Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, June 18, 2014

Heirs Inheriting Headaches

InheritanceAfter her husband committed suicide in 2013, Rebecca Powell discovered that he had been running a Ponzi scheme for over a decade.  In this case, which is now unfolding in Travis County, Texas Probate Court, nearly 90 creditors allege that S. Mark Powell conned them of around $30 million.  His estate agreed that $15.4 million in death benefits from his seven life insurance policies would go to settle those claims.

While this is an exceptional case, debt and unpaid taxes can eat away at an expected inheritance and pose a risk to an executor who distributes money to heirs before discovering the debt exists.  Direct debts of the deceased are problematic in addition to liabilities that he or she may have guaranteed.  If a relative co-signs a private loan, upon the co-signer’s death, the loan could be immediately due or declared in default—even if you have been making timely payments. 

Foreign financial accounts are also in the spotlight, as they must be disclosed on a Foreign Bank Account Report (FBAR) if they total more than $10,000.  This requirement applies to owners and inheritors, and anyone with “signatory authority” over the account.  Failure to file an FBAR carries steep penalties and can be criminal if violation is willful. 

Other tax complications heirs may face are complex statutes of limitation.  If an estate has no money left to pay a tax bill, the IRS can pursue heirs individually (transferee liability) up to the amount of the inheritance. “Postmortem tax woes have ranged from intentional tax evasion; to not reporting certain assets; or, in advanced age, forgetting to file altogether.”

Unfortunately, if you have been named the executor or personal representative of an estate, you have additional risks in the form of fiduciary liability—you could be held financially responsible for distributing assets to heirs before paying certain creditors.  Executors must follow state or federal guidelines regarding the order in which to pay creditors.  Moreover, f0iduciaries that breach their duties can be liable for the full amount owed.

See Deborah Jacobs, Heirs Left With Unpaid Bills May Inherit More Grief Than Gold, Forbes, June 18, 2014.


Estate Planning - Generally, Estate Tax, Income Tax | Permalink

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