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Spring 2010
Trusts & Estates Newsletter
How To Limit An Executor’s Personal Liability
For A Decedent’s Unpaid Taxes
By: Jeffrey D. Chadwick
Being an executor can often be a demanding
and thankless task. In addition to coping with the
loss of a close friend or family member, executors
are routinely charged with navigating estate plans
through an unfamiliar and intimidating course of
administrative hazards. And to add another worry,
unwitting administrators can inherit dad’s unpaid
income and gift tax liabilities, and not just his car or
stock portfolio.
This article explains how executors can incur
personal liability for a decedent’s unpaid taxes and,
more importantly, how they can avoid it. The first
section traces the executor liability standard through
the Internal Revenue Code (the “Code”) and the
courts, while the second section lists the steps an
executor should take, as well as the IRS forms he or
she should file, when he or she knows or suspects
the decedent has unpaid taxes.
I. EXECUTOR
LIABILITY
DECEDENT’S UNPAID TAXES
FOR
Pursuant to Code § 6901(a) and 31 U.S.C. §
3713(b), an executor is personally liable for a decedent’s unpaid income and gift taxes if the executor:
(1) knew the debt existed, and (2) distributed the
estate without first paying the taxes.1 If the executor does distribute estate assets in excess of the federal tax debt, the executor is only liable to the extent
of the improper distribution.2
Knowledge of the tax debt requires “actual
knowledge of the liability or notice of such facts as
would put a reasonably prudent person on inquiry
as to the existence of the unpaid claim of the United
States.” 3 If the government makes a prima facie
showing, the burden of proof is on the executor to
establish that he or she was unaware of the decedent’s debts.4
Before paying a decedent’s federal taxes, the
executor can pay certain estate expenses and make
distributions to creditors having priority over the
federal government.5 In Private Letter Ruling
8341018, the Service identified funeral and administrative expenses, exempt property allowances, and
family allowances as costs that can be paid before
federal tax liens.6 Administrators, however, cannot
pay state and local taxes before paying federal taxes
owed by the decedent.7
Typically, an executor can pay the debts of
secured creditors before paying the United States.8
But an executor cannot exhaust estate assets satisfying the claims of general lienholders in derogation
of outstanding federal tax liabilities.9 If an estate
with insufficient assets owes debts to multiple creditors, therefore, the executor and his or her counsel
must analyze each claim to determine the priority of
the estate’s liabilities.
II.STEPS TO AVOID EXECUTOR LIABILITY
The best way for an executor to avoid personal
liability for the taxes of a decedent is to notify the
IRS of the fiduciary relationship, investigate the
extent of the tax assessment, and apply for discharges from personal liability for the gift, income,
and estate taxes of the decedent. Listed below are
five steps an executor should take if she knows or
suspects an estate has an outstanding tax liability:
A. File Notice of Creation
Relationship (IRS Form 56).
of
Fiduciary
The executor can file a notice of fiduciary
relationship under Code § 6903 and corresponding Treasury Regulation § 301.6903-1. The notice
requests that the Commissioner send all tax-related
documents concerning the decedent to the executor,
and not to the last known address of the decedent.
Executors must file the notice in the district where
the decedent resided prior to his or her death and, if
necessary, the district where the executor currently
resides. To comply with the Regulations, executors
can use Form 56.
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Trusts & Estates Newsletter
Spring 2010
B. Request Decedent’s Prior Tax Returns (IRS
Form 4506).
E. File Notice of Termination of Fiduciary
Relationship (IRS Form 56)
If the executor does not have the decedent’s
prior tax returns, she can request these by sending
Form 4506 to the IRS. Filing Form 4506 confirms
whether the decedent filed returns and demonstrates
the executor’s good faith in determining the extent
of the tax liability.
An executor can shield herself from future liabilities by notifying the IRS when she has completed
her duties as administrator of the estate. Executors
can file the same form, Form 56, used to inform the
Service that a fiduciary relationship has been created.
C. Request a Prompt Assessment (IRS Form 4810).
Code § 6501(d) permits executors to request a
prompt assessment of income and gift taxes, including penalties, owed by the decedent. The request
shortens the statute of limitations on future assessments from three years to eighteen months, except in
cases where no return was filed, the return filed was
false or fraudulent, or the return failed to report 25%
of the gross income or gifts.10 While the request
does provide an accurate overview of the decedent’s
tax liabilities, it often invites audit and should be filed
only when an audit is forthcoming or expected. To
comply with Treasury Regulation § 301.6501(d)-1,
the executor can complete Form 4810.
D. Apply for Discharge from Personal Liability
of Decedent’s Income, Gift, and Estate Tax (IRS
Form 5495).
An executor may apply to be released from personal liability for the decedent’s income, gift, and
estate tax pursuant to Code §§ 2204(a) (estate) and
6905(a) (income and gift). Executors can apply for
discharge from all three taxes by completing Form
5495. For income and gift taxes, executors must
apply after the relevant return has been filed.11 For
estate taxes, executors can apply at any time, though
the government may require a bond if it has already
extended the time for paying the tax.12
Jeffrey D. Chadwick is an associate at Williams
Mullen in Richmond, Virginia. His practice focuses
on estate planning, trust administration, and business
taxation. He earned his juris doctor degree from the
University of Richmond School of Law and his bachelor of science degree from Baylor University.
1. See Kasner, Strauss & Strauss, Post Mortem Tax Planning ¶ 2.05(1); cf.
United States v. Bartlett, 186 F. Supp. 2d 876, 885 (C.D. Ill. 2002) (setting
forth a five-part test); Allen v. Commissioner, 78 T.C.M. (CCH) 828 (1999)
(suggesting a three-pronged inquiry).
2. 31 U.S.C. § 3713(b).
3. Little v. Commissioner, 113 T.C. 474, 480 (1999).
4. See McCourt v. Commissioner, 15 T.C. 734, 738 (1950).
5. See Kasner, Strauss & Strauss, Post Mortem Tax Planning ¶ 2.05(1).
6. I.R.S. Priv. Ltr. Rul. 8341018 (July 11, 1983) (citing Rev. Rul. 80-112,
1980-1 C.B. 306).
7. See United States v. Irby, 97 A.F.T.R. 2d 2006-437, 441 (S.D. Ala.
2005).
8. See, e.g., United States v. Estate of Romani, 523 U.S. 517 (1998) (finding that a judgment creditor with a valid state law lien had priority over the
government’s tax lien).
9. See W.T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881, 885 (4th
Cir. 1988) (noting that the federal government has “absolute priority over
the claims of all general lienholders”); Rev. Rul. 79-310, 1979-2 C.B. 404
(holding an executor personally liable for paying mortgages and general
creditor claims before satisfying federal tax debts).
10. Code § 6501(c)-(d).
11. See Treas. Regs. § 301.6905-1(a).
12. Treas. Regs. § 20.2204-1(b).
13. See Kasner, Strauss & Strauss, Post Mortem Tax Planning ¶ 2.05(2)(d).
The Service has nine months from receiving an
application under Code §§ 2204(a) or 6905(a) to
inform the executor if any tax is due. If the executor
pays the tax, or if the Commissioner fails to respond
within nine months, the executor is discharged from
personal liability. Even if the request is granted, the
IRS can still assess deficiencies against the estate or
its beneficiaries, heirs, and transferees.13
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