Executors are sometimes pressured by beneficiaries to “wrap up” the estate quickly and make distributions of estate assets. Often this is because beneficiaries want their money and don’t understand the liability executors can face for distributing the funds before it is advisable. I’ve written before about how this can have significant, adverse consequences when the IRS comes after the personal assets of the executor for payment of the estate tax. Can executors be held personally liable?
Unfortunately, this happens more frequently than executors would like. In the latest case, Estate of Lee, the executor, Mr. Frese, was on the hook for unpaid estate taxes. Kwang Lee died on September 30, 2001. Mr. Frese, a licensed attorney, was acting as executor of the Lee Estate. He filed an estate tax return on May 21, 2003. In April 2006, he received a notice of deficiency from the IRS claiming that the estate owed taxes in excess of $1 million. He filed a Tax Court petition disputing the liability. Between July 2003 and February 2007, he made distributions totaling $1,045,000 to the beneficiaries. Of that amount, $640,000 was distributed on February 28, 2007, after he was aware of the potential for additional estate tax. After the February 28, 2007 distribution, only $183,000 remained in the estate.
The Tax Court case concluded in March 2010 when the Court determined an outstanding liability of $536,151 in estate taxes. The executor submitted an offer-in-compromise to settle the debt, which was later rejected by the IRS. After the offer-in-compromise was rejected, Mr. Frese filed another case to dispute the rejection. The Tax Court determined that Mr. Frese was personally liable for the unpaid estate taxes because he made the February 2007 distribution with the knowledge that there was a pending Tax Court case for estate taxes owed. The February 2007 distribution would have fully satisfied the outstanding liability. Before making distributions and wrapping up any estate, please make sure to check with your legal and Henry+Horne advisors.
Jennifer King, CPA