Insolvent Decedent's Estate? Be Careful!
Remember the days of royalty and the old saying — the king’s debtor lies dying, the king shall be first paid? Now, in place of royalty we have governments but much the same rule applies.
The Internal Revenue Code says, “A claim of the U. S. 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.”
As an example, let us look at the estate of Spendina Moore who prior to her death used her credit card with zeal, but also failed to file tax returns. Although Spendina stopped spending at her death, there was a sizeable amount of tax due the federal government. Her married daughter, Kare Les (“Kare”), was unaware that her mom owed a substantial tax debt of $100,000, so she was able to pay the credit card debt by selling Spendina’s house. It wasn’t until later, when Kare became aware of the tax debt, that she realized the estate was insolvent.
Was Kare careless? It may seem unfair that Kare should be responsible for unknown debts of her mother, but sadly for Kare Les neither the king nor current law particularly cares about what she knew.
As another example, Bob was a successful lawyer who filed tax returns but did not pay the tax shown on the returns. Bob died unexpectedly of a heart attack leaving his widow Betty as the executor of his insolvent estate.
Bob was careful to file tax returns as an individual, married filing
separately (MFS). As a result,
Betty, who had no income, was not directly responsible for Bob’s taxes, but
unfortunately for Betty, who did not pay the taxes first, she inadvertently
became responsible for the unpaid taxes to the extent that assets were
distributed to others and not to the
It is often surprising to many that Kare or Betty could become liable for the tax debts of Spendina or Bob without being careless or without intentionally ignoring the tax debt, but the primitiveness of the king shall be first paid concept does not require intent, willfulness, or a desire to avoid paying the government. Betty and Kare Les in these examples do not have to be careless or have the intent to violate tax laws.
Frequently, funds are disbursed from the estate of a decedent without knowledge of any tax liability, and it is only later that the tax liability comes to light.
One of the first things that could be done if there is any reason to suspect an insolvent estate would be to decline to be the administrator of the estate. The duty to pay the taxes first is that of the administrator, not the beneficiaries. If Betty and Kare had declined to serve as administrator or executor, then they would not have become responsible for the taxes of the decedent. Unfortunately, in many instances the individuals who become administrators have little or no knowledge of the unpaid tax debts.
One could ask the IRS and the state for tax transcripts that would tell the administrator if the decedent had filed tax returns and paid the taxes due. It would, however, be rare for an administrator to think of asking for tax transcripts unless the administrator already had some inkling of unpaid taxes.
In many states there is a form associated with probate which asks the administrator to certify that all taxes have been paid or that provisions for the payment of taxes have been made. It is possible, particularly if the administrator is unaware of unfiled returns, that such forms can be completed, and, if there are hidden tax debts, the administrator could still be liable to the taxing authorities.
Even if there are no taxes involved, an insolvent estate can present significant problems as to who or what gets paid and in what order. Such problems are akin to those that arise in bankruptcy and require great attention. It may be necessary to invoke the authority of probate or judicial officials to resolve the problems of too much debt and not enough assets.
If you are the executor of an estate from which taxes need to be paid, make sure the taxes are paid! Not to do so could unwittingly make you personally liable for those taxes. If you are aware of such a situation and need help, call Newland & Associates.
Copyright 2009
Published by the law firm of Newland & Associates, PLC
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Call us at (703) 330-0000 for a full range of business law and
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