A Boutique Trusts & Estates Law Firm

How NOT to Probate an Estate

Monday, May 12th, 2014

Serving as a Personal Representative can lead to headaches if you don’t follow the rules.

Consider a recent federal case, United States v. Shriner. Mrs. Shriner died in 2004, and she failed to file income tax returns for the last several years of her life. Her two sons were appointed as Co-Personal Representatives of her estate, and they hired an attorney to file the missing tax returns. They also told the IRS to send all tax notices to the attorney.

The IRS notified the attorney (several times) that the estate owed over $275,000 in back taxes. (Mrs. Shriner apparently did well for herself.) By early 2006, the sons had distributed $470,000 to themselves as beneficiaries of the estate, leaving behind too little money for the estate to pay the tax bill. The IRS was not amused.

Under federal tax law, the sons were now personally liable for their mother’s back taxes, but only if they “knew or should have known” about the tax bill before they distributed the money. The sons claimed they did not know, and they blamed their attorney (naturally) for not telling them. To the court, that was no excuse, and it ordered the sons to pay a total of $333,000, including interest and penalties.

Was it really the attorney’s fault? The federal court did not say, but it appears the local probate court thought otherwise. According to the website for the Maryland Registers of Wills, the sons are no longer serving as Personal Representatives, but their attorney continues to serve as attorney for the estate.

The sons learned the hard way that beneficiaries should only get paid after all creditors, especially the IRS. Their plight is eased by the fact that they received enough money from the estate to pay the tax bill, but their liability would be the same even if they had distributed that money to other beneficiaries. Their problem was not that they received the money but that they distributed it at all.

Maryland and federal law establish several tiers of creditors of estates, and these creditors must get paid in the proper order of priority, or else the Personal Representative will be personally liable for any higher-priority debts that go unpaid. A Personal Representative who wants to avoid traps such as this one should seek the advice of a knowledgeable probate attorney (and to heed that advice).