Usually when an executor is appointed to administer an estate, he or she does not think that the liabilities of the estate could actually become their own. However, in U.S. v. David A. Tyler and Louis J. Ruch, a federal judge ruled that an executor can be held liable for the unpaid federal income taxes of an estate. In Tyler, the executor of an estate conveyed real property to the son of the decedent. The son was also one of the executors of the estate. The estate had a large unpaid income tax liability at the time of the real property conveyance. The son, who was aware of the unpaid income tax, sold the real estate and claimed to have lost the proceeds in the stock market. As a result, the Internal Revenue Service found itself trying to get blood from a stone because real estate conveyance essentially drained the estate. Tax liens are not extinguished by death and do stay attached to an estate’s property. Interestingly though, the Internal Revenue Service found recourse not in the Internal Revenue Code, but under Title 31 of the United States Code in Tyler. Under 31 USC 3713(b), the fiduciary in charge of assets is liable for unpaid claims of the government if (1) the fiduciary distributed assets, (2) the distribution rendered the estate insolvent, and (3) the fiduciary had actual or constructive knowledge of the liability before the distribution took place. Clearly, this underscores the importance of executors being properly advised when distributing assets of an estate.
The third prong of the statute only requires that the executor was aware or should have been aware of the government’s claim. It does not require that the executor understands his or her duty to pay the federal government before distributing the assets of the estate. Thus, it is very easy for an executor to find himself or herself on the hook for tax liabilities of the estate. This rule also has implications for those that are executors of an estate, but not the executor who made the distribution. If there are multiple executors for an estate, the Internal Revenue Service has the power to hold the executors jointly and severally liable for the unpaid tax. In other words, an otherwise innocent executor may be considered guilty by association. Plus, if one executor cannot personally pay, the other executor or executors may be liable for not just some but all of the unpaid tax. It would seem, at least intuitively, that the Internal Revenue Service ought to pursue those who obtained the assets of the estate. But in Tyler, while imposing liability on the son would have been fairer, it would have been frivolous. The Internal Revenue Service is ultimately going to look to where it can collect its claim, and if that means pursuing an executor who did not take anything from the estate, they now have the power to do so.
The foregoing demonstrates that it is in the best interest of all of the parties involved with an estate to seek counsel to avoid this problem. The experienced attorneys at Chepenik Trushin LLP are ready, willing, and able to assist with your estate planning and administrative needs. Please feel free to contact us for an initial consultation.