• Ronald A. Flate

Being a trustee or an executor?

Dear Clients and Friends,

Upon the passing of a loved one, many of you are already designated as that persons executor or successor-trustee or both.

There are things for you to do, attorney representation is often needed and we are here to help. Our below article provides a caution and some general information that may be of help.

As a general rule, the trustee of a living trust or an executor of an estate does not have personal liability for the debts and obligations of a decedent. Lest trustees or executors become complacent, however they should be aware of an important exception to that rule which was illustrated by a 2013 federal court case between executors and the Internal Revenue Service (IRS).

At the time of her death, a woman had a substantial unpaid tax liability in the range of a half-million dollars. There was no question that the two executors of her estate, one of whom was her son, had been aware of that liability since they had received letters from the IRS advising them of a federal tax lien on real property owned by the decedent and of their obligation to satisfy that debt.

The executors had even unsuccessfully challenged the lien in an administrative appeal. Despite this knowledge they conveyed the real property to the executor’s son for one dollar. The son then sold the property for an amount in excess of the tax liability but later claimed that the proceeds “pretty much got blown away in the market.”

The IRS prevailed in its federal court lawsuit against the executors seeking satisfaction of the tax liability from them. The winning theory was that the executors by disposing of the real estate without having first satisfied the income tax liabilities of the decedent violated their duties as fiduciaries (from the Latin fiducia, meaning “trust,” a person or a business like a bank or stock brokerage who has the power and obligation to act for another – the beneficiary – under circumstances which require total trust, good faith and honesty) of the estate of the taxpayer.

The IRS proceeded under a federal statute that holds a fiduciary liable, to the extent of unpaid claims of the government, if the fiduciary disposed of assets of an estate before paying the government. Three elements must be present for such a cause of action, and they were all shown by the IRS in the case before the court: (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.

The applicable concept of joint and several liability of the executors had the potential for an especially bad outcome for the executor who had conveyed the real property to his co-executor, the son of the decedent. If the son does not have enough money or assets to pay the tax debt—a probable outcome given his travails in the market—the other executor could be on the hook for the entire debt, even though he never had the benefit of the proceeds from the sale of the property. Executors be forewarned: Be sure that Uncle Sam gets what is coming to him before distributing estate assets to beneficiaries.

As a former attorney with the IRS who was specially assigned to the Estate and Gift Tax Division we continue to service clients in their estate planning needs, administration of their estates and probate matters. We also continue to provide an initial free phone evaluation on any of your questions regarding fees and estate planning options. We look forward to hearing from you.

Best,

Ron

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