Estate’s Personal Representative could be liable for Deceased’s Debts

By Jonathan Goldberg, J.D., CPA

Being selected to administer an estate (sometimes referred to as the personal representative, executor or trustee) comes with a lot of responsibilities to make sure the deceased’s assets are distributed according to their wishes. But one thing many of these representatives don’t realize is that they could be held liable if they don’t ensure that the decedent’s income taxes and debts are paid before the assets are distributed to the beneficiaries of the estate.

This topic of personal representative liability became more of an issue when a Court of Appeals in a recent case held that co-executors of a decedent’s estate were personally liable for the decedent’s unpaid income taxes because they knew that the deceased had unpaid taxes but still distributed assets of the estate without paying the taxes from the proceeds of the estate.

Therefore, it is important to confirm that prior and current income taxes and debts have been paid in full before distributing any assets to the deceased’s heirs. In regard to income taxes, it is vital to file the deceased’s last Federal and state tax returns for the year in which the decedent died. If someone dies in 2012, their income tax returns must be filed by April 15, 2013.

Until a personal representative is sure about the amount of unpaid taxes or debts that the deceased may owe, they should retain sufficient assets in reserve to pay unpaid taxes, debts and other fees (legal, accounting, etc.) before partial distributions can be made to beneficiaries.

Fortunately, the personal representative cannot be held liable if the estate did not have enough assets prior to distribution to cover any income taxes or debts. So if taxes and debts came to $50,000, and the estate only had $40,000 in assets, the personal representative would not be liable for the additional $10,000. However, if the tables were turned and the estate had debts of $40,000 and the estate had $50,000 that was already distributed to heirs, the personal representative would be liable for the entire $40,000 debt.

Even if the personal representative didn’t know that there were taxes or debts to pay, but still distributed the assets, they could be held liable. The key question that needs to be answered before making any distributions is: what are the known debts of the deceased? Provided the proper notices and statutory requirements are satisfied the personal representative cannot be responsible for unknown debts. Taxes are considered a known liability and must be paid.

If you have been named a personal representative for someone’s estate, and would like to know what your responsibilities and liabilities could be as a result, please contact me at (248) 932-5200 to discuss it.