If you or your client are a trustee, executor of someone’s will, or an advisor managing trust assets, there’s a hidden liability you should know about. If an estate has not paid gift taxes on distributions a trust has made to beneficiaries, you may be personally liable for those taxes. That’s right. If you oversee any distribution from an estate or a trust and know that there is a Federal tax liability, you’d better make sure that liability is covered before the grantor dies.
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This means you need to stay abreast of tax laws, which means having a partnership with a great accountant might be a very good idea. Especially in light of the possibility that estate exclusion amounts may undergo radical changes by the end of the year.
There was a case where a decedent failed to pay taxes due on distributions made during his lifetime. The executor was found liable for personal property that was distributed to the beneficiaries as well as rent payments made by the estate.
A trustee or executor can be deemed liable for these taxes because, in the eyes of the IRS, they are a representative of the estate. Even charitable contributions can invoke this liability. If charitable deductions are taken from money set aside for charitable contributions, the fiduciary may be personally liable in the eyes of the IRS
because the funds may be considered out of the reach of the IRS.
If you have a family client who is a trustee or executor for his or her family, this is a conversation you may wish to have with them. Being a fiduciary is a great privilege that enables us to serve our clients at the highest level. Having their backs when it comes to their fiduciary roles is a tremendous service we can provide. You don't have to be a tax professional to bring their attention to these things.