4.2.1.1 The federal code requires that the personal representative pay the federal estate tax. This obligation extends to that part of the estate tax generated by non-probate property never coming into the personal representative’s hands. I.R.C. Sec. 2002; Treas. Reg. Sec. 20.2002-1. If the personal representative distributes property (whether to an heir or to pay a debt out of the order of priority), he or she is personally liable to the extent of such distribution. Thus, a personal representative may wish to retain assets until receiving a discharge from personal liability from the IRS. I.R.C. Sec. 6905. Another approach is to request a prompt assessment of income or gift tax to shorten the time from three years to eighteen months. I.R.C. Sec. 6501(d).
4.2.1.2 The trustee of an inter vivos trust is exposed to transferee liability. This liability is different than that of the personal representative. “If such trustees properly distribute or pay over trust funds before the IRS serves them with a notice of transferee liability, they should have a defense to liability.” Lane & Zaritsky, Federal Income Taxation of Estates and Trusts, ¶ 16.04[8], (Warren, Gorham & Lamont, 2004).
4.2.1.2.1 “Many fiduciaries are unwilling to run the risk of distributing assets before final settlement of tax liabilities, because the question of whether they had ‘notice’ of delinquencies cannot usually be answered with confidence.” Id. At ¶ 16.04[11], 16-29.
4.2.1.3 On the other hand: “The use of a revocable trust avoids any hiatus in the management of the decedent’s assets following his death. (This) may be extremely important if some of the assets are volatile and require close watching.” Cornfeld, “Loving Trusts or Hateful Wills,” 27 Inst. on Estate Planning, 13-21 (Miami 1993).
4.2.1.4 The “secret” estate tax lien of Sec. 6324 covers all property in a decedent’s estate regardless of notice for ten years. Bona fide purchasers are discharged from the lien (Sec. 6324(a)(2) – the lien is transferred to the selling trustee), whereas bona fide purchasers from an estate are discharged only to the extent the proceeds are used for administrative expenses as allowed by a court of competent jurisdiction. Sec. 6324(a)(1).
4.2.1.4.1 In addition, of course, this is the lien under I.R.C. Sec. 6321 arising after the tax is assessed and payment documented. This lien required notice.
4.2.1.4 The time to present claims against a decedent’s probate estate is six months from death. Estates and Trusts § 8-103. Will contests run from the later of six months after the appointment of the personal representative under a probated will or three months after a later probate. Md. Rule 6-431(b). Contests dealing with the trust itself (for example, whether the death provisions were caused by undue influence) probably enjoy a three (3) year statute running from the death of the settlor (because it is, after all, revocable until death). See Ullman v. Garcia, 645 So. 2d 168 (Fla. 1994). For a creditor to claim against a revocable trust, however, presumably the creditor must first file a claim with the Register within the six (6) month window, then as a collection matter pursue the trust assets.
The Uniform Trust Code (2003) limits contests of a revocable trust to three years or 120 days from notice to the person wanting to contest. Notice includes a copy of the trust. The UTC, however, provides that the trustee may distribute per the terms of the trust without liability if the trustee does not know of a judicial proceeding to contest the trust or receive notice of the potential for such a proceeding and such a proceeding commences within 60 days of such notice.
