If a living trust is dissolved and tax liabilities are imposed afterwards, who is responsible to pay the tax?

Question

My brother (Executor), sister and myself are the beneficiaries of our mother and step-father's living trust. They are both deceased and we are dissolving the trust. If any tax liabilities or other costs are discovered after the trust proceeds are dispursed equally between the three parties, who would be responsible for the liabilities? Are all three parties held equally responsible? Can they come back only on the Executor or any one of the three parties?

Answer 1

If your brother has filed all of the necessary federal and state tax forms and he has received a closing or tax clearance letter from the IRS and the state he can distribute the assets without fear of coming back at him as the executor.
Any assets or liabilities that come up after distribution would the responsibility of each of you. That said any expenses should not come up because they would be presented after the statute of limitations has runs on the two estates. Other assets should be minor and each of you should pick up your share of the taxes.
If a significant asset is found your brother may have to reopen the probate with the court.

Answer 2

My brother (Executor), sister and myself are the beneficiaries of our mother and step-father's living trust. They are both deceased and we are dissolving the trust. If any tax liabilities or other costs are discovered after the trust proceeds are dispursed equally between the three parties, who would be responsible for the liabilities?<<<

The trust beneficiaries would be responsible.

Are all three parties held equally responsible? Can they come back only on the Executor or any one of the three parties?<<<

State may yield different answers. But I would guess jointly or severally.

You should really seek competant tax advise on this issue. Depending on the amount of the trust and where you live, you might be surprised that some favorable tax situations may exist.

And be ware, that you must consider bith income and estate taxes.

\For example, if you live in an estate tax-free state such as Florida and the trust is up to$2 million. You would have no federal or state estate taxes. In addition, if the trust has stocks and bonds, the value of the date of death, as opposed to the original cost, would be the determinate factor in calculating the gain (hopefully the case). This might prove to be a favorable income tax situation. A Living Trust is a taxable entity now that the grantors have left us.

Contact the CPA society in your state for a referral.

Good luck.

Answer 3

Judy's right. Make sure you brother has filed all of the tax returns both income and estate tax. The IRS will give him a closing letter for the estate taxes after they have gone through the return. The IRS can go after the executor and after the beneficiaries, up to the amount each beneficiary has received from the estate.

Answer 4

Technically the executor is solely responsible unless he files Forms 4810 (request for prompt audit) and Form 5495 (release from personal liability). That is what professional bank executors routinely do before closing estates.

Answer 5

You should wait to distribute the proceeds until the taxes are paid, then would be a good idea to hold some back for another year or two (an accountant could give you an idea of how much to hold back) until you're sure there won't be any more expenses.

Answer 6

You'll have to see a lawyer in your state on this one, buddy. It's too dicey. And don't see just any lawyer, see one who specializes in trusts. With trusts you'd be surprised how few regular old lawyers know what's going on with them.