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Fiduciary Liablity For Unpaid Taxes — Part III

6. WHEN CAN AN EXECUTOR BE PERSONALLY LIABLE TO THE IRS FOR A DECEDENT’S UNPAID TAXES?
Answer: The government can hold the executor personally liable for taxes the decedent owed to the IRS where because the executor pays creditors and beneficiaries, the estate lacks the funds to full-pay the IRS. Example: A decedent has unpaid taxes of $12. The decedent’s estate has $10 in total assets. The executor distributes $3 to the estate beneficiary, and then pays the remaining $7 to the IRS. The law requires the executor to pay claims owed to the United States before paying most of the other of the decedent’s debts. For purposes of the law, “debts” includes distributions to beneficiaries. Because the executor blundered when he distributed $3 to the beneficiary before paying/applying all $10 of estate assets to the IRS on account of the $12 of unpaid taxes, the executor is PERSONAL LIABLE to the IRS. In our example, the executor is personally liable for the amount of $3 (the amount he paid to the beneficiaries instead of paying the IRS). Note that the executor is not liable for the $5 of taxes remaining unpaid after (i.e. $12 owed the IRS minus the $7 of estate assets paid to the IRS), because the estate only had $10 from the outset, so the government could not expect the executor to pay more than $10. Since the estate had $10, and paid $7 to the IRS, the executor is personally responsible to pay $3 to the IRS. You will find the law at Section 3713 of title 31 of US Code (note §3713 is not an Internal Revenue Code section). There exist two important caveats to the general rule of an executor’s personal liability, discussed in our next post.

7. IF THE ESTATE HAD SUFFICIENT ASSETS TO PAY ALL IRS TAXES, BUT BECAUSE THE ESTATE ASSETS’ VALUE PLUMMETED AND THE TAXES COULD NOT BE PAID, IS THE EXECUTOR PERSONALLY LIABLE?
Answer: No. Example: A decedent has unpaid taxes of $12. When the decedent died, the assets were worth, $20. The economy suffered a depression and the estate assets dropped in value to $7. The executor pays the $7 to the IRS, leaving $5 of unpaid taxes. The executor is not personally liable to the IRS for the $5 because the law (§3713) only imposes personal liability where the executor paid other creditors or made beneficiary distributions which left the estate with insufficient funds to pay the entire $12 of taxes.