I regularly remind readers about the nitty gritty details of Estate Planning. Estate planning must make clear who pays debts and taxes, ensuring whether the estate will have enough cash, and appointing executors and trustees. These are not as exciting as the issues that are most discussed, such as tax reduction strategies, but these are the key issues that determine the success or failure of most plans.
A recent case shows what happens when not enough attention is paid to these details.
A man owned a farm, sold it, and incurred capital gains taxes. He died before the year ended and before paying the taxes or filing his tax return for the year. His oldest son was named executor of the estate. A younger son was a joint owner with right of survivorship with his father of the farm and inherited the rights to the farm’s checking account after it was sold. The checking account held the sale proceeds, minus mortgage repayments.
Notice that because the farm and its checking account were held as joint owners with right of survivorship, the father’s probate estate never had an interest in them and the executor never had an interest in or control over the farm assets. Title to the farm’s assets passed to the younger son as soon as the father died.
Yet, the estate and its executor are responsible for all taxes of the estate, including the father’s final income tax return and the taxes due under it. The IRS assessed the executor for the capital gains taxes from the sale of the farm. The executor went to court to challenge this, saying his brother should pay the taxes since he had the money.
The court said it had no choice but to rule for the IRS. The executor is responsible for paying the taxes on the deceased’s final income tax return. The brother who served as executor could sue the other brother for the money, but he first had to pay the IRS the money.
This is why from time to time I remind you that your will should state who is responsible for the taxes. You also need to estimate the cash flow of your estate and be sure you know the sources of the cash for taxes and other expenses. Otherwise, your estate could end up fighting with the IRS, and your family members fighting with each other. (U.S. v. Guyton, No. 3:07-cv-00273, D.C. Fla, May 7, 2009)
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