The IRS is a terrible heir to disappoint

August 19, 2021

Being an executor can be a headache. Finding all of the assets, sorting through the will, and dealing with disappointed heirs can be hard work. 

But the worst disappointed heir might be the IRS.

The Tax Court last month held an executor personally liable for unpaid estate taxes when the executor distributed assets to beneficiaries prior to finalizing the payment of the federal estate tax.  After distribution there were not enough assets remaining in the estate’s name to cover the assessed tax. 

Tax Court Judge Greaves explains why (citations and executor name omitted):

An executor must have had actual or constructive knowledge of the Government's claim when the estate had sufficient assets to pay it, or notice of such facts as would put a reasonably prudent person on inquiry as to the existence of the Government's unpaid claim. A notice of deficiency with respect to estate tax liabilities given to an executor before the executor's distribution of estate assets is sufficient to satisfy this notice requirement.

Respondent's notice of deficiency, issued to Executor before he made the February 2007 distribution, was sufficient to create a claim under the FPS [Federal Priority Statute, the law creating personal executor liability for unpaid estate tax]. Furthermore, the record establishes that Executor had actual knowledge of the unpaid claim at the time of the February 2007 distribution. Respondent mailed the notice of deficiency to Executor in April 2006, and Executor was a named party in the petition filed with this Court disputing that deficiency claim in July 2006.


Under these circumstances, Executor made the February 2007 distribution at his own peril, and any advice he may have received in this regard cannot absolve him from liability.

So if you are the executor and you aren't sure whether tax is owing, think twice about distributions. If the IRS wants in, the other heirs can wait.

Cite: T.C. Memo. 2021-92.

Related: Change May Be on the Horizon for Estate and Gift Tax Exemptions

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