In my previous column, I discussed the responsibilities of executors, the persons who are the key figures in the settling of estates. Here, I’ll discuss why this is crucial and how badly things turned out for executors who failed to obtain the proper tax advice.
The need to obtain the right kind of advice was made expensively clear to the son and daughter-in-law of Henry Lammerts, who owned a Cadillac dealership in Niagara Falls, New York, and died in 1961—and who had designated them as his executors.
Upon Henry’s death, his son took over leadership in settling the estate. While he was under the impression that a tax return had to be filed for his father, he was unaware of the need to file an income tax return for the estate.
The son found out from his accountant that no return had been filed reporting income received by the estate. The filing was eventually done seven months after the due date and elicited an IRS assessment that included a sizable late-filing penalty.
The executors argued that they were new at this sort of thing and had relied on their accountant and the estate’s lawyer to do whatever was necessary. Of course, the accountant’s and the lawyer’s recollections significantly differed when they testified in court.
The accountant said there was nothing in his past services to the family to suggest that, on his own initiative, he would have to file an income tax return for the estate. Similarly, the lawyer pointed out that neither of the executors had asked him for a rundown of the responsibilities attached to being an executor. Consequently, the trial court’s approval of the penalty was upheld by the Second Circuit Court of Appeals.
Now consider the predicament of Kenneth Leigh, production manager of a dress business. Because of his familiarity with the company, Kenneth became the court-appointed administrator of the estate of the owner, who died without a will. He knew nothing about administering an estate but retained an attorney in whom he had complete confidence.
He tried to read estate documents presented to him for signature; by and large, however, he blindly relied on the lawyer's competence. Several days before Kenneth's submission of a final accounting to the probate court, the attorney asked him to sign an amended estate tax return.
It listed assets that were overlooked in the original return. Kenneth saw the amended document’s cover page showed an additional $27,000 due, but he signed without questioning the lawyer about the amount.
The probate court approved the accounting, although it didn’t reflect the additional estate tax. To wind things up, or so Kenneth thought, he went ahead with a distribution of the remaining assets to the heirs.
Not long afterward, he received an IRS notification. Sorry, it said, but Kenneth was personally liable for the $27,000, as he was aware that taxes were due at a time when the estate had sufficient assets to pay them.
Apparently, Kenneth was unable to get the heirs to take care of the taxes. So the dispute wound up in the Tax Court, which rejected his argument that, as a layman inexperienced with estate matters, his reliance on competent counsel relieved him of the duty to inquire as to the proper disposition of the estate.
The court cited his awareness of the general obligation of estate taxes, the signing of the original tax return and payment of the tax and the signing of the amended return — circumstances that indicated actual knowledge on his part of the existence of the debt. He had an obligation, said the court, independent of any reliance on his attorney, to look at the face of the amended return to see whether any additional tax was due.
Then, a reasonable inquiry of the lawyer would have revealed the tax was still unpaid. Because Kenneth failed to do those things, he was personally liable for the amount owed.
Suppose, as is not uncommon, executors volunteered to serve without compensation and weren’t heirs. Would that persuade the courts to rule that executors who received nothing also owed nothing to the IRS? Put it this way: If I’m going to represent one of the two parties and I’m being compensated on a contingency basis, I’d want to represent the IRS.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.