10-Year Statute of Limitations Applies to Government’s State Law Claim as Third Party Beneficiary Instead of State’s 6-Year Statute of Limitations

The estate’s estate federal estate tax liability was approximately $6.6 million, $4 million of which was paid to the IRS at the time the estate tax return was filed.  Because a closely held business accounted for more than 35% of the Decedent’s adjusted gross estate, the estate made a valid election pursuant to Code § 6166(a) to defer payment of the federal estate tax liability with ten annual installments.

Although the estate tax remained unpaid, the trustees of the trust holding the estate’s assets distributed stock from the closely held business to the trust’s beneficiaries.  The trust’s beneficiaries signed a Distribution Agreement in which they agreed that they would be responsible for the remaining estate tax liability.  The estate, and the trust beneficiaries, failed to pay approximately $1.5 million in federal estate taxes.

The government filed a complaint naming the trust’s beneficiaries as defendants and sought to recover the remaining estate tax liability.  The trust’s beneficiaries argued that the government’s claim as a third-party beneficiary of the Distribution Agreement was untimely because it was not filed within the six-year state statute of limitations applicable to contract claims.  The Court held, however, that the ten-year statute of limitations set out in Code § 6502(a) was applicable to the government’s third-party beneficiary claim.  The Court supported its holding using United States v. Somerlin, 310 U.S. 414 (1940), which provided that the “United States is not bound by state statutes of limitation […] in enforcing its rights […] When the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement.”

U.S. v. Johnson, No. 17-4083, 17-4093 & 18-4026 (U.S. Court of App. Mar. 29, 2019).

LISI 60-Second Planner: Johnson — Government’s Estate Tax Collection Claim is Timely

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Devisees Personally Liable for Unpaid Estate Taxes

If an imposed federal estate tax is not paid when due, a transferee, surviving tenant, or a beneficiary, who receives, or has on the date of the decedent’s death, property included in the decendent’s gross estate under sections 2034 through 2042, is personally liable for the estate tax.  In order to establish liability under § 6324(a)(2), the government must prove: (1) the estate tax was not paid when due and (2) the transferee, surviving tenant, or beneficiary received property included in the gross estate under §§ 2034 to 2042.

Estate tax returns must be filed within 9 months of the decedent’s death.  Here, the estate tax return was not filed until eight years after the decedent’s date of death.

Further, it is undisputed that the defendants were transferees, surviving tenants, or beneficiaries who had property on the date of the decedent’s death or received property as a result of the decedent’s death.

Here, the Court found that the devisees were liable for unpaid federal estate tax, penalties, and interest under 26 USC § 6324(a)(2).  It is undisputed that the estate’s federal estate tax was not paid when due and each defendant received property includible in the gross estate.

United States v. Ringling, No. 4:17-CV-04006-KES (D.S.D. Feb. 21, 2019).

Case: Devisees Personally Liable for Unpaid Estate Taxes (D.S.D.) (IRC §6324), Bloomberg Law Daily Tax Report. Feb. 25, 2019.

Bernie Sanders Proposes Extreme Estate Tax on Billionaires

According to a statement, Sanders’s proposed plan would set a 45% tax on the value of estates between $3.5 million and $10 million, with the rate increasing so that amounts greater than $1 billion would be taxed at a rate of 77%.  Meanwhile, some Senate Republicans seek to repeal the estate tax entirely.

The current approximately $11 million estate and gift tax exemption per person has risen from $650,000 per person 20 years ago.\

Davis, Laura and Arit John. Sanders Proposes Estate Tax of Up to 77 Percent for Billionaires. Bloomberg Law. Feb. 1, 2019

House GOP Tax Cuts and Job Act Repeals Estate and GST Taxes; No Change to Retirement Accounts

The Act repeals both the estate and GST taxes for decedents dying and generation skipping transfers occurring after December 31, 2023.  In the meantime, beginning January 1, 2018, the basic exclusion amount will be increased to $10 million, adjusted for inflation.

The Act keeps the Internal Revenue Code § 1014 step up in basis at death intact.

Further, all individual beneficiaries of IRAs, not just surviving spouses, will still have the ability to stretch the payout of inherited IRAs over their life expectancies.

Note that the Act will evolve before becoming final, if ever.  Stay tuned for future changes.

For a more detailed briefing, read the WealthCounsel Insight Brief here.

How Trump’s Tax Proposal Affects You

  1. Both the estate and generation skipping taxes get the boot.
  2. What about stepped up basis under I.R.C. § 1014?  I.R.C. § 1014 provides that, for most property, a decedent’s beneficiaries receive a step up in basis to fair market value at the decedent’s date of death.  Thus far, the proposed changes don’t affect I.R.C. §1014.
  3. Regarding retirement, the proposal states, “Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”  The proposal does not address questions relating to the possible elimination of stretch inherited IRAs.

Read more in Bloomberg Law Tax Management Weekly Report, October 2, 2017, “Big Six Tax Framework: 5 Policy Decisions.” (subscription required)