TRUSTEES CAN BE LIABLE FOR TAX

United States v. Karst is a clear warning that stretching out estate tax payments under Section 6166 does not protect trustees from personal liability if they pay themselves before paying the IRS.
Section 6166 allows an estate whose assets consist largely of closely held business interests (generally more than 35% of the adjusted gross estate) to elect to pay part or all of its federal estate tax over time—up to 10 annual installments after a 5‑year interest‑only period. This can help avoid a forced sale of a family business, but it also keeps the IRS’s collection rights open longer.

​In Karst, a Kansas federal district court held co‑trustees personally, jointly, and severally liable for unpaid estate tax, interest, and penalties after they distributed trust assets to themselves even though they knew the estate tax had not been fully paid, and then stopped making the Section 6166 installment payments. Under Section 6324(a)(2), anyone who receives non‑probate property (including trustees and beneficiaries of a revocable trust) can be personally liable for the estate tax up to the value of what they receive. When an estate elects to pay tax in installments under Section 6166, Section 6503(d) pauses the normal 10‑year IRS collection period for as long as the deferral is in effect, which extends the time the IRS has to pursue trustees if payments stop or the election goes into default.
Key points for clients:

• Trustees who receive or control non‑probate assets that are part of the taxable estate must treat unpaid estate tax as a top‑priority debt. Paying themselves or other beneficiaries while the tax is still outstanding can create direct personal liability.
• A Section 6166 election can provide valuable breathing room by allowing installment payments, but it also suspends the IRS’s collection statute during the deferral period. If payments are missed or the plan is abandoned, trustees may face collection well beyond the 10‑year window they might otherwise expect.
• Practical risk‑management steps include closely monitoring Section 6166 payment obligations, documenting decisions about liquidity and how taxes will be paid and avoiding discretionary distributions to trustees or beneficiaries until estate tax liabilities (including interest and penalties) are fully funded or otherwise resolved.