Beneficiaries of an Estate Are Personally Liable For Federal Estate Tax

U.S. v. Estate of Kelley, No. 3:17-cv-965-BRM-DEA, 2020 WL 6194040 (D.N.J. Oct. 22, 2020).

Lorraine Kelley died on December 30, 2003, and her brother, Richard Saloom (“Saloom”), and Richard Lecky were co-executors of her estate.  The co-executors  filed a Form 706 on behalf of the Estate of Lorraine Kelley (“Kelley Estate”), reporting an estate tax liability of $214,412 and a gross estate of over $1.7 million.  The IRS examined the estate tax returns, and Saloom consented on the Kelley Estate’s behalf to the assessment of an additional tax liability of $448,367, which was based on a corrected gross estate of over $2.6 million for a total tax of $662,780.  As of September 2, 2019, the total unpaid balance of the Kelley Estate’s estate tax liability was $688,644.

Saloom was the sole beneficiary of the Kelley Estate, and distributed and received all of the estate property without paying the estate tax.  In late 2007, Saloom tried to resolve the tax liability and entered into an installment agreement with the IRS.  Saloom died in March 2008, and his daughter, Rose Saloom (“Rose”), continued to make payments to the IRS.

When Saloom died, his gross estate included property valued at over $1.1 million.  Rose was appointed executor of the estate of Richard Saloom (“Saloom’s Estate) and filed a New Jersey inheritance tax return that listed Saloom’s debt as including $456,406 in “indebtedness” for “federal tax.”  Id. at *2.  Rose was the sole beneficiary of Saloom’s Estate, and she eventually distributed and received all the property from it, without paying the tax due to the IRS.

In February 2017, the United States filed a complaint seeking reduction of the estate tax assessment to judgment against the Kelley Estate, transferee liability against Saloom’ Estate, fiduciary liability against Saloom’s Estate, fiduciary liability against Rose , and liability against Rose under the New Jersey Uniform Fraudulent Transfer Act (“UTFA”).

Rose filed a motion to dismiss the complaint, which the court denied.  The government later filed a motion for summary judgment.  The parties entered into a consent judgment with respect to the claims against the Kelley Estate and closed the case.  The United States later requested that the court re-open the case and restore the motion for summary judgment with respect to the claims against Rose and the Saloom Estate.

The court granted summary judgment against the Saloom Estate for the tax liability of the Kelley Estate because a beneficiary who “receives property from a decedent’s estate is personally liable for any unpaid estate tax based on the value of the property received.”  Kelley, No. 3:17-cv-965-BRM-DEA, 2020 WL 6194040 at * 3 (citing 26 U.S.C. § 6324(a)(2)).  Summary judgment was appropriate in this case because Rose presented no arguments or evidence for why neither she nor her father’s estate was liable for the Kelley Estate tax liability.  Since there was no genuine issue of material fact in this respect, the government’s motion was granted.

The court also granted summary judgment against the Saloom Estate for fiduciary liability under 31 U.S.C. § 3713(b) for the estate tax liability of the Kelley Estate.  Section 3713 imposes personal liability on a fiduciary when he distributes assets to himself, before paying a government claim.

Personal liability will attach if the government can establish three elements:  “(1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.”  Kelley, No. 3:17-cv-965-BRM-DEA, 2020 WL 6194040, at *4.

The United States claimed that Saloom, as executor of the Kelley Estate, “distributed all of its approximately $2.6 million in property to himself, which rendered the estate insolvent,” even though he had knowledge of the Kelley Estate’s unpaid tax liability.  Id.  Rose did not present any evidence to dispute any of the three elements, and the court granted the government’s motion for summary judgment as to fiduciary liability against Saloom’s estate.

Using the same criteria outlined above, the court also granted the government’s request for summary judgment against Rose for fiduciary liability under 31 U.S.C. § 3713(b) for the estate tax liability of the Saloom Estate.  Specifically, Rose knew of the Saloom Estate’s tax liability, but nonetheless transferred the assets to herself rendering the state insolvent, none of which she disputed.

The court, however, denied the United States’ motion for summary judgment against Rose under the UFTA, which has the goal of preventing a debtor from placing his or her property beyond a creditor’s reach by way of a fraudulent transfer.  The UFTA states that a transfer can be found fraudulent if, among other things, the debtor made the transfer (a) “[w]ith the actual intent to hinder, delay, or defraud any creditor of the debtor,” and if the debtor “intended to incur or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due.”  Kelley, No. 3:17-cv-965-BRM-DEA, 2020 WL 6194040, at *5 (citing N.J.S.A. § 25:2-25).

The court determined Rose had no such intent, but rather, the transfer was the result of an inheritance, and the property remained within the reach of the government because Rose was still personally liable for the unpaid tax — it made no difference that the Saloom Estate was insolvent.