Many individuals accept the job of Executor anticipating the responsibility of collecting and distributing their deceased family member or friend’s assets and winding up their earthly affairs. But what happens when your deceased love one, unbeknownst to you, leaves behind unpaid tax debt? Very few executors realize that they could potentially be held personally liable for any federal estate taxes that go unpaid.
Under 31 U.S.C. § 3713, when the estate of a deceased debtor is not enough to pay all debts of the debtor, a claim of the U.S. Government shall be paid first. The executor who pays any debt of the person or estate before paying the U.S. Government’s claim is liable to the extent of the claim. Additionally, the executor of an estate is personally liable for the unpaid claims of the U.S. to the extent of any distribution form the estate when (i) the executor distributed assets of the estate; (ii) the estate was insolvent at the time or the distribution rendered the estate insolvent; and (iii) the executor had notice of the U.S.’s claim.
Fortunately for executors, in a recent case, the Tax Court held that the IRS has the burden of proving that the estate was insolvent at the time of the distribution. Therefore, if the IRS does not satisfy its burden, the executor will not be held liable for any of the estate’s unpaid taxes.
The job of executor, while an honor for many, is riddled with important responsibilities and obligations. It’s important to consult with an estate planning attorney to make sure you as the executor comply, or the executor of your estate complies, with the fiduciary duties of the position. A properly executed estate plan can assure that your taxes are paid in full and that your executor is not held personally liable for any of your debts.
For more information, or if you would like to create your estate plan, please contact May Oberfell Lorber’s estate planning department, 574-243-4100.
The content of this article is for information purposes only, and neither contains nor should be considered legal advice.
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