Pitfalls of Being an Executor

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

At the time of her death, the decedent had a substantial unpaid income 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-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, had violated their duties as fiduciaries 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 liabilities 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.