Page 64 - Successor Trustee Handbook

As stated above, there are various ways that you may raise funds to pay the estate
taxes; but there is still a possibility that this may be difficult to do, or might be
financially impracticable (such as selling assets in a depressed market). If the full
remainder of the tax due cannot be paid with the estate tax return, it may be
possible to elect a deferral of payment through either a “hardship exemption” or
“installment payment program” Again, you should consult with your tax preparer
with regard to these options before simply liquidating assets. Note that the taxes
can be paid from the Trust and will usually be deducted on a pro rata basis from
each beneficiary’s inheritance; however, this will depend on the Trust document as
well as state law. If assets pass to people directly, outside of the Trust, such as IRAs
or life insurance proceeds, you, as Trustee, may have a right and duty to claim
reimbursement from those beneficiaries of the portion of the estate tax attributable
to the asset they received; again, however, this is usually addressed in terms of the
Trust document, as well as both Federal and local law, and you will need to consult
with an attorney about this issue.

Follow up until you receive the IRS “closing letter”. After a certain period of
time, generally between six and eighteen months after the filing of the estate
tax return, the IRS will issue a closing letter accepting the return as filed, if it
does not spot any significant issues. You should know that virtually all estate
tax returns where a tax is due and/or paid will be audited in some respect by
the IRS. You may only receive a simple letter requesting additional information
as to certain issues they identified on the return. Many times, your preparer’s
response to these questions can finalize the matter so that you then receive
the closing letter. At other times, less frequently, the IRS will open a full audit
of the estate tax return, which generally will include a meeting with your tax
preparer (which you should not attend!) and a more detailed look at various
backup information they will request. The audit may result in no changes, or
changes that result in a refund, or an increase in the tax due; you then have
certain rights to contest the IRS audit examination report, if you wish to do so,
you will need to coordinate these efforts with both your attorney and estate
tax return preparer. In any event, during the time between the filing of the
return and the issuance of the closing letter to you, it is important that you
respond timely to any IRS notices and requests; preferably, you should have
your attorney or estate tax return prepare the response on your behalf. Until
you receive the closing letter, you should not distribute all Trust assets to the
beneficiaries, just in case any additional taxes, penalty or interest become
due; your tax preparer and/or attorney can assist you in determining the
“reserve” you should hold until getting the closing letter (see the Chapter,
“Termination of the Trust”).

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