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Liability for estate tax: how is it affected by passage of time?

It sounds like a bad estate planning dream. Is it really possible that the IRS would try to collect estate tax from a beneficiary more than a decade after the death of a parent who was trying to pass his estate along to his children?

The answer, unfortunately, is yes. In a recent case in Florida, a federal court held that the IRS can seek to collect to estate tax from a beneficiary even if thirteen years have passed since the transfer of assets to a beneficiary. The beneficiary had argued that the claim by the IRS should be blocked by the statute of limitations.

The reasoning in the case could affect taxpayers in Massachusetts and across the country in other estate tax cases. Though a ruling from a federal court in one state is not binding in another, it can be an influential precedent for future cases.

The Florida case involved a wealthy doctor who whose estate planning strategy included an inter vivos trust consisting mostly of stocks, valued at nearly $4.6 million. The estate also included a substantial IRA worth nearly $4 million.

Federal estate tax was supposed to be paid out of the inter vivos trust. But in the recent litigation, the IRS sought to obtain the IRA distribution from one of the beneficiaries to pay a portion of the estate tax.

Of course, the estate tax should have been paid earlier, by the fiduciaries who were managing the assets in the inter vivos trust. But this case suggests that if those administering the estate do not do this, it may subject beneficiaries to liability for estate tax.


Source: Forbes, "IRS To Collect Estate Tax From Beneficiary After More Than A Decade," Peter J Reilly, August 7, 2013

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