There are ways to shorten this time period and protect yourself from being personally liable for any taxes owed. If you’re in charge of handling someone’s money after they die, you need to let the IRS know. You can use Form 56 to do this. If you don’t, the IRS might send important notices to the wrong address, and you could be responsible for paying taxes that aren’t actually your responsibility. It’s best to file Form 56 for both the person who passed away and their estate, and be sure to send it to the right IRS office. It’s also a good idea to include a copy of the legal paperwork showing that you’re in charge. If someone is appointed as a personal representative (PR) for an estate and wants to stop being the PR, they need to fill out a Form 56 to let the IRS know. This will help protect them from any legal or financial responsibilities after they stop being the PR. They should also file the form with the IRS service centers they originally filed paperwork with, and include the name and address of the new PR. However, filing the form doesn’t automatically protect the former PR from things they were responsible for while they were the PR. They may need to take other steps to reduce their personal responsibility. If someone dies and still owes taxes, the person in charge of their estate can ask the IRS to release them from being personally responsible for the taxes. They can do this by filing a form called Form 5495. After filing the form, the IRS has nine months to tell them if there are any additional taxes owed. If they don’t hear from the IRS within nine months, or if they pay any additional taxes owed, they are no longer responsible for the taxes. However, the IRS can still collect the taxes from the estate’s assets. If the person in charge of the estate wants the IRS to assess the taxes quickly, they can also ask for a prompt assessment, but this shortens the time the IRS has to collect the taxes. If you need the IRS to assess taxes quickly, you can use Form 4810 or send a letter to the IRS Service Center where you filed your tax returns. You must state the types of taxes and tax periods you want assessed and mention Section 6501(d) of the tax code. The request must be sent separately from any tax return. If you filed joint tax returns with your spouse, a request for prompt assessment by the estate’s representative doesn’t affect your spouse’s tax liability. If you don’t request prompt assessment and taxes are assessed after the estate is distributed and the representative is no longer responsible, the IRS can still send a notice of deficiency. If you file Form 4810 separately from Form 5495, it helps the estate and its beneficiaries and provides the representative with extra protection from personal liability. If you’re the person in charge of handling someone’s property and finances after they die (like an executor of a will or a trustee of a trust), you can ask the IRS to quickly figure out how much estate tax you owe. You can also ask to be released from personal responsibility for paying that tax. If the IRS doesn’t tell you about any extra tax you owe within nine months of your request, or if you pay any extra tax they say you owe, you won’t have to use your own money to pay any more tax. But this doesn’t get the property out of owing the tax, and the IRS can still try to make the property pay the tax later. If you don’t ask for this help, the IRS can take longer to figure out how much more tax you owe and make you pay it. When someone dies, their estate might owe taxes on gifts they gave while they were alive. The person in charge of handling the estate (the PR) can ask to be released from personal responsibility for these taxes, as long as they acted in good faith and didn’t know about any unreported gifts. This means they won’t have to pay the taxes out of their own pocket. However, they still have to pay any taxes owed on gifts made within three years before the person’s death, or on gifts they were already aware of. To summarize, if you are the personal representative of an estate in Florida, you may be personally liable for the estate tax if you distribute assets to beneficiaries before paying the tax. However, you can apply to the Florida Department of Revenue for a determination of the amount of tax and to be discharged from personal liability. Once you pay the tax, you will receive a written receipt showing that you are no longer personally liable. There is also a statute of limitations that generally limits the time frame in which the Department of Revenue can assess and collect the tax from you personally. Applying for a determination of the tax amount could potentially shorten this time frame. In order to reduce personal liability for taxes owed by a deceased person or their estate, a personal representative (PR) should:

1) Understand their tax obligations as a PR
2) Quickly figure out what taxes are owed and the status of tax returns
3) Sell estate assets to pay off all taxes and debts
4) Take steps to reduce personal liability, such as filing the right forms and requesting discharge from personal liability.

By doing these things, the PR can protect themselves from being personally responsible for any taxes owed by the deceased or the estate. Fiduciaries, like executors and trustees, have to sell enough assets to have cash on hand for taxes and bills. They can’t try to time the stock market to get the best price. If the IRS needs to send a notice about taxes to someone who’s died, they can send it to the last known address. Before 2002, gift tax returns for Florida residents were filed with a different IRS office. Fiduciaries have to keep proof that they’re allowed to act for someone else. If someone who owes taxes has died, their spouse might have to pay those taxes. There’s a law that allows the government to take a piece of someone’s property if their estate owes taxes. If someone gives a gift, there’s a limit on how much they can give without paying taxes. In Florida, there’s a law that allows the government to take a piece of someone’s property if their estate owes taxes. William C. Carroll and John “Randy” Randolph are both lawyers in West Palm Beach who specialize in estate planning and trust matters. They have received additional certification in wills, trusts, estates, and tax law. They are knowledgeable and experienced in their field, and are assisted by law clerk Jennifer Gurevitz. This article is endorsed by the Real Property, Probate and Trust Law Section.

Source: https://www.floridabar.org/the-florida-bar-journal/minimizing-a-personal-representatives-personalliability-to-pay-taxes-part-ii/