The executor of a decedent’s estate has a duty to act in a prudent manner and in accordance with the law. At times, this may result in having to take an unpopular position or action that angers the beneficiaries.
An executor’s obligations
If the executor of an estate discovers foreign accounts and/or income that the decedent failed to disclose during their lifetime, the executor has an obligation to:
- Document any facts that might exonerate the decedent from a charge of willful nondisclosure/noncompliance – including but not limited to receipt of bad tax advice, inexperience, illness, and minimal interaction with the account.
- Bring the decedent’s tax and informational returns into compliance through the Offshore Voluntary Disclosure Program (OVDP), Streamlined Filing Compliance Procedures, or other method of disclosure as recommended by a qualified tax attorney.
- Settle all government debts before paying other estate debts and making distributions to beneficiaries.
As noted in Part I, although an executor has no affirmative duty to advise beneficiaries as to what forms they should file, they should in all good conscience make them aware of their responsibility to report a foreign gift.
Criminal and civil liability
It may be tempting for an executor to avoid the hassle and cost of compliance, and to simply satisfy the beneficiaries through a superficial assessment of the decedent’s debts and speedy distribution of the estate. This is not only shortsighted and irresponsible, it will result in the estate incurring greater liabilities in the long-run and can place the executor at high personal financial risk.
In addition to felony charges for tax evasion under 26 U.S.C. § 7201, executors are at risk of additional prosecution – including charges under 18 U.S.C. § 4 which makes it a crime to have knowledge of the commission of a felony and to engage in an affirmative act of concealment.
Although criminal prosecution is rare, particularly if the executor is unrelated to the decedent, civil penalties under 31 U.S.C. § 5321(a)(5) are very likely. For example, if an executor discovers previously undisclosed foreign accounts and fails to remedy the delinquency, they may be subject to:
- Taxes and accrued interest for the previously unreported foreign income
- Penalties under 26 U.S.C. § 6038D for failing to report certain foreign assets
- Penalties for delinquent FBARs
The government has a six year statute of limitations to collect FBAR penalties, and there is no limitation to the imposition of Title 26 taxes and penalties.
Use an attorney
Whenever an executor is faced with a situation in which there is a potential conflict of interest with the estate beneficiaries, hiring an attorney to guide the administration process is crucial. An experienced attorney can help you plan the best course of action in a very sticky situation, mitigate the possibility of criminal charges and/or civil penalties being raised against you personally, and can represent you in any civil action brought against you by the beneficiaries. Contact our San Francisco office today for a consultation.