Unpaid estate taxes and the effect on heirs

When a person passes away, that person's estate is disbursed among heirs and beneficiaries. Before that can happen, the estate has to pay out debts. Some of those debts may include taxes.

Who is responsible if an estates taxes haven't been paid?

Tax liability falls to the executor of an estate. If there is no executor, then anyone who is in possession of the property becomes the executor of the estate.

Can the Internal Revenue Service file a claim for taxes on a trust?

In certain circumstances, yes. However, in some cases, particularly if a trust is set up and never funded, the IRS can't seek compensation for delayed taxes from the person who was a trustee or co-trustee of that trust.

Under Section 6324(a)2), trust beneficiaries can't be held liable for estate taxes. While they can be held liable for spouses, trustees or transferees who receive property, if a person is only a beneficiary of a trust, that person can't be held liable under current law.

Another way for trustees or transferees to avoid liability for taxes is if they don't receive property on the day of a person's death. If they do not control estate property, then a claim for tax relief from the government should be dismissed.

What happens to federal income tax debts?

A lien can be placed against your assets or estate to obtain the taxes owed. Before the property can be doled out, any debts must be satisfied. Setting up a trust doesn't eliminate tax obligations, and tax obligations follow the property.

There are many complications in figuring out what's owed, which is why trustees may choose to work with an attorney.

Source: Wealth Management, "Who's Liable for Unpaid Estate Taxes," Dawn S. Markowitz, Sep. 15, 2016

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