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Court: IRS can tax estate of man who died 13 years ago

Florida residents often set up a trust in order to pass on their estate to their heirs without going through the cumbersome and expensive probate process. What's more, Florida has no estate tax, and the federal estate tax currently applies only to the wealthiest estates, so many Florida residents may presume that estate taxes won't be a problem at all. However, a recent case shows that even carefully planned estates sometimes run into tax issues.

In an extraordinarily complicated case, the U.S. District Court for the Southern District of Florida recently ruled that the IRS could take estate tax from a distribution made to the heir of a Florida doctor who died in 2000. The heir tried to argue that the death was so long ago that the IRS was barred by the statute of limitations from trying to collect it now.

The court disagreed, finding that the estate went into a trust, which was supposed to pay the estate tax but put it off through several extensions. Thus, when the heir got her distribution from the trust years later, the tax was still due. In other words, the extensions not only put off paying the taxes, but also froze the statute of limitations.

Some observers criticized the court's decision, arguing that it could lead to heirs and beneficiaries being hit by tax bills years after they receive the assets of an estate - and possibly after they've already spent them. It also shows that there can be an advantage to the traditional probate process: At least when an inheritance goes through probate, tax issues are taken care of at the outset.

There are many factors to consider when planning an estate under Florida law, and there are plenty of legal and tax issues that can come up when inheriting wealth in Florida, as well. It's important to get help planning estate issues, and to continue updating the plan as circumstances change.

Source: Forbes, "IRS To Collect Estate Tax From Beneficiary After More Than A Decade," Peter J. Reilly, Aug. 7, 2013