Another Cautionary Tale for Executors, Trustees, and Beneficiaries: Liability for Unpaid Estate Taxes

The United States District Court for the Eastern District of California has issued an opinion finding that the executors of the estate, the trustees of the family trust, and the beneficiaries of the estate who received distributions from the estate are liable for unpaid estate taxes. United States v. Estate of Espinor, 2016 WL 2880191 (ED Cal. May 17, 2016).

The court found the executors of the estate and trustees of the family trust personally liable for more than $600,000 of unpaid estate taxes pursuant to 31 USC 3713. Additionally, the beneficiaries of the estate were found liable under Section 6324 of the Internal Revenue Code, but fortunately for the beneficiaries, their liability (tax and interest) only extends to the value of the assets received from the estate.

31 USC 3713(b) reads as follows: “A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.”

31 USC 3713 imposes personal liability on a fiduciary of an estate for unpaid estate taxes (and other taxes) where the fiduciary has used estate assets for other reasons such as paying creditors other than the US Government or making distributions to beneficiaries of the estate. Accordingly, the fiduciary is placed in the uncomfortable position of having to decide between paying beneficiaries (who are no doubt hounding the fiduciary about when their bequest will be paid) or withholding such payments until the estate tax liability as well as other tax liabilities with the IRS are resolved, whether by running of the statute of limitations or by other means.

Estate of Espinor serves as a reminder of the dangers fiduciaries face when administering estates where estate tax (or other tax) is owed, or might be owed in the future.

Additionally, Estate of Espinor serves as reminder to beneficiaries that there is a possibility of having to pay back any distributions received from an estate. Section 6324(a) of the Internal Revenue Code imposes transferee liability on the beneficiary when there are unpaid estate taxes. In a beneficiary’s case, such liability (including tax and interest) should be limited to the value of property received from the estate. See US v. Marshall, 798 F.3d 296 (5th Cir. 2015).