What Should the Surviving Spouse Do to Avoid Personally Paying Penalties and Interest to the IRS?

March 17, 2017 by

The headline above could have easily read “A surviving spouse is personally liable for payment to the unpaid creditors of her late spouse’s estate.” Here, the unpaid creditor is the IRS.

Federal and Florida laws include priority rules that tell the personal representative, or successor trustee, the order in which creditors are paid. Usually, the respective government must be paid first when the estate of a deceased person has insufficient assets to pay all of its debts and taxes. Under Florida law, there are some higher priority debts to be paid before federal taxes, e.g. probate attorney fees and costs, and funeral costs up to $6,000.

A recent case decided against a surviving spouse who served as the personal representative (a/k/a executrix) of her late husband's estate. Generally speaking, a personal representative is personally responsible for the estate's unpaid taxes. More specifically, a surviving wife’s liability as personal representative is equal to at least the value of the nonexempt assets she transfers to herself, as those funds are to first be used to pay the federal government's tax claim.

Before a personal representative is personally liable, the IRS must first establish that:

  1. The personal representative distributed assets of the estate;
  2. The estate was insolvent when the distribution was made or the distribution made the estate insolvent, meaning the estate’s liabilities exceeded the value of its assets; and
  3. The distribution occurred when the personal representative already knew of the liability for the unpaid taxes.

In the case mentioned above, the personal representative surviving spouse was held personally liable because the federal government was able to show she distributed the assets when her husband’s estate was insolvent and she knew the taxes were unpaid when she made the distribution to herself. The court concluded the value of the assets transferred was $125,938. With penalties and interest, the amount the she must pay from her personal funds to the federal government exceeds $300,000.

The surviving spouse attempted to defend herself by arguing there was an “equitable exception” to the applicability of the priority laws in her case. She said certain expenses in the administration of the estate may take priority over tax liabilities and she used the transferred assets to pay such expenses. While it is correct there are exceptions to the government's priority, the personal representative surviving spouse did not show the court the administrative expenses were actually paid.

Settling a deceased person’s estate involves personal and business decisions made after the personal representative has adequate information and legal recommendations.

Settling estates should not be a DIY project. Whether you are the personal representative in a probate or the successor trustee of a deceased person’s trust, you are a fiduciary. As a fiduciary, you are entrusted to act prudently and carefully in making reasonable business decisions, which usually includes acting only after you first consult with an attorney to help you.

For decades, our firm has helped clients in the settling of probate and trust estates. If you are a personal representative, executor, executrix, or successor trustee and want to discuss what to expect when settling an estate, call the attorneys at Stross Law Firm, P.A. (813-852-6500) or Contact Us for a free initial consultation.