Is your inheritance from a deceased family member’s estate held up due to the decedent’s outstanding tax returns or outstanding tax liabilities? Read this for your options …

Probate is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. The probate court will supervise the process when a deceased person (a decedent) leaves assets to distribute, such as bank accounts, real estate, and financial investments with or without a Will. The probate court provides the final ruling on the division and distribution of assets to beneficiaries.

In many cases, the decedent has established documentation, which contains instructions on how their assets should be distributed after death and designates in such documents who oversees implementing this process.  This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Where a decedent fails to establish such documents while alive, State law and the probate courts will dictate how the estate is administered and to whom assets get distributed to.

Probate With a Will 

A deceased person with a Will is known as a testator and he or she is deemed to have died “testate.” When a testator dies, the person designated as the executor under the Will is responsible for initiating the probate process. The probate process for a testate estate includes distributing the decedent’s assets according to the Will.

Probate Without a Will 

When a person dies without a Will, a person is to have died intestate. An intestate estate can also occur when a written Will is presented to the probate court and the probate court has been deemed the Will to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to State law.

What Is The Probate Process?

A probate court proceeding begins with the appointment of an administrator or executor to oversee the estate of the deceased person. Such personal is typically called the “personal representative.”  The personal representative receives all legal claims against the estate and paying off the outstanding debts. Also, the personal representative is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. Then the probate court will assess what assets need to be distributed among the legal heirs and how to distribute them.

The probate process can take a long time to finalize and can become costly, therefore it is important to know whether a probate is required following the death of an individual. The more complex or contested the estate is the more time it will take to settle and distribute the assets. Furthermore, the proceedings of probate court are publicly recorded so avoiding probate would ensure that all settlements are done privately.

Note though that having a Will does not mean that probate is avoided, it just serves a roadmap for the probate court. There are several options involved with end of life planning to help avoid the probate process.

Don’t think that a death of a taxpayer will make the IRS go away

If a decedent died owing taxes, the decedent’s Estate will be pursued by the IRS until the outstanding amounts are paid. Under the Statute Of Limitations For Collections, the IRS has up to 10 years from when a tax assessment has been made to enforce payment.  The last date for the IRS to enforce payment is called the Collection Statute Expiration Date (“CSED”). Whether there are any past outstanding tax returns or the current year of death return, the Administrator of the Estate, or other appropriate person, will need to get these tax filings up to date report all income made during the year prior to their death and file the necessary decedent’s tax return. Additionally, if the Estate is receiving income, the Estate must also file fiduciary income tax returns (Form 1041).

Who pays the decedent’s taxes?

The tax liabilities of the decedent or the decedent’s estate would be paid from the estate’s assets under a certain priority to claims of other creditors and before any distributions are made to the heirs and beneficiaries.  Such a process would be supervised by the probate court if the estate is being probated. Usually, collection of a decedent’s tax liabilities are limited to the assets of the estate. However, you may be required to pay the decedent’s taxes to the extent of assets you received from the decedent’s estate.

What if the estate is insolvent?

An estate is deemed to be insolvent when its liabilities exceed the value of the estate’s assets.  In this scenario, the taxes may go unpaid when there are insufficient funds to pay the decedent’s taxes. The IRS cannot transfer the tax to another person, except to a surviving spouse if the underlying tax liabilities come from joint income tax return that the surviving spouse filed with the decedent. In this case, the IRS may collect the tax balance from the decedent’s spouse.

IRS And State Tax Agencies Treated Like Any Other Creditor.

As part of the process of probate or any other estate administration including the administration of a trust, all creditors of the decedent including the IRS and any State Tax Agency must receive notice of the administration in order to establish the statutory period of time for such a creditor to file a claim.  Failure to provide such notice extends the time for a non-noticed creditor to file a claim.   When a claim by a creditor is filed, the Estate will have the opportunity to object to the claim and ultimately the probate court will determine whether the claim is stricken, modified or affirmed.

What Should You Do?

Don’t let a decedent’s unpaid tax liabilities get in the way of your inheritance.  At the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. Whether or not a will or trust exists, the expertise of a skilled lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. is needed to help protect the interests of the parties involved. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.