Most everyone in New Jersey has heard the saying that the only two things that are guaranteed in life are death and taxes. When those two concepts meet, it can end up being a mess for the person or people who are in charge of the estate administration. When the IRS is owed money, it can even transcend death.
For instance, if the IRS has a tax lien on a retirement account, the lien doesn't disappear when the owner of the account dies. In fact, whoever inherits the account may become liable for the taxes. The same is true for stock accounts and any other asset that the IRS can file a tax lien against.
When a woman filed the estate tax return for her father's estate, it was determined that the estate owed about $2.5 million in taxes to the IRS. The estate was mostly comprised of a retirement account and some stocks. The estate and the IRS made an agreement to allow the stock market to rebound before paying the taxes, so the family could get the maximum value out of the asset.
Unfortunately, the executors didn't handle the stocks very well and were also paying themselves too much money out of the estate. Long story short, they didn't have the money to pay the taxes when due, which had also increased to nearly $3 million. Now that the estate was insolvent, the IRS attached the retirement account, which had already been distributed to the heirs.
The co-executor took the IRS to court saying that the estate owed the taxes, not her, so the IRS shouldn't have the right to the retirement account. She also argued that it had been about 10 years since the IRS filed its lien, so the lien isn't valid any longer since IRS liens are only supposed to be for three years. The court disagreed.
The court indicated that the tax lien on the estate went with the retirement account. The beneficiary inherited the account subject to the IRS's already filed tax lien. In addition, the court ruled that the tax lien was still valid 10 years later. These are things for people in New Jersey to keep in mind when handling an estate administration. The tax ramifications can be severe is not property handled.
Source: Forbes, "Worse Than Paying Taxes? Paying Someone Else's---And IRS Can Make You Do It," Robert W. Wood, Aug. 10, 2013