Fiduciaries Beware! Personally Liable for Taxes!

Most of my new clients come to me with the idea that they should nominate a spouse or a child to serve as the executor/successor trustee of their estate. Except for small estates, which also have no “family politics,” or for family members who might be CPAs or professional fiduciaries (and who have a lot of time on their hands), I will spend a lot of time counseling clients on the pros and cons of relying on family, friends and other non-professional fiduciaries. (Mostly, there are a lot of cons.)

A few times, clients have come back to me, to tell me that (to their surprise) a grown child would rather not serve as a parent’s executor. Savvy children understand that even well-organized estates and fully-funded living trusts could take a lot of time and effort to settle. Also the “settlement work” will inevitably involve the fiduciary in unwelcome family politics. Savvy children also understand that a fiduciary can become personally liable to beneficiaries, creditors, and other parties. Who has a spouse or a child, ready, willing, and able to take that much time, and do that much work, for little pay, and at significant, personal financial risk; especially at a time of grief and family crisis?

Being a fiduciary is not an ‘honor.’ It is an important and sometimes very difficult job. That is why nearly all family member-fiduciaries will soon hire and rely upon professionals to assist with the work and avoid trouble.

Now I’ve got another example: Tax liability! In United States v. Rodney Richel (22 Jul 2012), a U.S. District Court ruled that an executor was personally liable to the IRS, after the IRS served the executor with a Notice of Levy on a beneficiary of the estate. The executor was held liable for $114,519.68 (plus interest) for distributions that went to the beneficiary but which, under the law, should have been paid directly to the IRS.

The IRS Levy was served on the executor in 1996, but the distributions to the beneficiary were not made until 2003 and 2005. The passage of time did not serve to excuse the executor!

The trust, which the executor was administering, required distributions of interest, with discretionary distributions of principal. Good grief! In that case, the client not only exposed the fiduciary to personal liability for the beneficiary’s taxes, the client also exposed the inheritance to a large tax collection. Clearly, this client did not hear my ‘two-minute lecture’ regarding the use of Inheritance Protection Trusts and the all-around protections afforded to heirs by fully discretionary trusts, which are managed by professionals under well-considered governance provisions and if desired, detailed client instructions.

About Paul D. Hunt

If you're a resident of California, and a homeowner, then you should clearly put your home into a living trust. A living trust makes probate unnecessary. (We don't like to say "avoiding probate," because that's misleading!) Probate is very expensive – an average home in Alameda will require a probate fee of about $37,000. Also, probate is very slow, and it's done in public. Our law office is dedicated to getting rid of all of the estate planning myths out there, like the "avoiding probate" myth. We want every family in Alameda to enjoy the many benefits of a trouble-free estate. Come to one of our seminars, or call for a free initial appointment at (510) 523- 2100.
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