Executors and the Decedent’s Unpaid Taxes: A Trap for the Unwary

An executor is normally not personally liable for the debts of a decedent. However, a special rule applies to federal taxes. Outside the Tax Code, in an obscure corner of federal law, we find the following:

A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.

For this purpose, the term “unpaid claims” is intentionally broad, covering income tax (individual or estate), estate tax, gift tax, and the civil penalty associated with unpaid payroll taxes. Essentially, the government is saying “we get paid first.”  If the executor fails to heed this warning, it can be responsible for paying the debt out of its own pocket.

Under what circumstances will an executor be personally liable? First, a tax claim merely has to exist; it does not have to be assessed. Second, the executor must make a distribution to beneficiaries or creditors while the decedent’s taxes remain unpaid. Finally, the estate must either be insolvent at the time the payment was made or it must have been rendered insolvent by the transfer.

Under Tennessee law, creditors of an estate can reach the assets of a decedent’s revocable trust if estate assets are insufficient. As a result, the statute quoted above could also be an issue for trustees of revocable trusts.

Executors and trustees are always under pressure to make distributions as soon as possible. A wise fiduciary, however, will ensure that the decedent’s tax issues have been settled before releasing funds to creditors or beneficiaries.

 

Source: 31 U.S. Code § 3713(b)

Posted by Joel D. Roettger, JD, LLM, EPLS

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