No money to pay final tax return HELP!!!

[Zee]

My client's wife is the executor of her Aunt's estate. The Aunt died 6/15/07. The deceased had several IRA's with designated beneficiaries. The bank disbursed those funds directly to each beneficiary. The only remaining asset is a house and furniture in Miami which is in need of numerous repairs prior to be saleable in a very down market, and the beneficiary of the house is another relative.

I prepared the decedent's final tax return. Almost $10,000 is owed to the IRS. There is no money or liquid assets remaining to pay the bill.

My client's wife was one of the IRA beneficiaries (almost $80,000). I suggested that as executor, she should pay the income tax liability borrowing money to the estate until the house is sold making sure the money is returned from the proceeds of the sale by April 15th to avoid future interest and penalties. I hope this is right.

Their Miami attorney seems to be a "screwball". He told my clients no final return was necessary since the Aunt was dead, and not to pay the amount due from personal funds because they would never get it back. He also suggested an extension. Why extend when all the information is available? An extension without paying the tax won't stop penalties and interest from being incurred. I suppose if the tax isn't paid, the IRS would eventually place a lien on the property? No? I just want to stop the bleeding.

Please...can someone provide some input? This can't be a "unique" situation.

[erchess]

Limited knowledge here

I have prepared final 1040s for individuals too poor to need estate returns but I have never filed an estate return or been the executor of an estate. However, my impression is that the executor of an estate is responsible for paying the taxes involved and in this situation will have to pay them out of her funds. I am not a lawyer but it seems to me that she may have a cause of action against the bank if it disbursed funds without her consent. If she did consent, even by ignoring a letter from the bank she deserves her fate. The tax burden should have been divided among the beneficiaries according to their percentages of the take. It was the responsibility of the executor to make that happen. The person who is getting the house is responsible for paying at most his or her pro rata share of the tax. If this is a reasonably functional family perhaps the people who have received their shares will voluntarily help with the tax bill but I do not believe that they can be compelled to do so. The executor can and will be compelled to pay.

[Zee]

I have prepared final 1040s for individuals too poor to need estate returns but I have never filed an estate return or been the executor of an estate. However, my impression is that the executor of an estate is responsible for paying the taxes involved and in this situation will have to pay them out of her funds. I am not a lawyer but it seems to me that she may have a cause of action against the bank if it disbursed funds without her consent. If she did consent, even by ignoring a letter from the bank she deserves her fate. The tax burden should have been divided among the beneficiaries according to their percentages of the take. It was the responsibility of the executor to make that happen. The person who is getting the house is responsible for paying at most his or her pro rata share of the tax. If this is a reasonably functional family perhaps the people who have received their shares will voluntarily help with the tax bill but I do not believe that they can be compelled to do so. The executor can and will be compelled to pay.

I agree. But, can the executor prevent banks from disbursing IRA's to a designated beneficiary? It appears that all they needed to show was a death certificate (unless the story I'm hearing isn't factual). I doubt very much they will be able to recover on a pro-rata basis from each beneficiary at this point. They're all in Portugal. Apparently, they've been using a lawyer since the beginning. Frankly, I think he breached his responsibility if he didn't provide guidance prior to these disbursements. He apparently told them the return should be filed as part of the 1041. In my opinion, a final Form 1040 tax return needs to be filed for income/expenses until the date of death in the SSN of the decedent. The 1041 should pick up any income and related expenses after the date of death.

[JohnH]

I agree with the lawyer about the extension (no opinion about aything else he said)

I think you should recommend that they file an extension & buy some time to get it all sorted out. The extension will relieve them of the monthly 5% FTF penalty, which is its purpose. This leaves only the interest and FTP penalty combined of approx 1.25% per month (plus maybe some estimated tax penalty if applicable) - a paltry amount compared to having them pile one mistake on top of another at this point.

Get everybody on the same page before rushing into filing a return. If I were the executor, I'd jump at the opportunity to pay $125 or so for a month or two rather than part with $10K right now that I may not be able to get back.

[Zee]

I agree with the lawyer about the extension (no opinion about aything else he said)


John H - Thanks for the reply. I like to hear all sides of the situation.
I think you should recommend that they file an extension & buy some time to get it all sorted out. The extension will relieve them of the monthly 5% FTF penalty, which is its purpose. This leaves only the interest and FTP penalty combined of approx 1.25% per month (plus maybe some estimated tax penalty if applicable) - a paltry amount compared to having them pile one mistake on top of another at this point.

Get everybody on the same page before rushing into filing a return. If I were the executor, I'd jump at the opportunity to pay $125 or so for a month or two rather than part with $10K right now that I may not be able to get back.

John H - Thanks for the reply. I like to hear all sides of the situation and your suggestion does have merit.

But, the lawyer doesn't think a final return is necessary at all. The fact is the lawyer screwed up big time, and should have offered proper advice to the executor, and he should be responsible for contacting each beneficiary and advising them of their liability to the estate.

I doubt that an extension would help much, and think a $125 month penalty wouldn't sit with well with anyone and possiblity even create more problems. There are too many beneficiaries involved (about 6), all in Portugal.

The deceased withdrew almost $100,000 of 1099R income just prior to her death. My client has no idea what happened to that money. Obviously, someone benefited.

[JohnH]

In your original post you said the lawyer told them not to file, but he also suggested an extension. That's why I said I agreed with that part of his recommendation.

If you tell them up front there will be about $125 or so of P&I, but the extension will avoid a $500 per month penalty, they should have enough sense to understand that. And if you rush into filing when there are still so many unknowns, you may make a mistake that could cost you more than all the penalties combined. WHo cares if they aren't happy about the cost of an extension? They didn't care enough to get their facts together early enough in the tax season to settle the unknowns - leisure, laziness, & indecision has a price associated with it.

Put the monkey on their back - advise them of the cost for filing the extension vs the alternative of putting up $10K of their own money and see what they do. It's really their decision anyhow - not yours. Maybe they can't figure this out and will be foolish enough to pay the $10K, but at least you've given them reasonable options. Wouldn't an extension at least give you & them time to write a few letters or emails back & forth to Portugal explainign the situation and the opportunity to see who in the family has any character and will do the right thing?

BTW, if I'm ever placed in charge of the IRS, I'm ordering that 40% of all audits will be done on returns filed between Apr 13 -15. I'll bet those returns are the most prone to errors and would yield the most revenue simply because they're prepared in haste, under deadline pressure, and without the benefit of thoughtful reflection.

[Zee]

JohnH-

Yes, I'm aware I posted the lawyer suggested an extension and I understand your point that it might provide some breathing space at a cost of $125 month. But, what will it change if there is no agreement, other than adding cost? Even if the beneficiaries argree to pay their pro/rata portions, the reporting won't change. The final 1040 will be exactly the same, no? The fact is if they can't agree, my client as executor is responsible. I don't think that can be avoided. In fact, they might as well file without remitting the taxes due. It would have the same result as the extension.

I don't like delaying the resolution of issues. I believe a timely filing will bring the issue to the table and force any resolution quicker at less cost, and it doesn't increase my clients risk. If they can't find a resolution, they're responsible. It's that simple.

[JohnH]

Ok..........

[veritas]

I'm not an attorney

But is it not the responsibility of the personal representative to file all tax returns as necessary? File an extension.

And is it not also the responsibility to make sure all debts are paid? I would look at the laws of the state where the decedent resided.

[Zee]

Ok..........

A brief follow-up. After our discussion, I decided to call the taxpayer and offer him the alternative of an extension. He would prefer to submit the return on a timely basis and pay the tax. After further discussion, it appears his family (all in Brazil not Portugal) are very friendly and it won't be a problem recovering their share of the tax bill.

[JohnH]

Glad you got it resolved.
All's well that ends well.

[Burke]

Just an addendum, the executor is responsible for paying the legal obligations of the estate and its taxes, IF IT HAS ASSETS. There are other procedures for bankrupt estates. The IRA's passed outside the estate if they had named beneficiaries and do not come under the executor's authority at all. The post is confusing about the house. It is stated that it is an asset, yet a relative is the beneficiary. It cannot belong to both. If it is an asset of the estate, it can be sold and proceeds used to pay expenses, or a mortgage can be obtained by the executor to pay expenses until it is sold. If the relative's name was on the house as owner before the TP's death, then it is not an asset of the estate. The executor cannot be compelled to pay taxes from personal funds for the estate if there are no estate assets to pay them from, unless monies were distributed improperly.

[Zee]

Just an addendum, the executor is responsible for paying the legal obligations of the estate and its taxes, IF IT HAS ASSETS. There are other procedures for bankrupt estates. The IRA's passed outside the estate if they had named beneficiaries and do not come under the executor's authority at all. The post is confusing about the house. It is stated that it is an asset, yet a relative is the beneficiary. It cannot belong to both. If it is an asset of the estate, it can be sold and proceeds used to pay expenses, or a mortgage can be obtained by the executor to pay expenses until it is sold. If the relative's name was on the house as owner before the TP's death, then it is not an asset of the estate. The executor cannot be compelled to pay taxes from personal funds for the estate if there are no estate assets to pay them from, unless monies were distributed improperly.

Your description makes sense. I was told the IRA were beneficiary IRA's. My understanding is the home is in probate, but one of the relatives is to receive the home. I'm guessing the relative was designated in the will to receive the home, and it wasn't titled to them before death, but don't know for sure. In that case, I would expect the home is an asset of the estate, right?

It also seem reasonable that the executor of an estate shouldn't be responsible for unpaid taxes if there were no assets and monies were distributed properly.

However, I was told the home was in probate. Doesn't that make the home an estate asset? If so, the home is a very illiquid asset. It's in bad need of repair and the market conditions are terrible for a sale in Miami. As such, when no liquid assets are available to pay the income tax of the decedent what happens? Is this a situation where the interest and penalties can be avoided until the home sells? If the answer is yes, should the return be submitted without payment with a letter of explanation? Or, what? I guess your suggesting a mortgage to pay the taxes until the home is sold. In this situation, do you think an extension is preferable to submitting the return without payment with an explanation attached? Last, assuming the home was titled prior to death to the other relative, what is done with the final tax return? Filed with an explanation of the bankrupt estate?

Thanks very much for the input. Please try to answer this post quickly, as I need to call the client back today if there's another alternative.

[glgillis]

I read this thread late last night and am glad Burke posted that excellent reply because it straightens out some misconceptions in earlier replies. It all hinges on whether the title was passed before death. If it was not, then it is an estate asset and can be used to satisfy debts, regardless of who it is willed to. That is how families, without good planning, lose family farms and businesses. The assets have to be sold to satisfy taxes and debts, regardless of what a will says.

My personal preference would be to file the return, without payment, with an explanation that the tax will be paid when, and if, funds become available. I have had to do this several times, particularly when someone dies in March/early April and the executor does not have access to funds before April 15.

As to the executor paying the tax, and getting reimbursed, that is an honorable thing to do, but I have had a number of attorneys say NEVER pay estate expenses personally unless you are the sole heir and it is a liquid estate! The others are under no legal obligation to repay and the definition of "gets along well" can change quickly when it comes to writing checks.

[Zee]

House is asset

Thanks to Burke and GLGillis.

I met with my client again this morning. The house was not titled to the recipient designated in the will prior to death. You indicated "If it was not, then it is an estate asset and can be used to satisfy debts, regardless of who it is willed to". Shouldn't the "can be used" be "must be used"?

I suggested we send in the return without payment (or an extension), attaching an explanation that the house is in probate and in a depressed housing market might not be sold for some time, etc. It didn't make sense to me that IRA's with a designated beneficiary would be liable for debts or expenses of the estate.

The client preferred to make payment with the tax return to avoid further IRS scrutiny of the estate. Apparently, they have a very congenial relationship will all the relatives that received monies and believe they will contribute their fair share of the taxes due. I also learned they paid the funeral expenses out of their own pocket. The recipient of the house in the will is almost 90 years old, and the client's wife is the primary beneficiary of her will.

At any rate, I've done all I can. I do think your suggestion is the best.

This was a good learning experience for me. I think I'm going to spend most of continuing education time looking into estate taxation & planning. It could provide a good "niche" here in Florida, if I can get it right.

Thanks again for everyone's help!!