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Deceased taxpayer owes, now what?


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Taxpayer died suddenly after 'estate planning' to qualify for Medicaid.  She sold all P&G stock and incurred a hefty CG bill.  Daughter is executor.  I filed the return and daughter paid about 1/3 with the filing but there are insufficient funds left for the balance of $2150.  IRS offers OIC option on Notice CP14, installment agreement or delay collection.

Of course daughter and brothers benefited from the stock sale proceeds but had to repay some of the Medicaid funds used for care.  They are very reluctantly willing to pay the balance due.  Any idea what an OIC costs to process?  I've never had any clients in that position.  They think it will save a lot of money, I'm not so sure.

As executor, the daughter does have the obligation to pay from estate funds but that remains only about $1000 and the attorney has yet to present his bill, 5 months later.  Ideas?  And thanks!

 

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1 hour ago, Lion EA said:

Where'd all the money go? Follow the money. Did the "kids" take the money before paying all the bills? If they won't pay the IRS, do you really think they'll pay you? Huge retainer or disengage!

Exactly, where did the proceeds from the sale of the stock go?

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Thanks for the replies.  I have been paid for the deceased's tax return prep and have just been asked about how to now proceed.  As they are good friends and fellow church members, I won't be charging for a few words of advice on how to proceed but thank you for watching out for my welfare. They did pay all outstanding bills except IRS as they didn't know how much it would be.  Surprise and shock were the reactions. I really don't care about the attorney, however.

'All the money' included gross proceeds from stock of $9800 but she also took a total distribution from an annuity for $15,000, and total distribution from IRA of $40,600 the sum of which and a bit more her SS max taxable.  And of course any withholdings were at 10% at most for the 22% bracket.  Did anyone consult me for tax ramifications before this took place?  Ummm, no, they just listened to someone at the assisted living home who advised them to get her income down to whatever amount it would take to qualify.  (In my unsolicited opinion, this scam to spend down to get onto the taxpayer dime while distributing funds to relatives is terrible.  It may be legal but I think it is horribly unfair to the rest of us.  Down from soapbox.)  It's sad that she got a clean report from her last cancer check up about a month before she died of a ruptured intestine, perhaps from all the chemo she endured over the years. 

I am guessing that the stock was not distributed to save the recipients from cap gains, don't know.  My inclination is to tell them the OIC will cost ??? How much??? so not worth it and that they should be prepared to pay.  The executor did acknowledge that the kids got the money so are sort of prepared to cough it up.  They all have kids in college so perhaps thought Grandma was doing a good thing for them.  On the other hand, none of the children lost their jobs during COVID.

So I have a message and thanks again for the replies on a summer day.  Now go outside and play!

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I believe the filing fee for an OIC has increased to $205 for the IRS.  Then any available funds have to be used to pay as much as the IRS thinks is collectible towards the tax.  I suspect if the kiddos got the money from grandma, the IRS is going to look at whether they can pay the taxes in determining how much the offer can be, and so they will wind up paying the taxes anyway.  I am not sure about that - I have never done an offer in these circumstances.  Then there is the fee for someone to prepare the offer unless they are willing to do it themselves.  I don't have any idea how organized they would be as far as getting the numbers together, and I have always charged by the hour for an OIC.  I can't imagine it would be less than 2 or 3 hours, even if they do most of the heavy lifting by giving you everything you need in an organized manner.  Someone more familiar with offers will hopefully chime in - they might be faster at preparing them than I am. 

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Not sure IRS would be interested in the OIC since the Federal government can go against the fiduciaries under R.S. 3466 and 3467. You might want to have a look at Fiduciary Liability Under the Federal Priority Statutes (duke.edu). Just saying.

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I will look at this but my recommendation to the executor was for the family to pay up.  They got the money.  The executor has mentioned that the sibling recipients just may have to cough up the money.  I noted again that the balance due is not that great, about $2100 or so.  Whatever the cost of trying to finagle a delay or compromise, etc., the money is still owed, these folks had the use of it for over a year.  Had there been planning, withholdings would have been appropriate and the shares would have been less by that much.

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Jerry W is absolutely correct.  No money is to be distributed from the estate until all the bills are paid.  If the beneficiaries took the cash before the creditors, they are indeed liable for the bills.  Don't even think OIC, the law is pretty clear.  In this case, it may be that the money was distributed before the taxpayer died?  If so, were gift tax returns filed?  Gifts made within three years of death are included in the estate, so the heirs can't claim it only has $1k.  Its bank account may only have $1k, but the rest is sitting in their bank accounts.

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I will have to check about who received how much but know that the money was distributed early in 2020, well before she died.  Good point about gift tax returns but I did not realize about gifts within 3 years of death are estate assets.  Again, nothing was ever mentioned to me until after death.  So far as I know, all bills were paid, including mine, except for the attorney (no bill received as yet) and taxes.  The attorney told the executor not to pay the credit card bill and I don't know of any others. 

As this is now getting more involved and  taking more time, it may be time to send another engagement letter to address these issues.  My original letter does state that IRS representation is a separate matter.  I will mention that and see where it goes.  This is a problem with new clients which I did not solicit.  I was hoping to quietly muddle along with my steady regulars who have been 'trained' to contact me first not after money issues arise.  All previous clients that have died have had either no complications with taxes or I have been trustee or executor or fully informed.  Retirement continues to appeal...

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Isn't it possible that the executor might be liable if the heirs stonewall on paying the taxes?  Sounds like the executor did a distribution to heirs before settling all the outstanding debts (including taxes). 

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This liability might be the case and I don't know exact dates, but I believe the stock proceeds and the money from the IRA and annuity liquidations were passed out in spring of 2020, a year before death.  The family, following assisted living staff advice, was trying to impoverish mother to qualify for Medicaid (already stated my feelings about that earlier).  I do believe the executor is mostly prepared to pay up personally but having the 3 year aspect and possible gift tax returns needed may prompt her to apply some pressure to siblings.  I don't know for sure, but think that some money went to grandkids for college expenses.

I have emailed executor with this additional information and questions along with the note that a new engagement letter would be in order for me to further discuss  and possibly act on the circumstances.  I knew nothing of these transactions let alone the dollar amounts until the paperwork arrived in late February to prepare her returns and she died a month later, the day before we were to meet.  The executor seems inclined to answer direct questions but not offer information.  Whether this is just intentional or other, I don't know.  She is an advanced practice nurse so perhaps, to give benefit of doubt, is unaccustomed to offering information freely that might be considered confidential. I don't suspect nefarious motives but money is a sensitive topic. 

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I like your idea of new engagement letters for instance: 

1. Personal tax returns for someone no longer with us

2. Gift tax return

3. Estate tax return

4. Representation & Consultation

WITH A RETAINER REQUIRED FOR EACH.

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"The gift itself is only included in the total estate value, to the extent the gift is more than $15,000. Therefore, if a gift is made within 3 years of death, and the gift is worth $25,000, only $10,000 of the gift – the amount above the sum excluded from tax – is included in the gross estate. The gross estate, as discussed above, will also increase by the amount of the gift tax paid on the gift."

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Thanks again for hints.  The personal return for 2020 is finished but the deceased will have a final 2021 return.  There is no estate tax return as the estate will not be large enough and assets were not even probatable as in trust.  There may not be gift tax returns to do as I don't know how many people received how much.  Her total gross income including all sources was about $115,000.  There will be no gift tax in any event as way below the threshold.  But good to know that only the amount above the $15,000 each is potentially available for inclusion.  I think the Medicaid rules are a bit different but she qualified for only 3-4 months so not much to payback as I understand.

It will be interesting to see what the executor replies.  Thanks again to all for input.

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Not much to pay back?  That could be $10k a month!  I am totally with you that it's just not right for people to give away all their money to family so we, the taxpayers who have less than they do, will pay for their care.  The look-back rule has helped somewhat.  Yet I have seen what you are seeing--staff in senior care facilities and even attorneys advising people to get rid of their money.  Often that person is old and frail and likely to need care within months, so it's totally inappropriate advice coming way too late. I know you don't care if the attorney gets paid or not, but the way laws are written (by attorneys, of course) I believe their fees are priority debts.  Just hope the heirs didn't spend everything yet.

You won't need to file a 1041 unless the estate had more than $600 in income.  You might want to wait to file the decedent's final return until you learn how much will be paid back to Medicaid.  Say it is $30k.  That amount can then be deducted as medical expenses on the decedent's final return, which may lower the tax bill.  (There is an election to claim the decedent's medical expenses paid after death on the final 1040.)

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On 7/30/2021 at 6:37 PM, Sara EA said:

Gifts made within three years of death are included in the estate,

 

14 hours ago, cbslee said:

"The gift itself is only included in the total estate value, to the extent the gift is more than $15,000. Therefore, if a gift is made within 3 years of death, 

Actually the gift is only included in the estate if the decedent retained an interest in the asset or revocable power per section 2035.

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The IRS' position will be that THEY should have been paid FIRST, and it that left insufficient funds for other creditors, too bad/so sad with a side dose of tough noogies.  They're gonna have to pony up, and they should never have paid off the other creditors first.  They could have gotten other creditors to take a percentage of what was owed - happens all the time when there are insufficient funds in an estate for full payment - but they'll never get money back.

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Thanks again for all this information.  I believe the only outstanding debts at death were a small credit card bill which the attorney told executor not to pay and whatever the home had outstanding plus Medicaid payback.  The gifts were, I believe, the funds realized from the IRA and annuity distributions and stock sale proceeds, again, well before death, about a year, so not strictly estate distributions.  The deceased had just received a clean report from cancer bouts and expected many more years of life.  Her death was a total shock to everyone.

Sara EA, I'm not sure where you get the $10K per month payback.  What do you mean?  If you meant Medicaid, I believe that has already happened and it wasn't very much as for only 2-3 months.  The executor said it was just a few hundred as she lived in a lower cost home.

Regarding the 'income' of the 'estate:' I guess I won't be able to determine the size of the estate until the executor provides information.  And if there is claw back of the gifts, how is income determined?  The deceased had virtually nothing in the bank as I think most of her depleted income (SS, small pension) went to the home.  I guess this will be taking some time as I have no updated information.  The executor has been notified that she is the responsible party for the tax due and has, previously, acknowledged that she and sibs will have to pay. The final 1040 awaits until next tax season as she died in 2021.  For the possible gift tax returns, if the gift recipients have to return a portion of the money to meet the tax liability, does that then reduce the amount of the gift?

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Danrvan is correct, the value of the gift is no longer included in the estate except under certain circumstances.  (Under the old rules it was--I've been doing this too long!)  So there are two things to consider.  First is who pays the IRS?  The decedent had the money and chose to give it to people instead of paying the taxes on it.  The executor is responsible for paying the decedent's taxes but since there was nothing in the estate to pay with, it might make sense to ask a tax attorney.  However, since you said the amount due isn't all that much, it might be cheaper for the heirs just to pay it, which they may have to do anyway.

A gift tax return must be filed if any one person got more than  $15k.  No, paying the decedent's taxes doesn't lower the amount of the gift because the donees are assuming responsibility for the decedent's taxes whether they pay from her money or their own.

Medicaid in most if not all states has a five-year look-back period. Any money gifted in that time period can be clawed back from whomever received it. I was using an average nursing home stay at $12k a month, with the decedent paying $2k and Medicaid the rest.  Say she was in a really low cost home, say, $5k a month (does such a place exist?), she paid $2k, so the donees are responsible for $3k a month.  Unless she had a lot of Soc Sec and pension to contribute, they will likely owe more than a few hundred to Medicaid.

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