While being the executor or executrix of an estate has its financial advantages, it can carry an enormous liability as well. Suppose Aunt Gertrude dies, leaving behind a $1 million dollar estate. You, the executor, fairly distribute the estate to the beneficiaries. Most people would assume it’s all over at that point. The shocking reality is that if Gertrude had an income or gift tax liability when she died, that liability now rests squarely on your shoulders. As far as the IRS is concerned, the executor or executrix should have kept the funds in the estate until the liabilities were paid off, even if he or she knew nothing about the tax liability at the time of the distribution. The only door they will come knocking on is yours. There is hope however, in the form of three important IRS forms that help alleviate your liability as executor or executrix:
Form 56 : Notice Concerning Fiduciary Relationship
This is the first form an executor should file. It notifies the IRS that you have been appointed personal representative. This will cause the IRS to correspond directly to you concerning the decedent’s taxes, ensuring that you get the information you need.
Form 4810 : Request for Prompt Assessment of Income and Gift Tax
This form provides a solution to the dilemma you face as executor: On the one hand you want to distribute the estate in a timely fashion but on the other hand you can’t be certain the decedent didn’t owe income or gift taxes. Normally the IRS has 3 years to discover and assess a tax liability as per the Statute of Limitations. Form 4810 is a request to reduce the statute to 18 months. By waiting 18 months to distribute the estate, you are protecting yourself as well as distributing the estate in a much more timely fashion.
Form 5495 : Request for Discharge of Personal Liability for Income and Gift Tax
This form offers an even better solution to the executor’s dilemma. If you file Form 5495, you are discharged from personal liability for deficiency just 9 months from date of filing, unless the IRS claims a deficiency prior to expiration of the 9 months of filing.