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Executor and Trustee Liability for Unpaid Taxes

The post-mortem fiduciaries, i.e., the executor or trustee handling a decedent’s estate, have many responsibilities. One of them is the payment of applicable taxes. And, when these taxes are not paid theses fiduciaries face personal liability.

In a recent ruling from a federal district court in Texas an executor and trustee were found to be liable under the federal priority statute when they made distributions and disbursements while gift taxes owed by the decedent had remained unpaid. See, United States v. MacIntyre, CIV.A. H-10-2812, 2012 WL 2403491 (S.D. Tex. June 25, 2012). Under federal law personal liability may be imposed upon a fiduciary of an estate in accordance with the federal priority statute, 31 USC 3713(b) . Under this statute, a fiduciary paying any part of the debt of an estate before paying the government’s claim is potentially liable to pay the claims that go unpaid. Personal liability of the fiduciary can occur when three things have been established: (1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

Earlier in 2012 a federal district court in Pennsylvania made a similar ruling. See, United States v. Tyler, CIV.A. 10-1239, 2012 WL 848239 (E.D. Pa. Mar. 13, 2012). A district court ruled that co-executors of a decedent's estate were personally liable for unpaid income taxes for which tax liens had been filed. The liens had been recorded on real estate owned by the parents of one of the co-executors. Both parents died within a year of each other. The son and a non-family member served as co-executors of the mother’s estate. There had been no probate of the father’s estate, the person who hadn’t paid income taxes for a number of years, and against whom the liens existed.

States have the ability to pursue the fiduciary for unpaid taxes as well. In Illinois that state’s attorney general sought to hold the executor of an estate personally liable for estate tax liability, filing a complaint under the Illinois Estate and Generation–Skipping Transfer Tax Act (Act) (35 ILCS 405/1 to 404/18. See, People ex rel. Madigan v. Kole, 2012 IL App (2d) 110245 (April 11, 2012). In this case, the Illinois estate tax was paid by the executor with a timely filed Illinois estate tax return. However, after an IRS audit resulted in an increase in the calculation of the federal taxable estate the executor did not file a revised Illinois estate tax return. The appellate court ruled that an earlier certificate of discharge did not discharge the executor from personal liability for the additional estate tax that became due as a result of the IRS audit. The appellate court reasoned that if the information originally submitted was inaccurate the certificate could not affect a discharge from personal liability for all taxes which are determined to be owed.

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