Monday, March 13, 2017

829 F.3d 77 (1st Cir. 2016)
(cert. denied 1/9/2017)

Trusts and Estates practitioners often focus solely on the Tax Code found in Title 26 of the United States Code and ignore other parts of the United States Code (U.S.C.). However, it is a mistake to do so as Marci McNicol learned first-hand. In this case, the Federal Priority Statute found in 31 U.S.C. § 3713 came into play to impose liability on Marci for the decedent’s unpaid Federal income tax liability.

Here, at the time of his death, the decedent owed over $300,000 in Federal income taxes. As a result of this and other liabilities, the decedent’s estate, which consisted almost entirely of interests in two closely held companies, was insolvent. Marci, the decedent’s widow, transferred decedent’s interest in one of the companies to herself even before the court had appointed her as executrix of the decedent’s estate. Once she was appointed executrix of decedent’s estate, Marci transferred the other company to herself. Both transfers were without consideration at a time when Marci knew of her husband’s unpaid tax liability.

In October of 2003, the IRS filed a formal claim against the estate for the unpaid income taxes due. By November of 2006, however, the tax bill had not been paid, and the IRS again contacted Marci seeking payment. Marci informed the IRS in 2008 that she would no longer cooperate with them in the collection effort. At that point, the IRS served Marci with a formal notice of potential liability under the Federal Priority Statute, and ultimately filed suit against Marci in her capacity as executrix of the decedent’s estate to collect the decedent’s liability and also against her individually under the Federal Priority Statute for transferring assets to herself from the decedent’s estate without first paying the decedent’s Federal income tax liability.
The Federal Priority Statute provides that (1) a claim of the U.S. government against a decedent is to be paid first when the decedent’s estate or trust is insolvent, and (2) an executor or trustee who pays “any part of a debt” of an estate or trust prior to paying the government claim is personally liable for payment of such government claim. The trial court granted the government’s motion for summary judgment against Marci individually to the extent of the value of the property transferred to her from the estate.

Using such phrases as “it is clear beyond contradiction” and “the statute means what it says and says what it means”, the Appeals Court resoundingly affirmed the trial court’s order. The Federal Priority Statute creates a priority of payment outside the scope of the priority of payment provisions found in state probate codes, and outside the scope of Federal transferee liability provisions found in Title 26. Under the Federal Priority Statute, the executor or trustee is personally liable for the government’s claim as long as the following three requirements are present, with the burden of proof as to all three on the person seeking relief from such personal liability.

1. The executor or trustee transferred assets of the estate or trust prior to paying the government claim;
2. The estate or trust was insolvent at the time of such transfer; and
3. The executor or trustee had knowledge of the government’s claim or notice of facts that would cause “a reasonably prudent person to inquire” as to the existence of such a claim.

Interestingly, the Court did not limit personal liability to those transfers that occurred once the estate was opened and Marci was officially appointed executrix. This Court extended personal liability under the Federal Priority Statute to any person having control over the decedent’s property at the time it was transferred. Thus, this would extend personal liability under the Federal Priority Statute to any person having control over a decedent’s property that would be subject to the claims of the decedent’s creditors under applicable state law. This could include property held in any nonprobate transfer form, such as in a transfer on death account.

As a consequence of the potential personal liability under the Federal Priority Statute, an executor, trustee or person having control of the decedent’s property (referred to hereafter for convenience together as “executor”) should ascertain as quickly as possible the extent of the decedent’s debts and the value of the decedent’s property in whatever form held. If it is possible that the decedent was insolvent at the time of death, the executor should review the decedent’s income tax returns to determine whether all of the decedent’s income was reported and all the deductions were validly taken. The executor should review all of decedent’s gift tax returns and make sure that all taxable transfers were adequately disclosed on a gift tax return. Consider filing a Form 4810, Request for Prompt Assessment Under IRC § 6501(d) for all of the decedent’s open year income tax returns and gift tax returns, which will shorten the statute of limitations for such taxes to an 18 month period.

The Federal Priority Statute is not invoked to produce executor liability where estate assets were in fact used to pay expenses given priority under a state’s priority of payment provisions. If a determination is made that the decedent was insolvent at the time of death, or the estate could potentially become insolvent, close attention should be paid to the state priority of payment statute. The executor of a potentially insolvent estate should not make any disbursement or distribution, other than for those items given priority under the state priority of payment statute, until all Federal tax liabilities have been ascertained and paid.

Thursday, January 2, 2014

The Missouri Court of Appeals recently issued an opinion in Robert T. McLean Irrevocable Trust v. Ponder,[1] a case involving the question of whether a Trust Protector could be held liable in not exercising the right to remove and replace the Trustees of a special needs Trust.

The Robert T. McLean Irrevocable Trust (the “Trust”) was created with settlement proceeds from Robert McLean’s (“Robert”) personal injury case.  Ponder was appointed “Trust Protector” of the Trust with the right to remove the Trustee and appoint a successor Trustee.  The Trust Protector was also given the right to appoint a successor Trust Protector and to resign as Trust Protector.  The Trust also provided that the “Trust Protector’s authority was conferred in a fiduciary capacity” and that the Trust Protector was not liable for any actions taken “in good faith.”  The Trust did not provide Ponder with any power or duty to supervise the Trustees or direct their activities.


Friday, December 20, 2013

With research and drafting assistance from Washington University extern, Kelsey Delong.

In Williams v. Hubbard, et. al., the Missouri Court of Appeals addressed the issue of whether a beneficiary of a decedent’s estate would be entitled to funds from the decedent’s account if the payable on death (“POD”) beneficiary or joint owner of the account was found to have procured the beneficiary or ownership interests through undue influence. In this case, the court found that the beneficiary could have rights to some of the decedent’s multiple accounts, but not all of them.

In this case, Betty Margaret Reynolds (“Betty”) hired Respondent Kenneth Nelson to draft several of her estate planning documents, including a beneficiary deed, a 2000 Will, and a 2006 Will. The beneficiary deed named Appellant Eric Williams as the sole beneficiary of certain real estate owned by Betty. The 2000 Will drafted named Norma Lamp and Erma Baughman as equal beneficiaries. The 2006 Will named Respondent Sandra Nelson and Appellant Eric Williams as equal beneficiaries. (more…)

Friday, November 1, 2013

Originally posted on

Individual trustees who must administer real property often attempt to save the trust money by personally making certain improvements, repairs, or maintenance to the property.  They then charge the trust for the work they performed.  As the Nebraska Court of Appeals points out in In re Estate of Robb, however, these acts – however well-intentioned – may be self-dealing and can put the trustee in a position of a conflict of interest, which can warrant removal from that fiduciary position.

When Mason D. Robb died, his son, Theodore, became the personal representative of his estate and the trustee of the inter vivos Mason D. Robb Revocable Living Trust.  The trust contained three pieces of real estate.

Under the terms of the trust, the trustee was to hold and use the trust property to pay administrative costs and the debts of the settlor and for the benefit of the Mason D. Robb QTIP Family Trust.  The trust directed the trustee to separate the funds in the family trust into two equal shares: one for Theodore’s benefit and one for the benefit of his sister, Linda.  Theodore’s share was to be delivered to him outright while Linda’s share was to be held in trust.  Linda was also entitled to income distributions from her share of the family trust. (more…)

Tuesday, September 3, 2013

With research and drafting assistance from Washington University School of Law student, Kelsey DeLong.

In Estate of Lambur, the Missouri Court of Appeals addressed the issue of whether an attorney-in-fact is permitted to gift the principal’s property to herself when the gift is not expressly authorized in the power of attorney.

In 2005, Verna Irene Lambur (“Irene”) executed a durable power of attorney naming her nephew’s wife, Anna Stidham (“Anna”), and Jackie Johnson (“Jackie”) as her attorneys-in-fact. The power of attorney granted Irene’s attorneys-in-fact the following power:

“To establish, change or revoke survivorship rights in property or accounts, beneficiary designations for life insurance, IRA and other contracts and plans, and registrations in beneficiary form; to establish ownership of property or accounts in my name with others in joint tenancy with rights of survivorship and to exercise any right I have in joint property; to exercise or decline to exercise any power given to me to appoint property [sic]; to disclaim or renounce transfers to me of property; to make inter vivos gifts of my property to my lineal descendants, including my attorneys in fact, in amounts that are equal by line or class and in an amount for any person that does not exceed in any year the annual gift tax exclusion[.]”

Shortly after the execution of the power of attorney, Anna and Jackie transferred assets that Irene owned, individually, into two new accounts, each titled in the names of Irene, Jackie, and Anna, with rights of survivorship. Upon Irene’s death in May, 2005, the combined value the two accounts was $129,134.46. (more…)