Understanding Limitations on Transfers in Which Decedent Held Interest

Inheritance tax imposes a tax on the right of succession, while estate tax is a tax against property. The former is enforceable against the individual transferees or those with dominion and control over the property, while the latter is due by way of estate representatives. In the interest of making estate transfers transparent so that transfers in estates do not go unnoticed, states have provisions in effect to impose limitations on transfers.

Author Kristen Kemp writes: State death taxes are imposed in approximately half of the states. Inheritance tax imposes a tax on the right of succession, while estate tax is a tax against the property. The former is primarily enforceable against the individual transferees or those who exercised dominion and control over the property, while the latter is usually due by way of the estate representatives. Notwithstanding, in the interest of making transfers within a decedent's estate transparent so that transfers in estates do not go unnoticed, states have provisions in effect to impose limitations on transfers.

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Most states hold the personal representative, the trustee, or the transferee liable for the tax on any premature transfers. Those holding the personal representative, minimally, liable include: District of Columbia, Indiana, Maryland, Massachusetts, Minnesota, New Jersey, New York, Ohio, Pennsylvania, Vermont, and Washington.

In addition to charging liability on the personal representative, many states have "form requirements" that must be met before a transfer can occur. Generally, to meet form requirements, a state must certify that it agrees to the transfer or waives the liability against a transferor for a particular transfer.

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The form requirements also provide notice to the individual charged with filing the return, typically the personal representative, of the existence of the property and to whom it was transferred. The requirements prevent nonprobate transfers, which would otherwise go unnoticed, from escaping the watchful eye of the representatives in charge of the estate. Additionally, they protect the beneficiaries against fraud, limit the potential for a race to the bank, and minimize the possibility for individuals to abscond with unknown funds.

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Practitioners must note that many courts require a copy of the state revenue department's closing letter or tax determination letter as demonstration that the estate/inheritance tax determination was finalized. This process ensures that the final distributions are not made until the tax liabilities are paid in full by the individuals charged with ensuring same.

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For more information, LEXIS.com subscribers can access 2-28 Bender's State Taxation: Principles and Practice 28.syn.