When a beneficiary receives an inheritance, there is no tax on the money received, and the estate tax usually pays the estate taxes to the IRS. However, when the estate fails to pay its taxes, the IRS under I.R.C. § 6234(a)(2) can seek the taxes from the beneficiary of an inheritance, the transferee, or the trustee of a trust. This happened in the case of Anna Smith. The executors of her estate filed an estate tax, and incurred a tax of about $6.6 million on her estate that was worth about $15 million in stock from a hotel. The estate elected to pay the tax in a 10 year installment plan. Unfortunately, in 2002, the stock’s value plummeted and the hotel went bankrupt. At this time the estate already paid about $5 million of the total amount due. So, the IRS decided to go to the beneficiaries of the estate for the remainder.
In this case, a court held that the IRS could not collect the remainder from the beneficiaries regardless of whether the court considered them to be beneficiaries or transferees. Here, the court noted that the statute of limitations had run. However, there were two beneficiaries that acted as personal representatives of the state. Under federal law, a personal representative must pay the IRS first when an estate becomes insolvent, otherwise, the personal representative will become personally liable. In the Smith case, the two claim that did not know that the state would be become liable.
See Robert W. Wood, When Estates Don’t Pay Tax, IRS Chases Beneficiaries, Forbes, June 28, 2012.
