A Personal Representative of an estate (“PR”) is personally liable for paying a decedent’s outstanding tax bills. This would include income taxes, gift taxes or estate taxes that may be owed by the decedent at the date of his or her death. For this reason, it is important that a Personal Representative engage a CPA, in addition to a probate attorney, for assistance in resolving potential tax issues.
A Personal Representative must be careful not to distribute any portion of the estate to beneficiaries before all federal taxes are paid, because he or she could be held personally liable to the extent of that distribution. It is the better practice not to make any distributions until tax issues have been identified and resolved. The costs of estate administration, which include compensation of Personal Representatives and their attorneys, along with reasonable funeral expenses not to exceed $6,000, do take priority over a claim by the IRS. Nevertheless, any family member clamoring to become a PR and take “control” of an estate should be aware of the potential tax liability that comes with obtaining that control.
What is even scarier is that, because failing to pay income taxes is deemed to be a breach of the personal representative’s fiduciary duty, the PR cannot dodge a claim by the IRS by declaring bankruptcy. A breach of fiduciary duty judgment against a Personal Representative generally is not dischargeable in bankruptcy. These are important considerations before you sign on to be PR of an estate.