By now most people are aware that significant legal and economic exposure goes along with serving as a personal representative or trustee for a close friend or family member. The recent case of U.S. v. MacIntyre (DC Tx, June 25, 2012) highlights yet another of these risks. J. Howard Marshall made gifts to certain members of his family in 1995 and died shortly thereafter without having paid the gift tax that was due on the gifts. His estate also failed to pay the gift tax due, so liability for payment of the tax was shifted to the donees under IRC Section 6324(b). One of the donees, Eleanor Pierce Stevens, also died before the gift tax was paid. Her executor was E. Pierce Marshall, Jr., and the successor trustee of her living trust was Finley L. Hilliard. Following Ms. Stevens’ death, the IRS informed Pierce Marshall, Jr., that it might assert liability against Stevens’s estate for J. Howard Marshall’s unpaid gift taxes.
The executor and trustee made various payments from and distributions of Ms. Stevens’s estate and trust assets, but did not pay the gift tax on the gift to Stevens from J. Howard Marshall. The United States asserted liability against both the executor and trustee for failing to pay the J. Howard Marshall gift tax liability, on the grounds that 31 U.S.C. Section 3713, commonly referred to as the “Federal Priority Statute,” provides that a debt owing to the United States shall be paid first when the estate of a deceased debtor, in the custody of an executor or administrator, is not sufficient to pay all debts of the debtor. The statute also provides that if a representative of the estate pays any debt of the estate before paying the government, the representative is liable to the extent of the payment for the unpaid claims of the government. The Tax Court has previously interpreted this statute to require, as a prerequisite for liability, that the representative: (1) is a fiduciary; (2) distributed the estate’s assets before paying a claim of the United States; and (3) knew or should have known of the United States’ claim.
While IRC Section 6324(b) makes the donee liable for the donor’s gift taxes, that section does not extend that liability to the donee’s executor or trustee. The court held that 31 U.S.C. Section 3713 can apply to make the executor and trustee liable for the payment of Mr. Marshall’s unpaid gift tax to the extent of the distributions and payments they made from Ms. Stevens’s estate and trust while leaving the gift tax obligation unpaid. The court had no trouble finding that both the executor and trustee were fiduciaries. It also found that Ms. Stevens owed money to the United States as the result of her liability as donee for Mr. Marshall’s gift tax under IRC Section 6324(b) and that the executor and trustee had notice of the United States’ claim.
Most individuals who become a personal representative or trustee are aware or are told by their counsel that they are personally liable for the payment of the decedent’s estate taxes to the extent of the decedent’s assets within their control. This liability arises under IRC Section 6324(a)(2). The MacIntyre case points out that a fiduciary’s potential exposure is not limited to the decedent’s own estate taxes, and that a fiduciary can be liable under 31 U.S.C. Section 3713 for any amount the decedent owes to the United States, whether for taxes or something else.