Clients often name a well-meaning relative as trustee or executor with little thought about what the role requires. A federal court case shows how costly that can be. Here’s what advisors should help clients understand before naming a fiduciary.
Key takeaways
- In U.S. v. Read, a trustee who distributed trust assets without paying a known tax liability was held personally liable for the tax.
- Fiduciary roles — trustee, executor, attorney-in-fact — are not honorary; they carry real legal and financial responsibility.
- Contingent and co-fiduciaries deserve the same care in selection as the primary.
Fiduciaries do not fill honorary positions — they must be ready to make life-altering decisions and keep the financial affairs in good order.
The Read case
In U.S. v. Read, a taxpayer funded an irrevocable trust for his children with his spouse’s appreciated stock options. Over time the options were exercised and the stock sold, creating an income tax liability of about $125,000 in the trust. Instead of paying the tax, the trustee distributed the trust assets to the children according to the trust terms.
When the IRS caught up, the U.S. District Court held the trustee personally liable for the tax, because he had paid other expenses while having notice of facts that would lead a reasonably prudent person to inquire about the debt owed to the United States.
What this means for your clients
Advisors routinely encourage clients to name fiduciaries: executors, trustees, agents under powers of attorney. Too often, clients pick a pleasant but semi-reliable relative willing to serve as a favor, with little understanding of the responsibilities.
A trust document may protect the trustee from claims by beneficiaries, but it does not necessarily shield them from third parties — especially the federal government.
Choosing contingent and co-fiduciaries
- Contingents matter. When planning for young children, the named fiduciaries are often older than the beneficiaries, so the contingent may well be called on.
- Co-fiduciaries must work together. Choose like-minded people who will advance the client’s purposes, and avoid structures that can produce tie votes.
- Consider professional help. For complex trusts, a corporate trustee or a professional co-trustee may be appropriate.
Where insurance advisors fit
Life insurance trusts, business agreements and estate plans all depend on capable fiduciaries. Encourage clients to have their attorney explain the duties and qualifications for anyone they appoint. For more on trust-owned coverage, see our articles on grantor trusts and estate tax liquidity. Contact us with questions about fiduciary roles in life, annuity, LTC or disability planning.
Frequently asked questions
Can a trustee be personally liable for trust taxes?
Yes. In U.S. v. Read, a trustee who distributed trust assets while aware of facts suggesting a federal tax debt was held personally liable for roughly $125,000 in unpaid tax.
Does the trust document protect the trustee?
It may protect a trustee from claims by beneficiaries, but it generally doesn’t shield them from third-party creditors such as the IRS.
Should a client name a family member or a corporate trustee?
It depends on the trust’s complexity and the family dynamics. Family members bring personal knowledge; corporate trustees bring expertise and continuity. Some clients use both as co-trustees.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
Connect on LinkedIn →We’re Here to Help
Have a question about what you just read, or a case you’re working on? Tell us a bit about what you need, and a member of the SRS team will follow up with you personally — no obligation, no hassle.
