Fiduciaries Held Liable For Estate & Gift Tax under Federal Priority Statute

Fiduciaries (trustees, executors, personal representatives) normally are not personally liable for the obligations of the trusts and estates they administer. As mentioned here previously, a major exception to this is the federal priority statute (a/k/a the federal claims statute) under 31 USC §3713(b)/Code § 6901(a)(1)(B). This little gem can create personal liability for a fiduciary that pays out estate or trust assets (including by reason of a distribution to beneficiaries) with knowledge that there are existing federal liabilities (such as taxes) that are unpaid, if the estate or trust is unable to later satisfy those liabilities.

This is not an abstract risk, but a very real liability for fiduciaries, as two fiduciaries learned in a recent case in Texas. In that case, the IRS asserted that a decedent did not pay gift taxes during lifetime, attributable to gifts indirectly made to the decedent. That is, the original donor did not pay the gift taxes on gifts to the decedent, so the decedent was liable for the gift taxes as a transferee. Both the executor of the decedent’s estate, and the trustee of his revocable trust, were knowledgeable of the IRS’ claim but nonetheless paid out funds without making provision for the payment of the gift taxes.

The case is illustrative of various aspects of the statute.

A. The executor was liable for personal property that was distributed to beneficiaries.

B. The executor was liable for rent payments made by the estate. Such payments are subordinate in priority to the federal claim for taxes.

C. The executor was NOT liable for funeral and last illness expenses.

D. The trustee of a revocable trust got caught up in the statute because the trustee was deemed to be the equivalent of a representative of the estate due to the obligation of the trust to pay the decedents debts.

E. The fiduciaries had taken income tax charitable deductions for over $1.1 million that had been set aside to fund charitable bequests. Such bequests were subordinate to the federal claim, so the fiduciaries were held personally liable for those set-aside amounts because the court found that the funds were beyond the reach of the IRS.

F. The fiduciaries were liable for legal and other expenses they paid for the charities.

G. The fiduciaries do not have to receive formal notice or a claim from the IRS, to be on notice for purpose of the statute.

H. The fact that the fiduciaries did not believe the IRS’ claim was valid, or that they relied on their professionals, did not relieve them of liability.

United States v. Macintyre (S.D. Tex., 2012) CIVIL ACTION H-10-2812
For more on this matter go to Charles (Chuck) Rubin