E285 How Professional Executors Manage Tax Clearance Delays

E285 How Professional Executors Manage Tax Clearance Delays

Every executor faces the tax risks unless they get proper tax clearance, which can take a LONG time. Here’s how we’ve seen that plays out with professional executors, non-estate attorneys, and amateur executors.

Professional executors set patient expectations

Professional executors set patient expectations

We advise heirs from the beginning that this will be a long process! This probably turned away many prospective clients who thought I was crazy for saying it could take years and decided to go with an attorney who told them it would take only months. (I’m pretty sure it ends up taking years for those attorneys, too). I’d rather be warned that it could take years, than to expect the over-promised and under-delivered “few months”.

We keep reminding our clients over the months that it is a long process. People don’t want to hear it, but at least they’re not wondering what’s going on.

An example of how long things can take: We filed an application for tax clearance for Mr. M.’s estate in September 2020. The IRS just responded via a computer-generated letter in July 2022 (almost 2 years later!). The IRS hasn’t even granted the tax clearance yet; the letter just acknowledged that they received our application.

This is why we set up the expectations in the beginning, because there’s nothing we can do about the government.

General attorneys react

General attorneys react

General attorneys can be very reactive if they have not had experience in this area. Many potential clients call us in similar situations where things are going slow, asking if their attorney is doing something wrong.

The potential client is dealing with the same set of facts that we deal with, except that his attorney has not set any expectations and is communicating with the heirs.

In order to get a case, some attorneys tell prospective clients that “probate” takes a few months. What they mean is that’s how long it may take to get letters testamentary. They don’t tell the client that getting letters is just step 1 of the 3 stages of probate.

Similarly, once the house is sold or accounts are collected, non-specialist attorneys tell the heirs that payout is imminent. But the inexperienced attorney comes to realize that to protect their client (the executor) from personal liability to the IRS, they must first get clearance.

Then the attorney has to break the news to heirs who thought they were about to get a check that it may be a LONG time. It’s all about expectations and being able to see a couple steps ahead; not just react to the situations as they come.

Friends or family executors get blindsided

Friends or family executors get blindsided

The previous situation isn’t great, but it’s not as bad as when an amateur executor gets blindsided. Sadly, amateur executors (friends and family) often don’t even realize they must get tax clearance first. Then they get hit with the personal tax liability.

For example, Ms. V. was the executor for her uncle’s estate, and she didn’t know to get the tax clearance. She just paid out the funds quickly to happy heirs.

Then IRS sent her a letter informing her that the estate owes $20,000 in taxes.

She had to try and recoup the funds from the heirs. Mrs. V. reached out to the heirs and waited patiently for the checks. How many checks do you think came in? None.

Some people might say, “Oh, my family wouldn’t do that to me.” Well, some heirs may want to help out, but in some cases, they’ve already spent their inheritance.

Unfortunately, the IRS doesn’t care who pays the taxes, as long as they get paid. Executors are personally liable. So, Mrs. V. had to come up with a way to get $20,000 to pay the IRS. To this day, I do not know if she took out a loan or if she was able to recoup the money from the heirs.

Having an amateur executor is probably the worst situation. They don’t know to how set expectations, and they end up getting into messy situations. This is a good reason to check out my book, “How to Hire an Executor.”

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