Personal Liability for Estate Taxes

 

Here is a greeting card for a bad day:

… the Internal Revenue Service … determined that the … Estate of Georgia M. Spenlinhauer (estate) is liable for an estate tax deficiency of $3,984,344.”

In general, when I see estate tax numbers of this size, I presume that there are hard-to-value assets. The estate will argue that the assets are illiquid, near unmarketable, and that it would be fortunate to get a thousand or two thousand dollars for them. The IRS of course will argue that the real numbers approach the GDP of many small countries. The Court will often decide somewhere between and call it a day.

Let me see what was at play.

• Whether the estate timely elected an alternative valuation date;
• Whether the estate may exclude $200,000 pursuant to a qualified conservation easement; 
• Whether the value of (yada, yada) was $5.8 million or $3.9 million.

So far it looks like another valuation pay per view Friday night fight.

• Whether the petitioner is liable as transferee for the estate tax deficiency.

That was unexpected.

What happened here?

In February 2005, Georgia Spenlinhauer passed away at the age of ninety-five. She appointed her son as executor. After paying expenses and specific bequests, the son/executor received the residue of the estate. Probate was closed in March 2009.

The executor/son requested and received an extension for the estate tax return until May 2006.

The accountant cautioned the executor/son that he did not have expertise in estate taxation and did not prepare or file estate tax returns as part of his practice.

As a practitioner myself, I get it. The executor/son had to find another practitioner – attorney or CPA – who did estate work.

The executor/son decided not to file an estate return.

COMMENT: I believe we have pinpointed the genesis of the problem.

In 2013 the executor/son filed for bankruptcy.

Through the bankruptcy proceeding, the IRS learned that he had never filed a tax return on behalf of the estate.

In 2017 he finally filed that estate tax return.

The return was audited.

In January 2018, the IRS disagreed with the numbers. It wanted money. It issued a Notice of Deficiency.

Of course.

In March, the IRS made a jeopardy assessment against the estate.

COMMENT:  Whoa! A jeopardy assessment usually indicates that the IRS suspects concealed assets or otherwise anticipates that a taxpayer will make collection difficult. Jeopardy makes the tax, penalty, and interest immediately due and payable. The IRS is authorized to begin immediate collection, without the usual taxpayer safeguards baked into the system.

A jeopardy assessment is not routine, folks.

Did I mention that the IRS was also simultaneously pursuing the assessment against the executor/son personally? Why? Because he had drained the estate to zero with the distribution to himself.

This would not turn out well. There are certain elections - such as an alternate valuation date - that must be made on a timely-filed return. Filing 11 years late is not a timely filing. There were the usual valuation disputes (I can use municipal assessment amounts as asset values! No, you cannot!). There was even a self-cancelling promissory note that got added to the estate (to the tune of $850 grand).

COMMENT: I have not seen a self-cancelling note in a moment. The attorneys worked hard on this estate.

A brutal audit adjustment involved certain litigation fees on an estate asset. The Court decided that the litigation benefited the executor/son and not the estate itself, meaning the estate could not deduct the fees. There went a quick half million dollars in deductions.

Yep, up the asset values, disallow certain deductions. The estate was going to owe - a lot.

And penalties.

The executor/son protested the penalties. To be fair, he had to. His argument?

He had relied on his accountant.

The same accountant who told him that he did not do estate work.

You gotta be kidding, said the Court. They approved the penalties in a hot minute.

There were no assets left in the estate, of course. How was the IRS to collect?

Oh no.

Oh yes.

The executor/son had exhausted the estate by distributing assets to himself. He had transferee liability to the extent of the assets distributed.

Personal liability.

This was not the routine valuation case that I first expected. This instead was closer to a Greek tragedy.

But why? The estate was large enough to obtain creative legal advice. A reasonable person must have suspected that there would be tax reporting, which work was beyond the skill set of the family’s regular accountant. Heck, the accountant was clear that he did not practice in this area. Rather than seek out another accountant (or attorney) with that skill set, the executor/son did … nothing.

Granted, the tax was the tax, whether the return had been timely filed or not. The additional weight was the penalties and interest. What were the penalties? I saw them near the beginning ….

$524,520.

Wow.

Our case this time was Estate of Spenlinhauer v Commissioner, T.C. Memo 2025-134.

Trump Savings Accounts

 

I was reading someone somewhere complaining about Michael and Susan Dell’s recent donation of $6.25 billion. 

The bitter are always with us, unfortunately. 

But it gives us a chance to talk about the new Trump savings accounts. I see that we even have a new tax form to (possibly) bulk-up our 2025 Form 1040 return.

What are they?

The Trump accounts are a twist on an IRA.

What is the twist?

One does not need earned income to contribute to a Trump account.

Anything else?

Trump accounts cease to be Trump accounts when the beneficiary turns age 18. These things are intentionally designed for infants, children and young adults who (likely) have not started working.

How are infants and children going to know how to open this account?

They do not need to. Their parent (more precisely, the person who can claim them on a tax return) will do so for them.

How will the parent/person do this?

Two ways:

·      There is a new tax form (Form 4547 - get it?)

·      There will be a new tax portal (trumpaccounts.gov) 

 

Will this account be with the government itself?

The Treasury will create the account with a “designated financial agent.” No, I do not know what that means. I do see where one can thereafter move the account - say to Fidelity, Schwab or Vanguard (as examples) - should one wish.

How do you know one can move the account?

Because I was looking at an ad from one of the investment companies.

What about free money?

Children born between January 1, 2025, and December 31, 2028 will be eligible for a $1,000 seed contribution from the Treasury. There are requirements, such as a social security number, of course.

This period (2025 to 2028) BTW is called the “pilot program.”

What if the family makes too much money?

The “too much money” thing does not apply to the $1,000.

What is the July 4, 2026 date I have read about?

None of the government’ $1,000 seeding will occur before July 4, 2026.

What if you were born before 2025?

You still qualify to establish a Trump account, as long as you are under the age of 18 at the end of the year. You won’t get that $1,000, though.

Big deal. Why all this hullabaloo for $1,000?

One can put more than a $1,000 into the account.

The annual limit is $5 grand, and the $1 grand seed money does not count toward the $5 grand.

An employer can also put in $2.5 grand annually, but that $2.5 counts toward the overall $5 grand.

Who can contribute?

Parents of course, but also grandparents, other family members, and friends.

And Michael and Susan Dell.

Who qualifies for the Michael and Susan Dell Donation?

The $250 Dell donation reaches children age 10 and under but not eligible for the $1,000 Treasury seed contribution.

There is also an income test, although the test is by zip code and not household. The test is $150,000 or less of median income. Note that a child may qualify even if living in a wealthy household, if the median (not average) income for the zip code is $150,000 or less. The reverse is also true, of course.

What if I cannot put in $5 grand every year?

Put in what you can. Skip a year. Do not make the perfect the enemy of the possible.

Is there a tax deduction for this?

In general: no. Think of it as a Roth contribution.

I am uncertain about the employer ($2.5 grand) contribution, though. Generally, such expenses are deductible by an employer. I however expect that it will also be taxable to the employee, meaning that someone somewhere is paying tax.

Is there another way to get money into the account?

Yes. There is the usual stuff, such as rolling an account from one investment company to another.

The one that intrigues me is a contribution from a 501(c)(3) tax exempt. There is no explicit limit on these contributions, other than the overall (c)(3) requirement to benefit broad categories of beneficiaries and not just the select fortunates.

This, BTW, was the Dell contribution we referred to above: a $6.25 billion donation to contribute $250 each to 25 million children age 10 and under.

What if my parent/person fails to open an account?

Supposedly, the Treasury will open one if the child otherwise qualifies.

You think so?

Consider me cynical at the moment.

How is this thing taxed?

It is not: think IRA.

When can the child get to the money?

Figure that the child cannot until he/she turns age 18. If he/she can, something terrible has happened.

What about after age 17?

Then the Trump account gets wonky.

Supposedly this thing becomes a “regular” IRA account.

OK, but it would be a “regular” IRA account with nondeductible contributions in it. In tax lingo, we call this a “nondeductible” IRA, which has greatly lost favor since people have had access to Roth IRAs. Distributions from a Roth are (generally) tax-free. Distributions from a nondeductible are partially tax-free. There is even a tax form (Form 8606) for nondeductibles to track the numbers between taxable and nontaxable.

Inside wonk: you would not believe how difficult it can be to get (some) tax preparation software to run an IRA distribution through Form 8606 to calculate the taxable portion. I have seen more than one staff accountant give up in frustration.

I suppose Congress may further clarify/change the rules for this age-18 flip. I would like to see the flip go to full-Roth and not to this nondeductible-IRA yahtzee, but we will see.

A positive, though: since it flips to a “regular” IRA, you can make annual IRA contributions to it, if you wish. You will need earned income, of course.

Are there penalties for distributions?

You are not supposed to access IRA monies before age 59 ½. If you do, the distributions (adjusting for that wonky nondeductible IRA arithmetic) will be taxable.

In addition to income tax and unless for several permitted purposes (first house, higher education, adoption expenses and so on), there will also be a 10% penalty.

What does CTG think?

You can tell Trump accounts took water during passage of the One Big Beautiful Bill. There is stuff to both like and dislike.

Me? In general, I like.

Let’s say that you can put away $1,000 per year for 18 years. Add the government’s $1,000 seed. Assume market rate of returns, low investment fees and the money remaining untouched (remember: it is not taxed while within the IRA) for 40 to 50 years.

What an incredible gift and legacy to a grandchild.