Some of the tasks of the estate executor are to locate all of the estate’s assets and to ensure all relevant taxes are paid before making any distributions to estate beneficiaries. Under US laws, if the Estate tax is not properly paid by the executor, the executor can have personal liability for the tax. More below on this scary thought! Although not discussed in this post, readers should be aware that an executor can also be held personally liable for a decedent’s unpaid income and gift taxes if the executor had knowledge of the debt and distributed the estate without first paying these taxes.
US Estate Tax
The US Estate tax is a “transfer tax” and not an “income” tax. This transfer tax is asserted against the estate of the individual who passed away, not against the recipient of the inheritance or bequest.
With regard to non-US citizens who are not “domiciled” in the US, only assets that are considered to be located within the US are subject to US estate tax. Many complicated rules apply to the analysis regarding the location (or “situs”) of an asset. An executor will need help in understanding which assets are subject to US Estate tax. Given the ever-present threat of personal liability for getting it wrong, the executor should make sure to get proper US tax assistance.
“Location” or “Situs” of Assets
By way of broad overview, any tangible personal property or any real property located in the US is considered to have a US-situs. Stock in any US corporation is deemed to have a US location regardless of where the share certificates may be held (while stock in a non-US company is treated as having a location outside the US regardless of where certificates may be located).
US bank deposits are generally given special treatment and deemed to be located outside the US so that they escape US Estate taxation. However, cash held in a US brokerage account is not such a “deposit” and is deemed to be located in the US. This often comes as a rude surprise to many non-US persons with US brokerage accounts. I find that individuals do not understand that US stocks and cash in US brokerage accounts are not exempt from US estate tax. US bank deposits are exempt and it seems that people easily confuse the concepts and rules.
Debts of US persons generally have a US situs. They can be treated as having a non-US situs, however, if the debt can be treated as a so-called “portfolio debt”.
Forms, Forms and More Forms
Estates of non-US persons must file a US estate tax return on IRS Form 706-NA if the taxable estate which is comprised of US-situs assets exceeds USD 60,000. This is a very small sum and any foreigner owning US real estate will likely exceed that value very easily! Estate tax returns are to be filed within 9 months of death but one can request a 6 month extension within the first 9 months. The extension request is made by filing Form 4768. Penalties and interest can be applied to late filed returns unless one can demonstrate “reasonable cause”.
Estates of non-US persons owning US assets are also affected by fairly new “basis reporting” provisions using Form 8971. The basis reporting rules apply if the estate tax return is filed after July 2015. Filing of Form 8971with the IRS and providing a Schedule A to any beneficiary (whether or not a US person) receiving a US-situs asset is now a task for estate executors to add to their list. Executors file Form 8971 to report the final estate tax value of such US-situs property distributed or to be distributed from the non-US decedent’s estate. This form, along with a copy of every Schedule A, is used to report values of the assets to the US Internal Revenue Service (IRS). One Schedule A is provided to each beneficiary receiving property from an estate. The beneficiary must keep careful track of the basis records so he will know what to do later when he disposes of the asset and must report the capital gain on a US tax return.
Executor’s Personal Liability
If you are an executor, it is not a good idea to make mistakes or to in any way ignore the US estate tax rules. The IRS may collect any unpaid estate tax from the executor and from any person receiving a distribution of the decedent’s property.
The Federal Claims Priority Act (FCPA) establishes the personal liability of the executor of an estate, to pay any claim owed to the government, such as unpaid taxes of a decedent. Broadly speaking, the FCPA provides the United States with a direct cause of action against the estate executor if he makes payments to other creditors or beneficiaries of an insolvent estate over the tax owed to the US government. Personal liability attaches in the absence of any bad intent on the part of the executor. Personal liability can result even if the executor is merely making a distribution from the estate of a bequest or a portion of the residuary estate to beneficiaries who have been named in the decedent’s will, or to those who are inheriting under intestacy laws.
The executor will have personal liability for unpaid estate tax if 1) the estate is insolvent or is rendered insolvent at the date of transfer, and 2) the executor had knowledge (whether actual or constructive) of the outstanding tax liability to the IRS. It is important to note that the tax liability need not have been assessed by the IRS at the time. For example, if an accountant assisting with the estate tells the executor that there is or may be an assessment for unpaid taxes against the decedent before the relevant distribution is made, the knowledge criterion is satisfied. Actual notice is not required, so long as the executor had sufficient notice of the claim that would cause a reasonably prudent person to inquire further.
An executor can apply to the IRS for discharge from personal liability of the decedent’s Income, Gift, and Estate Taxes by completing Form 5495. By filing this form, the executor is automatically discharged from personal liability if within 9 months of filing the IRS does not notify the executor of an unpaid income, gift, or estate tax liability.
An executor can shield himself from future liabilities by notifying the IRS when his duties as administrator of the estate have been completed. This is done by filing Form 56 (the same form that is used to inform the IRS that a fiduciary relationship has been created).
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