Serving as an executor to an estate or trustee to a trust is a serious commitment. Those who are serving in these roles are wise to move forward carefully. Various rules and regulations apply, and a misstep can mean more than a financial penalty to the estate or trust, it can mean that the person who is serving as the executor or trustee is held personally liable for the estate’s debts.
What rules hold me personally accountable as an executor or trustee?
One example is the Federal Priority Statute. As discussed in part one of this series, this statute essentially gives the government first claim when it comes to paying debts and it applies to estates and trusts.
A failure to pay off government claims, like tax debts, can directly impact executors and trustees when the creator of the estate or trust owes taxes to the Internal Revenue Service (IRS). This is because the statute allows the government to hold the executor or trustee personally liable for the debt if they used estate or trust funds to pay off other creditors first.
Other creditors could include a lienholder, but for these cases even an heir will qualify as a creditor. As a result, it is possible for an executor to find themselves liable to the IRS for the estate’s tax debt if the executor pays an inheritance before paying the estate’s tax obligations.
How does this rule work?
Courts generally expect the IRS to establish two elements to hold the executor personally liable:
- The executor distributed the assets, and
- The executor had notice of the tax debt.
Those serving in these roles can gather evidence to refute this claim. It is wise for those who serve as an executor or trustee to seek legal counsel if they are concerned the trust or estate may run afoul of this statue. An attorney experienced in this area of tax law can review the situation and provide guidance.