Trustees often assume they primarily manage and distribute trust assets according to the trust. While that is mainly true, one critical issue can turn a trustee’s role from a fiduciary responsibility into a personal financial risk: estate taxes. Sometimes, trustees can find themselves liable for unpaid estate taxes, even if they never benefited from the trust. Understanding how this liability arises—and how to avoid it—is essential for anyone serving as a trustee, particularly in Maryland and Washington, D.C., where additional state estate taxes apply.
Generally, estate taxes are the responsibility of the executor of an estate. However, when a decedent’s assets bypass the probate process and are held in a revocable living trust, the estate may not have a formally appointed executor. In such cases, the trustee often steps into the “statutory executor” role for tax purposes. Under the federal tax code, the IRS can pursue “any person in actual or constructive possession” of the decedent’s assets for unpaid estate taxes. This means that if a trustee has control over estate assets but fails to ensure the proper payment of estate taxes, they can find themselves legally and financially responsible for the shortfall.
The risk of personal liability arises when trustees distribute assets before satisfying the estate’s tax obligations. Under federal law, the government’s claim to unpaid taxes precedes all other claims, including those of beneficiaries. If a trustee distributes trust assets to beneficiaries without first ensuring that estate taxes are paid, they may be held personally liable for the outstanding tax bill. This liability applies even if the distributions were made in good faith, assuming the trust held sufficient assets to cover all obligations.
Another potential risk emerges when a trustee fails to file the estate tax return or miscalculates the estate’s tax liability. If the IRS later determines that additional taxes are due, it may look to the trustee for payment. Sometimes, even beneficiaries or third parties possessing estate assets can be pursued under these rules, but trustees are the most obvious targets due to their fiduciary role.
While the federal estate tax exemption is set at $13.99 million for 2025, Maryland and Washington, D.C., impose their state-level estate taxes with different exemption thresholds:
Trustees managing estates in Maryland or D.C. must pay these estate taxes before distributing assets. Otherwise, trustees risk personal liability, just as they would with unpaid federal estate taxes.
For trustees, careful planning and adherence to tax obligations before making distributions are key to avoiding personal liability. The first step is understanding the estate’s tax exposure. If the estate exceeds the federal or state estate tax exemption, the trustee must ensure that estate taxes are calculated and paid before distributing any assets. Consulting with tax professionals early in the process can help determine the exact tax liability and prevent unexpected issues.
As important as calculating the tax obligation is prioritizing its payment before making distributions. While trustees often feel pressure from beneficiaries to distribute assets quickly, doing so before settling the estate’s tax obligations can be a costly mistake. The IRS has the authority to pursue a trustee personally if they distribute funds that should have been used to satisfy tax debts. The same applies to Maryland and D.C. state tax laws. Therefore, trustees should always retain sufficient liquid assets within the trust to cover all estate taxes before approving any distributions.
Another layer of protection comes from formally requesting relief from personal liability. Under IRC §2204, trustees can apply for a discharge from personal liability by submitting a request to the IRS. If granted, this discharge ensures that the IRS cannot later seek additional tax payments from the trustee, offering a much-needed safeguard.
Additionally, trustees may consider securing indemnification from beneficiaries. Where taxes are uncertain, trustees can require beneficiaries to sign indemnification agreements stating they will be responsible for any unexpected tax liabilities. This approach can be helpful when trustees are pressured to make distributions before all tax matters are finalized.
Trustees must be especially cautious for estates that qualify for installment payments under IRC §6166, where taxes can be paid over several years due to business assets. The IRS may require a bond or impose a tax lien to secure the deferred tax payments. If a trustee signs such a bond personally rather than ensuring the beneficiaries are the responsible parties, they could find themselves liable if the taxes are not paid as scheduled.
Serving as a trustee is a significant responsibility. While most trustees focus on fulfilling their duties to the trust and its beneficiaries, estate tax liability can be a hidden trap. The risk of personal liability arises when trustees make distributions without ensuring that federal and state estate taxes have been addressed.
For those administering estates in Maryland and Washington, D.C., the additional state estate tax obligations add another layer of complexity. Trustees must carefully assess tax obligations, prioritize tax payments over distributions, seek relief from personal liability where possible, and consider indemnification strategies.
Estate administration is complex; the IRS and state tax authorities take unpaid estate taxes seriously. However, trustees can fulfill their responsibilities by understanding the risks and taking proactive steps while safeguarding themselves from unexpected financial exposure. Protect yourself from trustee liability for estate taxes – call Altman & Associates today at 301-468-3220 or schedule a consultation at altmanassociates.net.
