An executor must collect the assets of the estate, and then, in the following order, pay taxes and administrative expenses, pay the other debts of the decedent, and distribute the remainder, if any. Not understanding the priority of these payments can result in liability for the executor. In a recent tax case that liability added up to more than chicken feed.
James Louis Guyton sold his poultry farm in McAlpin, Florida, incurring a tax liability for the gain on the sale. Six months later he died, and his son, James, Jr., was appointed executor of his estate.
James, Jr. filed a final tax return for his father, indicating a federal income tax liability of $132,436. He paid $113,182.22 toward this tax liability - there was no more money available in the estate, because he had permitted his brother, Timothy, to withdraw $99,735.58 from a poultry farm checking account, since he was entitled to receive those funds under his father's will.
The Internal Revenue Service sent a "Notice of Deficiency" to James, Jr., as executor of his father's estate, claiming a balance due of $39,991.76, including accrued interest and a late payment penalty. James, Jr. denied liability, and the matter went to trial in the United States District Court for the Middle District of Florida.
James, Jr. claimed that he was not liable for the balance of the estate tax due, because he, as executor, had no more funds. He suggested that his brother, who received the $99,735.58, should be held liable for the balance due of $39.991.76.
The Court held that James, Jr. was personally liable for the balance due, since it was his responsibility to pay the taxes due to the IRS before distributing any money to an estate beneficiary. James, Jr. should not have released the funds to his brother from the poultry farm checking account, even though his brother may have egged him on. Timothy, the brother, could have stepped up to the plate and offered to pay the balance due, since he had the poultry farm funds, but apparently he chickened out.
If you are named executor under a will, obtain professional advice before paying estate debts or distributing funds. We will be glad to assist you in performing your duties as executor.
