Can The IRS Collect Unpaid Estate Tax From The Beneficiaries?

Overview

If the federal estate tax isn’t paid when due nine months after the date of the decedent’s death, is a person that receives property from the decedent’s estate personally liable for the unpaid tax? Does it matter how the person received the property - either by gift, as a surviving joint tenant or as a beneficiary of the estate?  How long does the IRS have to collect the tax?  These are all important questions, especially with respect to a farmer’s estate where present economic and financial conditions may have dissipated estate property such that the estate no longer has assets and funds with which to pay the tax, or where the assets have already been distributed.

The personal liability of estate beneficiaries for federal estate tax – that’s the topic of today’s post.

Establishing Liability

With the present level of the exemption from federal estate tax pegged at $11.4 million for deaths in 2019, it’s very unlikely that any particular estate will have to worry about federal estate tax.  But, this enhanced level of exemption (it was, in essence, doubled by the late 2017 tax legislation) is set to expire at the end of 2025 and go back to the pre-2018 level of $5 million (adjusted for inflation).  Also, it is possible that a change in the political winds come 2020, could reduce the exemption below $5 million.  That would make it far more relevant again for many farm and ranch families.

When a decedent’s estate has a federal estate tax liability, it is due nine-months after the date of death.  I.R.C. §6075(a).  A six-month extension is available.  But, if the tax is not paid when it is due, any transferee, surviving tenant or beneficiary of the estate is personally liable for the unpaid estate tax to the extent the property they received was included in the decedent’s gross estate under I.R.C. §2034 through I.R.C. §2042.  I.R.C. §6324(a)(2). The IRS also has a special lien for any unpaid gift tax.  I.R.C. §6324(b).  These liens arise automatically – no assessment, notice or demand for payment or filing is required.  The lien attaches to the gross estate and lasts for the earlier of ten years from the date of the decedent’s death or until the tax is paid. I.R.C. §6324(a).  The lien attaches to the extent of tax shown to be due by the return and of any deficiency in tax found to be due.  Treas. Reg. §301.6324-1(a)(1). 

The IRS must prove that an unpaid tax exists at the time of death and that a beneficiary received property that was included in the decedent’s gross estate at death.  I.R.C. §§ 2035-2042 list the various types of property and the rules governing how those types of property are included in the decedent’s gross estate for estate tax purposes.  Each beneficiary of estate property is personally liable for any unpaid estate tax based on the property they received from the estate and to the extent of the property’s value at the time of the decedent’s death.  I.R.C. 6324(a)(2).  See also Baptiste v. Comr., 29 F.3d 433 (8th Cir. 1994), aff’g. in part and rev’g. in part 100 T.C. 52 (1993); Baptiste v. Comr., 29 F.3d 1533 (11th Cir. 1194), aff’g., 100 T.C. 252 (1993).

Procedurally, the IRS is not required to follow the normal process for collecting a deficiency when it moves to assert the lien against a transferee of estate property.  See, e.g., United States v. Geniviva, 16 F.3d 522 (3rd Cir. 1994).  The special estate tax lien is also not subject to the filing and notice requirements of the general IRS lien of I.R.C. §6321.  I.R.C. §6323(a).  Thus, buyers, holders of security interests, other lien holders and judgment lien creditors may not be protected unless I.R.C. §6324 provides protection.  Rev. Rul. 69-23, 1969-1 CB 302.

Some property is exempt from the IRS lien.  Included in the exempt list is any part of the decedent’s gross estate that is used to pay charges against the estate or pay administrative costs.  I.R.C. §6324(a)(1).  The lien also doesn’t apply to any part of the decedent’s property that is transferred to a bona fide buyer or holder of a security interest, except that the lien attaches to any consideration received. I.R.C. §§6324(a)(2)-(3).  Also, any property that is released via certificate is exempt.  I.R.C. §6325; Treas. Reg. §301.6324-1(a)(2)(iv). 

Recent Case

The issue of liability of estate beneficiaries for unpaid estate tax came up in a recent case from South Dakota.  In United States v. Ringling, No. 4:17-cv-04006-KES, 2019 U.S. Dist. LEXIS 28146 (D. S.D. Feb. 21, 2019), the defendants were the daughters and one grandson of the decedent. The decedent died in late 1999 leaving his estate equally to his daughters and providing a specific bequest of farmland to one of the daughters as part of her co-equal share of the estate.  The will named the daughters as co-personal representatives of his estate. The estate included farmland and crops among other assets.  In 1999, the federal estate tax exemption equivalent of the unified credit was $650,000 and the top rate was 55 percent.

In 1996, the decedent entered into an agreement with his grandson to buy additional farmland. Under that agreement, the decedent bought the land and the grandson was to pay the decedent $32,000 via an installment contract. Ten days before his death in 1999, the decedent forgave the remaining balance due on the contract of $27,600.96. Also, in 1996 the decedent conveyed a warranty deed to his grandson for the family farm along with irrigation equipment and permits, retaining a life estate and the right to receive the rent income and profits from the farm during his life. After death, the farm was appraised at $345,700. Six days before death, the decedent and his grandson entered into a contract for deed of additional farmland. This contract called for the grandson to pay $90,000 to the decedent, with $10,000 to be paid before or at the time of deed execution and the balance to be paid in 20 equal installments. The grandson would not take possession until March 1, 2000. At the time of the decedent’s death in late 1999, the unpaid balance on the contract was $80,093.30.

In early 2008, the estate filed Form 706 reporting a gross estate of $834,336 and a net estate tax due of $28,939. No payment accompanied the filing. On Form 706, the estate reported assets as three pieces of farmland; co-op shares; stocks; bonds; two contracts for deed; cash; bank accounts; certificates of deposit (CDs); two life insurance policies; a corn crop that had been gifted to the grandson; the decedent’s pickup truck; a van; and other miscellaneous property.  The Form 706 reported that each of the daughters received $121,988 and that the grandson received $416,116. Later in 2008, the IRS agreed that the estate tax was $28,939, but that a late filing penalty of $6,511.27 and a failure to pay penalty of $7,234.75 should be added on. In addition, the IRS assessed interest of $23,189.78. The total amount the IRS asserted due was $65,874.80. In 2010, the estate requested an abatement of the penalties and interest. The IRS denied the request. In 2013, the IRS sent the defendants Form 10492 Notice of Federal Taxes Due with respect to the estate. Later in 2013, the IRS filed a Notice of Federal Tax Lien on the farmland.  The Notice was also sent to the estate. A hearing was not requested. Beginning in 2010, the defendants had made some payments on the estate tax liability, but as of mid-2018 over $63,000 remained due. The IRS then sued seeking payment from the daughters and the grandson personally via I.R.C. §6324(a)(2) and sought summary judgment. Only one daughter filed a response in opposition to summary judgment. 

The court noted that each of the daughters and the grandson jointly owned property with the decedent at the time of his death.  The jointly owned property also included a checking account on which one of the daughters continued to write checks after the decedent’s death.  Under I.R.C. §2040, the court noted, the decedent’s gross estate included all property that he and any other person held as joint tenants with rights of survivorship.   The two life insurance policies were included in the estate by virtue of I.R.C. §2042.  Various gifts were also included in the gross estate under I.R.C. §2035.  These included the decedent’s transfer of the corn crop and CDs to the grandson, as well as the forgiveness of the balance due on the contract for deed.  These were all included in the estate because they had been transferred within three years of death.  Also included in the decedent’s gross estate was the decedent’s retained life estate in the family farm that he had transferred to his grandson.  The retained life estate caused the farm to be included in the gross estate and made it subject to the special estate tax lien as I.R.C. §6324(a)(2) property. 

The court held that the defendants were personally liable for the unpaid federal estate tax as transferees of estate property and that they did not receive the property free and clear of estate tax liabilities. The court noted that transferee liability is not limited to those receiving a gift or bequest under a decedent’s will or via the administration of a revocable trust. Rather, liability extends to recipients of all property included in the gross estate including transferees who received lifetime gifts that are included in the gross estate under I.R.C. §2035 because they were made within three years of death; gift recipients whose gift was a discharge of indebtedness to the decedent; transferees who receive the property as surviving join tenants; property passing to remaindermen when the decedent had a life tenancy in the property; and life insurance proceeds on the life of the decedent.

The one daughter that filed a response to the IRS summary judgment motion asserted that the government was barred by the statute of limitations.  After all, she noted, the decedent died in 1999 and the IRS didn’t file suit to collect the tax until early 2017.  However, under I.R.C. §6324(a)(2), personal liability for unpaid estate tax can be asserted by the IRS ten years from the date the assessment is made against the estate.  I.R.C. §6502(a)(1).  See also United States v. Botefuhr, 309 F.3d 1263 (10th Cir. 2002).  The assessment was made in 2008 (remember the estate didn’t file Form 706 until 2008) and the IRS sued in 2017, nine years into the 10-year timeframe for doing so and 18 years after the decedent’s death.  The daughter challenging the government’s motion didn’t dispute these facts.  Now, the court’s decision finding the daughters and grandson personally liable for the unpaid estate tax comes just over 19 years after the decedent’s death.   

Conclusion

The clear lesson of the case is that federal estate tax liability just doesn’t go away if the estate doesn’t pay it.  In addition, the IRS has a lengthy timeframe to collect the tax.  Proper pre-death planning can, of course, help to either minimize or eliminate the tax.  Also, if the exemption from federal estate tax were to drop in the future, more farms, ranches and small businesses would get caught in its snare.  That was certainly the result for the South Dakota farming operation in the recent case.