Fiduciaries, like trustees and conservators, may face personal liability for wrongful acts in administering estates. Among the liabilities that a fiduciary may face is to the IRS for wrongful distributions such as those made prior to satisfaction of all income and estate tax liabilities. IRC Section 6324(a)(2) states:
“(2) Liability of transferees and others. If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee . . ., surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate . . . to the extent of the value, at the time of the decedent’s death, of such property, shall be personally liable for such tax “.
Prior to paying income or estate taxes the fiduciary must gather all the information and assets of the estate and where necessary obtain valuations. A complication can arise when gathering information about and collecting offshore assets, such as financial accounts, tangible and intangible assets. The complication may be that the assets are located in a country subject to sanctions, such as IRAN or CUBA, although there are many more. If financial accounts are held in sanctioned countries the fiduciary may need to take several steps and avoid mistakes and to reduce exposure to civil and criminal penalties. Example: Assume that a fiduciary for U.S. taxpayer has discovered a bank account in IRAN which belongs to the taxpayer and which has $10,000 or more and a Report of Foreign Financial Account (FBAR) has never been filed. The fiduciary may have a duty to come forward and enter the Offshore Voluntary Disclosure Program (OVDP) or personally face civil and criminal penalties under the Bank Secrecy Act (BSA) for failing to file the FBARs and under the IRC for tax fraud. But, the fiduciary also has an obligation to gather the funds. The sanctions regulations, which are administered by the U.S. Treasury Department, Office of Foreign Asset Control (OFAC), may require that the fiduciary obtain an OFAC license in order to bring the funds into the U.S. But, that raises the problem of how to get the funds out of IRAN. While OFAC may grant a license it does not mean that any method of funds transfers will work. Use of the informal value transfer system (Hawala), may result in prosecution for money laundering. Therefore, the fiduciary may face a serious problem in that the fiduciary must report the existence of the account and may need to use the assets in the account to pay the OVDP penalty, but may have limited access to legally obtain the funds. The problem becomes even more complex if the fiduciary must first liquidate assets (such as real property or business interests). An OFAC license must be obtained in those circumstances.
Fiduciaries for taxpayers with offshore assets face enormous challenges in information gathering, reporting, compliance and payment of taxes and FBAR penalties and acting without skilled advice is a sure road to personal liability.