Liability for an Estate’s Tax Debt

Posted Thursday, May 3, 2012 by John S. Palmer

Normally, the executor of an estate is not personally liable for the debts of the estate. However, if an estate’s debts are not paid in the proper order, an executor and even heirs of an estate can be rendered liable for the estate’s federal tax debt.

A federal statute (31 USC 3713) provides that if an estate lacks the funds to pay all of its creditors, debts to the US government must be paid in full before certain other creditors are paid. If an executor of an insolvent estate uses estate funds to pay these other creditors first, the executor may be personally liable to the US government to the extent he or she used estate funds to improperly pay these creditors, provided that he or she knew or should have known of the government debt before paying these creditors.

It is important to note that certain debts can and should be paid before paying any debt to the federal government. Washington law directs that debts of the estate shall be paid in the following order:

Expenses of administering the estate,including executor fees and attorney fees.
Funeral expenses in such amount as the court shall order.
Expenses of the last sickness, in such amount as the court shall order.
If the decedent was an employer, wages due his or her employees for labor performed within sixty days immediately preceding the death of decedent.
Debts having preference by the laws of the United States.
Taxes, or any debts or dues owing to the state.
Certain liens on real estate and debts secured by mortgages, in the order of their priority.
All other demands against the estate.

Note that debts to the US government are actually fifth in order of priority. Therefore, the executor only risks personal liability for the estate’s debt to the federal government if he or she improperly makes payments to the lower-priority creditors.

Another federal statute (26 USC 6901(a)(1)(B)) permits the IRS to collect the estate’s tax debt from anyone receiving a distribution of assets from the estate. Thus, if the executor makes a distribution to the heirs of the estate (including the executor, if he or she is an heir) and subsequently fails to satisfy the estate’s tax debt, the heirs who received distributions from the estate are personally liable for the unpaid tax debt, and the IRS will have at least one year to enforce the debt against the distributees, even if the statute of limitations to collect the debt from the estate expires before then.

If you have any questions or would like to schedule an appointment, please call us at (425) 455-5513, toll free at (877) 455-5513, or info@palmerlegal.com.