The role of a company’s executor can be challenging after a business owner passes away. Executor responsibilities include submitting payments to creditors, divvying up the estate to beneficiaries, and managing the decedent’s private affairs. Executors typically act as the middleman in ensuring all of an individual’s financial obligations were satisfied, but in certain scenarios, they may face personal liabilities.
A well-organized estate plan is one that takes several factors into account, including federal tax law
. In cases where the decedent failed to adhere to tax law and, as a result, owes a balance to the federal government, it’s crucial that executors prioritize these payments to avoid personal liability, according to the Cannon Financial Institute.
The institute highlighted a recent memorandum that explained a scenario in which personal liability may fall on an executor. In one instance, an individual passed away and left an estate whose assets were placed in a foreign trust. The executor paid creditors and beneficiaries from the trust. However, the IRS later determined that the decedent failed to file certain returns associated with the trust, and charged penalties against the estate.
In this case, if there was enough remaining in the trust to pay the IRS balance, the executor could use those estate funds to cover the amount. However, if the remaining balance was insufficient to cover these costs and the executor had prior notice from the IRS about the penalties and still chose to pay creditors and beneficiaries first, he or she would be held personally liable for the costs.
For this reason, it is crucial that executors ensure all estate and tax documentation was filed correctly prior to distributing assets to avoid liability.