A would-be executor or adminsitrator may not fully appreciate the complexities that can arise. Estate administration often involves discovering financial surprises that the deceased never anticipated.
For example, a family member who steps into the role of executor or administrator for the estate may find outstanding debts or tax liabilities that complicate the distribution of assets. These unexpected obligations can dramatically alter what beneficiaries ultimately receive.
One particularly thorny issue arises when a deceased person’s tax liability stems from income they didn’t realize was taxable. In community property states like Texas, this situation becomes even more complex because each spouse may be liable for taxes on community income—regardless of which spouse earned or controlled that income. This can raise very difficult questions. One such question is when a will directs the executor to pay the testator’s taxes, does that include taxes on community income for which the surviving spouse is also legally responsible?
Tabassi v. NBC Bank—San Antonio, 737 S.W.2d 612 (Tex. App.—Austin 1987, writ denied) provides an opportunity to consider this issue. It is a case where the will provided that taxes be paid, but the taxes were a community liability.
Facts & Procedural History
Mary worked as an art teacher at San Antonio College when she married Monib in 1980 in Mexico City. Monib was an Iranian national who had fled Iran with his two sons, Lame and Sane. The couple settled in San Antonio and had one child together, Rashid. Monib died of cancer in 1986.
Mary owned her residence in Marion at the time of marriage. Monib’s sole income during the marriage consisted of interest generated by his separate property funds deposited in foreign bank accounts. The estate was valued at over $3.1 million. Under Monib’s will, Mary received her community one-half interest plus specific bequests totaling over $600,000. The will established a testamentary trust funded with approximately $548,000 for Rashid’s benefit. Lame and Sane each received $333,000 under the will.
The probate dispute involved the independent executor, NBC Bank—San Antonio, who determined that the estate owed $943,200 in unpaid federal income taxes for tax years 1981 through 1986. These taxes had accrued on interest income earned by Monib’s separate property funds held in foreign bank accounts. Neither Monib nor Mary had been aware during his lifetime that their gross incomes for federal tax purposes included this foreign interest income.
The trial court found that the will unambiguously expressed an intent that the estate be liable only for taxes and debts for which the testator was individually liable. Because the income generated by Monib’s separate property was community property under Texas law, the court held that Mary was liable for one-half of the income tax attributable to it during the marriage. This allocation meant Mary would owe $471,600 of the tax liability. That amount would reduce the net value of her share of the estate to approximately $122,000.
Mary filed suit in the probate court seeking a declaratory judgment and equitable relief. The probate court ruled against Mary. She appealed.
How Texas Community Property Law Creates Joint Tax Liability
Texas is a community property state. Under the Texas Family Code, property acquired during marriage is presumed to be community property unless shown to be separate property. While separate property remains separate, the income generated by separate property during marriage becomes community property—though it remains under the sole management and control of the spouse who owns the underlying separate property asset.
This income is called “special community property” or “sole management community property.” Texas Family Code Section 5.22 gives the spouse whose separate property generates the income the exclusive right to manage and control that income. The other spouse has no say in how those funds are spent or invested during the marriage. However, this management right does not change the fundamental character of the property as community property. The non-managing spouse still owns a one-half interest.
Federal tax law treats community income differently than state law treats management rights. Under federal law, one-half of all community income is taxable to each spouse, regardless of which spouse exercises control over that income. The United States Supreme Court established this principle in Hopkins v. Bacon, 282 U.S. 122 (1930), and reaffirmed it in United States v. Mitchell, 403 U.S. 190 (1971). These holdings mean that even when one spouse has no knowledge of or control over community income, that spouse still bears tax liability for one-half of it.
In this case, the interest income from Monib’s foreign bank accounts was his separate property. However, the interest earned on those funds during the marriage was community property under Texas law. Despite Monib’s sole management right, federal tax law treated half of that income as taxable to Mary. Neither party disputed these characterizations. The question was not whether Mary was legally obligated to the IRS for half the taxes—she clearly was. The question was whether Monib’s will required his estate to pay her share of those taxes on her behalf.
What the Will Said About Paying Taxes
Monib’s will contained specific language directing the executor to pay taxes and debts from the residuary estate. The relevant provisions stated: “Pay all of my taxes, including Federal Estate, State Inheritance and Estate Taxes and other death taxes… out of my residuary United States and England property estate without apportionment.” The will further directed the executor to “pay out of my residuary United States and England property estate my just debts.”
The emphasis on “my” taxes and “my” debts became the focal point of the dispute. Mary argued that “my taxes” should be interpreted broadly to include all taxes related to income from assets Monib considered his own. The executor and sons argued that “my taxes” should be interpreted according to federal tax law, which classified half the taxes as Mary’s legal obligation.
The parties agreed that neither the decedent nor Mary knew about the accruing tax liability during his lifetime. This lack of knowledge meant that Monib could not have specifically contemplated this particular debt when drafting his will. Mary contended that this created ambiguity that should be resolved in her favor.
Can Unknown Circumstances Create Ambiguity in a Will?
Texas law provides a framework for interpreting wills. The fundamental goal is always to determine the testator’s expressed intent regarding property disposition. An unambiguous will must be construed as written within the four corners of the instrument. The intent must be drawn from the will—not the will from the intent.
When words in a will are capable of more than one meaning, evidence becomes admissible to determine the testator’s intent. Extrinsic evidence may include information about the testator’s situation, the circumstances existing when the will was executed, and other material facts that enable the court to place itself in the testator’s position at the time of execution. However, the intention of the testator must ultimately be found in the words of the will itself. The testator’s other declarations of intent dealing with the subject of the will are generally not admissible.
Mary argued that the will contained a latent ambiguity that could be resolved by considering Monib’s circumstances when he executed the will. She offered her testimony that during their marriage, Monib treated his assets and the income from them as belonging solely to him. She testified that Monib “always paid his taxes on his earnings” while she paid hers separately. Mary contended that this evidence showed Monib would have intended to assume the entire tax liability himself if he had known about it.
The court found this testimony inconclusive. The record showed that Monib had paid federal taxes for only two of the five years he lived in the United States. One check dated May 17, 1983, in the amount of $1,815.15 apparently paid his 1982 tax obligation on a single return. A second check for $2,460.98 presumably paid 1984 taxes for a year when Monib filed a joint return with Mary. From this limited evidence, the court could not infer that Monib intended his estate to assume sole liability for $943,200 in back taxes.
The Presumption That Testators Know the Law
The court faced a situation where the testator was completely ignorant during his lifetime of the tax liability that would later surface. Monib did not know that foreign interest income had to be reported on U.S. tax returns. He therefore could not have formed any specific intent about how to handle this particular debt when he drafted his will.
The court addressed this problem by applying a legal presumption. When a testator is unaware of circumstances that arise after death or during life, those circumstances may not be allowed to create an ambiguity where one would not otherwise exist. Instead, courts presume that the testator knew the applicable law. In this case, that meant presuming Monib knew about the operation of state and federal law regarding the characterization and allocation of liability for taxes generated by income on separate property.
This presumption serves an important purpose in will interpretation. If courts allowed post-death discoveries to create ambiguities in otherwise clear language, almost any will could be subject to reinterpretation based on circumstances the testator never contemplated. Every unexpected debt or changed circumstance could become grounds for rewriting testamentary provisions.
The court explained that because the decedent was unaware of the tax liability during his lifetime, the will could not be deemed to express any intent about the allocation of this unknown debt. Therefore, in the absence of clearly expressed contrary intent, the court would presume that the testator intended existing law to be applied. Existing law meant that Mary was liable to the IRS for half the taxes on community income.
The court found support for this approach in analogous cases. In Sneed v. Pool, 228 S.W.2d 913 (Tex. Civ. App. 1950, writ ref’d n.r.e.), the court held that inheritance taxes imposed on beneficiaries must be paid by those beneficiaries unless the will clearly states otherwise. Similarly, in Norton v. State, 210 S.W.2d 820 (Tex. Civ. App. 1948, writ ref’d), the court refused to interpret a will as requiring the estate to pay taxes that were legally the responsibility of beneficiaries. These cases establish that courts will not assume a testator intended to pay someone else’s tax obligations unless the will says so explicitly.
How Courts Interpret “My Taxes” in a Will
The interpretation of the phrase “my taxes” became the central issue. Under federal law, Mary was liable for half the taxes on community income. Those taxes were therefore not “his” taxes but rather “her” taxes. The will directed payment of “my taxes” from the residuary estate. This language could not reasonably be stretched to include taxes that federal law attributed to the surviving spouse.
This interpretation aligns with the principle that courts should not make gifts by implication. If Monib had wanted his estate to pay Mary’s tax obligations, he could have said so. He could have directed the executor to pay “all taxes related to income from my separate property” or “all taxes on interest from my foreign accounts including any taxes attributable to my surviving spouse.” Such language would have clearly expressed an intent to pay Mary’s share of the taxes. But Monib used the much narrower phrase “my taxes.”
The court’s interpretation respects the written words of the will. The will said “my taxes.” It did not say “all taxes on income from my separate property.” Taking those words at face value leads to the conclusion that only taxes legally attributable to the testator should be paid from his estate. Mary’s position would require reading additional words into the will. Courts are reluctant to add words that the testator did not include.
The Takeaway
This case shows that when a will directs an executor to pay “my taxes” or “my debts,” Texas courts will apply federal and state law to determine which obligations legally belong to the testator and which belong to others. Executors cannot assume that unknown tax liabilities should be paid entirely from the estate simply because the testator was unaware of them during life. Courts presume testators know the applicable law and intend for that law to be applied unless the will clearly states otherwise. For surviving spouses in community property states, this means they may remain liable for their share of taxes on community income—even income they never controlled—unless the will explicitly directs the estate to pay those taxes on their behalf. The Tabassi case makes clear that circumstances arising after death or unknown to the testator during life cannot create ambiguity in otherwise clear testamentary language. Executors administering estates with unpaid tax liabilities should carefully analyze whether federal tax law attributes any portion of that liability to the surviving spouse before paying the entire amount from estate assets.
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