Most people are aware of the little claims notice in the back of the newspaper. In Alabama, after someone is named as executor or executrix of a decedent’s Will or Estate, creditors are provided six months to file claims against the estate.
I always advise these executors and executrices to not pay any claims until the end of the six months. A recently released case reveals why: there is a priority of those entitled to receive assets. On Dec. 3, 2018, a U.S. District Court ruled that a special administrator of a probate estate is a proper defendant in a lawsuit to collect a decedent’s unpaid federal taxes.
In other words, the IRS sued the executor of an estate because he paid creditors before the higher priority of the IRS for taxes. What is the order of priority distribution: (1) federal income taxes, (2) burial and funeral claims, (3) general creditors, (4) and last heirs. Accordingly, all higher priority claimants must be paid in full before a lower level can receive anything.
For those practicing outside of the great state of Maryland, the case is essentially a cautionary tale on prioritizing creditors. Under 31 USC Section 3713, an executor of an insolvent estate is personally liable for payments made to creditors, other than the federal government, if an unpaid claim is due to the federal government. Assuming all assets of Pate’s estate were distributed to creditors (and not improperly distributed to beneficiaries), the representative of his estate would then be personally liable for Pate’s outstanding income tax bill to the extent payments were made to creditors other than Uncle Sam. For reasons not addressed in this decision, the government withdrew the claim against O’Brien individually and pursued the claim only in his representative capacity. However, the vast majority of our clients acting for an estate with insufficient funds to compensate all creditors will be well served by a reminder to prioritize outstanding federal taxes.
This means that if en executor wrongfully pays a lower level claimant first and there are not enough estate funds to pay the higher levels completely, the Personal Representative becomes personally liable for to pay the deficiency. OUT OF THEIR OWN MONEY.