New Case Holds Trustee is Personally Liable to IRS for Taxes
A recent case out of a federal district court in California found the personal representative of the estate to be personally liable to the IRS. In United States v. Allison (E.D. Cal. Feb. 24, 2022), approximately two weeks prior to Roger Wilson’s death, he created a revocable living trust naming Diane Allison and Sonja Wilson as co-trustees. The co-trustees were also named as Personal Representatives (Executors) of Wilson’s estate. In this capacity, they timely filed an estate tax return and paid the estate tax. Subsequently, the IRS assessed additional estate taxes, penalties, and interest. Unfortunately, the trust and estate lacked sufficient funds to pay the additional taxes as the Trustees/Personal Representatives had distributed all of the estate and trust property to the beneficiaries.
According to the Internal Revenue Code, 26 U.S.C. §6324(a)(2), if the estate tax isn’t paid, the persons who receive or are in possession of the property on the date of death are personally liable for those taxes. The court held that the trustees were persons in possession and thus personally liable to pay the estate taxes owed up to the value of the property held in the trust at the time of Wilson’s death - $518,750.00. The IRS also attempted to impose liability based on another federal statute, 31 U.S.C. §3713(b), which requires that the claim of the United States Government shall be paid first when the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor. The court left for another day the decision on whether the defendants would lose on this count as well.
The moral of the story is that being a trustee or personal representative of an estate can be a dangerous job. There are plenty of landmines. There is always the tendency to want to get the estate settled quickly and get money distributed to the beneficiaries. Beneficiaries may start putting pressure on the person administering the estate within days of the person’s death. Resist this temptation! Wait to make distributions until all creditor issues, including tax issues, have been resolved. If you want to make a distribution and there is still the possibility that additional assessments may be coming down the road, make sure you at least continue to hold enough estate assets in retention to cover for that possibility.
Be careful out there.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.