Do the beneficiaries have to repay funds if the executor doesn't keep enough to pay tax?

What happens when an executor distributes an estate to the beneficiary and then - oops! - discovers that the tax owing is more than expected and there isn't enough left in the estate? This happens more often than you might think, even though most executors are aware that taxes must be paid first.

An executor in this position is up the proverbial creek unless the beneficiaries are willing to co-operate and give some of the money back. In most cases, however, either the beneficiaries have either already spent/used the money or they simply don't want to give it back. This is especially true when the beneficiaries know that the executor has used estate funds to pay for professional advice from lawyers and accountants and still hasn't got it right.

Legally the responsibility for these taxes lands squarely on the executor. He must pay the taxes and other expenses before he pays the beneficiaries. If he makes a mistake or miscalculation, he is legally responsible for the payment of the outstanding taxes.

In practice, almost all estates are paid out in part before the executor gets a Tax Clearance Certificate from Canada Revenue Agency. When that payout (known as an interim distribution)is made, the executor must calculate how much tax is going to be payable and hold back enough to pay it. I always advise executors to get an accountant to help them make the calculation to make sure they are holding back enough. I also advise adding a little bit more to the holdback as a cushion. If there is a bit too much held back and the taxes are paid leaving a bit in the estate, that bit can then be distributed according to the will.

Recently I had a note from a reader asking whether the beneficiaries were required to repay money when the executor miscalculates taxes, and whether the beneficiaries could be harassed for the money. This two-part question requires a two-part answer. No, the beneficiaries are not required to repay the money given to them by the executor. But can they be harassed? Well, unfortunately that could happen, since most people are quite willing to harass others without any particular legal reason.