When a person dies, you might be wondering who is responsible for paying his or her taxes. Generally, the person’s estate or trust is responsible for those liabilities and pays them before making distributions to the beneficiaries. In situations where the liabilities exceed the assets (i.e. insolvent), state law governs which creditors get paid first. As you can imagine, taxes are towards the top of the list. Family members or those administering the estate or trust are generally not responsible for using their personal assets to pay off creditors of an insolvent estate or trust.
There are two exceptions where others may be responsible for the taxes of a deceased person. The first exception is called “transferee liability” where a person is liable for wrongfully receiving something from the estate. When a beneficiary receives property from an insolvent estate, the IRS can collect unpaid taxes from that beneficiary. The amount the IRS can collect is limited to the value of the property that the beneficiary received, and the IRS must show that collection efforts against the estate failed.
The second exception is called “fiduciary liability” where a person is liable for wrongfully paying something from the estate. A personal representative (executor) or trustee may be personally liable if he or she distributes assets that leave the estate or trust insolvent and he or she had actual or constructive knowledge that taxes were owed.
A recent case out of New Jersey, U.S. v. Estate of Kelley, 126 AFTR 2d 2020-6605, dealt with both transferee & fiduciary liability. Lorraine Kelley died on December 30, 2003. Her brother, Richard Saloom, and another individual were co-executors of her estate. Saloom was the sole beneficiary of the estate. The estate was valued at over $2.3 million and owed approximately $662,000 of estate taxes. Over the years, Saloom moved assets from the Kelley Estate into his name and used them to run his business and buy other property. He entered into an installment agreement with the IRS for the unpaid estate taxes prior to 2008 when the outstanding debt was still $400,000.
Saloom died on March 21, 2008. His daughter, Rose, was executrix and sole beneficiary of his estate, which included assets from the Kelley estate. At some point between Saloom’s death and 2017, Rose moved all assets from Saloom’s estate into her name but the outstanding tax liability from the Kelley estate was never paid. Rose was aware of the outstanding taxes from the Kelley Estate because her father had told her about them before he died.
The court imposed both transferee and fiduciary liability against the Richard Saloom Estate because Saloom distributed property to himself from the Kelley Estate that caused the Kelley Estate to be insolvent and unable to pay the outstanding estate tax liability. The court also imposed fiduciary liability against Rose Saloom because she distributed all of her father’s estate to herself without paying the Kelley estate taxes, even though she was aware of them at the time she made the distribution.
If you are responsible for administering an estate or trust and you think that it might not have enough assets to pay off all of its creditors, it is important to consult with your attorney and your Henry+Horne CPA to make sure that everything is paid out in the correct order and that you aren’t personally on the hook for any of the deceased person’s tax liabilities.
Jennifer King, CPA