Tuesday, November 6, 2018
The Internal Revenue Service has been emboldened by the strength of federal law and a recent case in which federal taxes were deemed a higher priority than fiduciary fees, thus creating issues for unwitting executors for insolvent (yet materially wealthy) estates. These type of estates usually involve an impressive menagerie of assets anchored with debts, such as homes with large mortgages, promissory notes in favor of closely held businesses, and high credit card balances.
The messy web of debts may also be coupled with tangled relationships with ex-spouses, children, and disputes with present or former business associates. There could be obligations from a divorce decree or settlement that must be performed before other responsibilities, so an advisor should work with the executor to lay out a plan. It should succinctly explain all assets and liabilities and a strategy for locating other assets and liabilities, and understand state statutory requirements to prioritize certain claims if the estate cannot sufficiently pay all claims. Many states are modeled after the Uniform Probate Code, but may have subtle differences.
The executor is free to negotiate with creditors in the best interest of the estate, and many creditors are willing to do so. They may believe that some money is better than no money at all.
Lastly, devise a method to protect the executor. On the opening of the estate, the executor should consider filing in the probate court a request for authority to pay fiduciary compensation and other expenses of administration, even if those expenses are still unknown at the time.
See Mark D. Brandenburg, Insolvent Estates of Wealthy Decedents, Wealth Management, October 31, 2018.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.