Liability of Executors and Transferees for Estate Taxes

“Liability of Executors and Transferees for Estate Taxes,” that is the subject of today’s ACTEC Trust and Estate Talk.

This is ACTEC Fellow Travis Hayes of Naples, Florida.

Serving as an executor of trustee is both an honor and a significant legal responsibility.  Fiduciaries are expected to administer estates and trust carefully, but many are surprised to learn that they may also face personal liability if estate taxes are not properly handled and addressed. Understanding those risks is essential for anyone serving in a fiduciary role.

In today’s podcast, ACTEC Fellow Beth Shapiro Kaufman of Washington, D.C. will discuss the potential liability of both executors and transferees for unpaid estate taxes, including important lessons from recent court decisions that we should be aware of. She will also explore practical steps fiduciaries can take to reduce their personal exposure while carrying out their duties. Welcome, Beth.

Beth Shapiro Kaufman: Thank you, Travis. We might as well have called this podcast, “Why You Don’t Want to Be a Fiduciary.”

What Makes an Executor Personally Liable for Estate Taxes?

Let’s start with the basics. So, the estate tax is imposed under Code Section 2001(a) on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. The zinger comes in the next section, Code Section 2002: “The tax imposed by this chapter shall be paid by the executor.” This is the first place that we see personal liability imposed on the executor.

How Executors Can Be Released from Personal Liability

Now, fortunately, the code also provides a way for the executor to discharge that personal liability. Code Section 2204(a) says that an executor can make a written application for the determination of the amount of estate tax due. In practice, that’s done by filing a Form 5495. The IRS then has 9 months to tell the executor that more tax is due than what was reported on the estate tax return. The executor is not personally liable for any tax the IRS determines the estate to owe after that 6 month period unless there’s been a deferral of tax under 6166 or 6161. So, after that six-month period, the IRS can still assess tax against the estate — they’ve got 3 years to do that — but the executor would no longer have personal liability.

Why Every Estate Tax Return Should Include Form 5495

The Form 5495 can be filed as early as with the estate tax return. Now, some practitioners worry that filing a Form 5495 with the 706 will increase the chances of audit. But I’ve been assured by former IRS employees that this is not the case. I also know that the largest trust companies in this country routinely file a Form 5495 with their estate tax returns. So, I would urge everyone to file a Form 5495 with their estate tax returns, both to normalize that practice so that nobody is suspicious when you file one with the return, and also to get the discharge from personal liability for the executor as early as possible.

Personal Liability for Trustees and Other Fiduciaries

Other fiduciaries, like the trustee of the revocable trust or the trustee of a QTIP trust, can also file for discharge from personal liability, and they use that same Form 5495. The result is the same. The process and timing is a little bit different. The application by the non-executor of fiduciary has to be accompanied by a copy of the instrument under which the fiduciary is acting and a description of the property held by that fiduciary. Their discharge becomes effective on the later of the discharge of the executor, or 6 months after the fiduciary makes the application by filing the Form 5495. So, it’s most expedient to just apply for discharge of both the executor and trustees at the same time and with the estate tax return.

The Federal Priority Statute: Another Hidden Risk for Executors

There is one additional source of personal liability for the executor, and that is found in something called the Federal Priority Statute, which is codified at 31 U.S.C. § 3713(b), which you’ll notice is not even in the Internal Revenue Code. It states “that a representative of a person or an estate 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.” Under this provision, an executor who distributes estate assets to beneficiaries before paying the federal estate tax or who pays other debts of the decedent before paying the estate tax can be held personally liable for the estate taxes.

And this doesn’t only apply to estate taxes if the decedent owed income tax or gift tax that they didn’t pay during their lifetime and the executor has actual or constructive knowledge of those debts to the government; the executor can be personally liable for those taxes as well. Are you convinced yet that you don’t want to be an executor?

When Beneficiaries and Other Transferees Become Liable

Let’s shift gears a little bit and talk about transferee liability. Code Section 6324(a)(2) imposes liability on the transferees of estate property when estate taxes have not been paid by the estate. The list of people who are treated as transferees is a long one, and it includes:

• the person’s spouse;
• the trustee of a trust funded by the decedent, either at death or before death;
• the surviving joint tenant under tenants by the entirety’s arrangement or joint tenants with right of survivorship;
• a person in possession of the decedent’s property by reason of the exercise, non-exercise or release of a power of appointment;
• a beneficiary who receives or has on the date of death property included in the decedent’s estate, so think they are about a designated beneficiary under retirement plan or a beneficiary of a life insurance policy.

A lien for estate tax attaches to all of these interests, and it’s not released by the transfer, hence we have transferee liability. The only exception is for a transfer to a purchaser for value, and there the lien switches over to what you’ve received for the property transferred rather than going with the transferred property. If the IRS is pursuing a transferee under transferee liability, they get one extra year to go after that person beyond what they would get to go after the estate.

The Paulson Case: A Cautionary Tale for Executors and Trustees

The best place to see all of these provisions in action is in a fairly recent case called U.S. v. Paulson, which was a decision by the Ninth Circuit in 2023, and that case is a nightmare. Alan Paulson died in the year 2000, he was 78 years old, he was survived by his third wife, three sons, several grandchildren. The 706 reported a gross estate of $193 million. The estate made a 6166 election with respect to the tax due on the business interest.

A whole host of people served as executors and trustees of Alan’s estate and revocable trust over the years, including a son, Paulson’s accountant, Paulson’s doctor, a daughter-in-law, and another son. The first son serving is the one who made a bunch of distributions to beneficiaries before the taxes were paid. When the court looked at this, they determined that he was not personally liable because he had filed a form 5495 for discharge of his personal liability, and the IRS didn’t assess these taxes within the nine-month period after he filed that form. So, he, the one who made the distributions, gets off the hook. The Ninth Circuit then turns to the successor trustees who took office after those distributions were already made and concluded that the successor trustees were liable for the tax, as were the beneficiaries who received distributions from the estate or revocable trust under a transferee liability theory.

The scary part of this decision is that the court found that successor trustees could be held accountable for the distributions made by their predecessors. The Paulson case is a great read. You ought to look at it, and the real intrigue comes from the fact that a large part of this decision turns on the placement of a comma, which you just have to love.

The Johnson Case: Distributing Assets Too Soon Can Backfire

The federal priority statute didn’t really come up in Paulson, but an earlier district court case in U.S. v. Johnson did rule on executor liability under that statute. In Johnson, the estate owned a business, and they made a 6166 election to pay the tax over 14 years. The executor then distributed the estate’s assets to the beneficiaries, and they entered into an agreement wherein the beneficiaries said, hey, executor, we’ll make the rest of those 6166 payments, and then the assets were distributed.

Well, as things turned out, the business went bankrupt, and the beneficiaries no longer had assets from which to pay the remaining estate tax payments. So, what did the government do? The government looked to the executor for payment because the executor transferred the assets of the estate out of his hands into the hands of beneficiaries before the estate taxes were paid. The government’s position survived a motion to dismiss, and I believe that case was eventually settled because there’s no further reported decision.

Practical Steps Executors Can Take to Reduce Personal Liability

So how is an executor supposed to protect herself?

• My first piece of advice is don’t take on a fiduciary role lightly. Maybe you would just rather be the lawyer and let someone else be the personal representative or the trustee. Think about it before you accept. Is it really worth it?
• File a form 5495 with the 706 to speed up the date on which you’re discharged from personal liability if you do decide to take on these roles, and then make sure you’ve identified all taxes that the decedent owes and paid them before you distribute any estate or trust assets to others.
• Even when you make that distribution, you should consider holding back assets until the statute of limitations runs if you have any concerns whatsoever about additional tax liabilities.
• And then if you do decide to make distributions before the statute of limitations runs, make sure you’ve maintained an adequate reserve in case some additional taxes are assessed.
• Also, when you make those distributions, it’s a good idea to use a refunding agreement so that the parties receiving the distributions are obliged to give you the money back should additional liabilities arise. However, as you see in the Johnson case, if the assets dissipate either through the beneficiary spending them or they are going down in value, that won’t help you if you have a refunding agreement if the beneficiary doesn’t have a way to refund the amounts you distributed.
• Finally, remember the advice that you don’t want to make the client’s problem your problem. So, protect yourself from personal liability in every way possible should you decide to serve in a fiduciary capacity.

Travis Hayes:  Thank you, Beth, for reminding us of the potential liability of fiduciaries and transferees for unpaid estate taxes, as well as informing us of the important lessons that can be learned from recent tax and federal court decisions.

 

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Federal and State Estate Tax Apportionment: Planning Pitfalls and Best Practices (Jun 2026)

 

Videos to share with your clients

• Should I Serve as an Executor? (Jun 2023)   Estate attorneys explain what individuals need to understand before agreeing to serve as an estate executor, such as probate, tax, and legal requirements.
• Choosing an Executor or Trustee (Sep 2019)  Selecting an executor or trustee to oversee your will or trust requires careful consideration. Learn about this topic from professionals in trusts and estates.

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