A person serving as a fiduciary of a decedent's estate (either as a personal representative or trustee) may accrue personal liability for the decedent's tax debts. Federal law, for example, provides that a fiduciary who distributes estate funds or pays estate creditors before paying a federal tax debt of the estate may become personally liable (to the extent of the distribution or payment).1 Similarly, fiduciaries may incur personal liability for an estate's Oregon tax debts by failing to file a required tax return or failing to exercise due diligence in determining or satisfying a tax obligation.2 Thus, a fiduciary who is dealing with potential tax liabilities of the decedent or limited funds to pay taxes must proceed carefully.
The first step that a fiduciary should take is filing Form 56 (Notice Concerning Fiduciary Relationship) with the Internal Revenue Service ("IRS"). This notifies the IRS that it should send any notices regarding taxes owed by the decedent to the fiduciary rather than the decedent's last address. When the estate or trust terminates, the fiduciary should file a follow-up Form 56 to notify the IRS of termination of the fiduciary relationship. In some instances, a fiduciary may also consider filing a Form 4506 or 4506-T to request copies or transcripts of tax returns filed by the decedent.3 The remainder of this article summarizes some of the steps that a fiduciary can take to minimize his or her personal liability exposure for specific federal and Oregon taxes.
A personal representative may apply for discharge from personal liability for a decedent's income and gift tax obligations as well as federal fiduciary income taxes attributable to the period after the decedent's death.4 The application is made by filing Form 5495 (Request for Discharge From Personal Liability Under Internal Revenue Code Section 2204 or 6905) with the IRS after filing the applicable tax return. The application must be filed with the Internal Revenue center where the estate tax return is filed. If no estate tax return is required to be filed, the personal representative should file the application with the center where the decedent's final income tax return is filed.5 If the personal representative is notified within 9 months of an amount owed, the personal representative will be discharged from personal liability upon payment of that amount. If there is no notification, the personal representative will be discharged from personal liability at the end of the 9-month period.6
A trustee (or personal representative who does not file Form 5495) would retain potential personal liability until expiration of the time limitation for assessment of taxes by the IRS. Generally, that limitation period is 3 years from the date a return was filed.7 To shorten the limitation period to 18 months, fiduciaries (both personal representatives and trustees) can file Form 4810 (Request for Prompt Assessment Under Internal Revenue Code Section 6501(d)) with the IRS. This form is applicable to personal income, gift, and fiduciary income tax returns and must be filed at the IRS center where the return was filed.8
The steps a fiduciary can take to minimize personal liability for Oregon income taxes are similar to the federal procedures. A fiduciary (personal representative or trustee) may file Form 150-101-151 (Election for Final Tax Determination for Income Taxes and Application for Discharge from Personal Liability for Tax of a Decedent's Estate) with the Oregon Department of Revenue ("ODR") to seek both a final determination of income taxes and discharge from personal liability. The election for final determination applies only to personal or fiduciary income tax returns filed during the fiduciary's period of administration and it generally shortens the limitation period for ODR's assessment to 18 months.9 If the fiduciary is notified within 9 months of an amount owed, the fiduciary will be discharged from personal liability upon payment of that amount. If there is no notification, the fiduciary will be discharged from personal liability at the end of the 9-month period.10
One other tool available to personal representatives is the judgment of discharge from the probate court.11 While not binding on the IRS, such a judgment may prevent ODR from holding the personal representative personally liable for the decedent's taxes.
In cases in which federal estate taxes are owed, a personal representative may apply for determination of a decedent's federal estate tax and discharge from personal liability for such taxes.12 The application is made by written letter to the IRS center where the estate tax return is filed either before, at the same time, or after filing the return.13 The IRS will notify the personal representative of the amount of estate tax within nine months after receipt of the application (or within nine months after the estate tax return is filed, if the application was filed before the return). Upon paying the amount noticed, the personal representative is discharged from personal liability for the decedent's federal estate tax.14 If the personal representative does not receive notification of tax due within that time period, the personal representative is discharged from personal liability.15
A fiduciary (personal representative or trustee) may seek determination of a decedent's Oregon inheritance tax and discharge from personal liability for such taxes by filing a Form 150-103-005 (Request for Discharge from Personal Liability for Oregon Inheritance Tax) with ODR either before, at the same time, or after filing the decedent's Oregon inheritance tax return. ODR must notify the fiduciary of any tax due as soon as possible, but no more than 18 months after the application date. If the application was made before the return was filed, ODR must notify the fiduciary of any tax due within 18 months after the return is filed. The fiduciary is discharged from personal liability upon payment of the amount in the notice.16
Discharge from fiduciary liability, as discussed in this article, applies only to a fiduciary's personal assets. If a fiduciary remains in control of a decedent's assets or if the fiduciary is a beneficiary of the decedent's assets, taxing authorities may seek recovery of a decedent's tax debt from those assets. Discussion of this additional liability (known as "transferee liability") is beyond the scope of this article.
Fiduciaries should conduct a thorough search for potential unpaid tax liabilities of a decedent. If the decedent did not file tax returns, the fiduciary should ascertain whether the decedent had a filing requirement. In cases in which tax liabilities exist, fiduciaries should consider applying to federal and Oregon tax authorities to seek discharge from personal liability and shorten the statute of limitations for assessment of such tax liabilities. The chart below summarizes the tax forms used for such purposes, as discussed in this article.
Form | Purpose | Who Files |
---|---|---|
Federal: | ||
56 | Notifies IRS of fiduciary relationship | PR or Trustee |
4506/4506-T | Request copies of returns (Form 4506) or transcripts of returns (Form 4506-T) filed by decedent. | PR or Trustee |
5495 | Request discharge from personal liability for income, gift and estate taxes as applicable | PR |
4810 | Request prompt assessment of income and gift taxes (shortens period of limitations) | PR or Trustee |
Written Letter/5495 | Request prompt assessment of estate tax | PR |
State: | ||
150-101-151 | Discharge from personal liability for taxes owed pursuant to returns filed during fiduciary's administration; shortening of period of limitation for the same taxes | PR or Trustee |
150-103-005 | Discharge from personal liability for Oregon inheritance tax | PR or Trustee |