Probate, Estate and Trust Tax Problems
Probate, Estate and Trust Tax Problems
Loss of a loved one or close friend can be painful and difficult. Furthermore, discovering a decedent’s unresolved tax problems can be overwhelming.
When someone passes away, their tax obligations do not automatically go away. The executor or trustee must ensure that the decedent’s tax filings are up to date, and that the estate or trust liabilities, including tax liabilities, are paid before distribution of assets to heirs or beneficiaries. If the tax returns are not all filed and/or the estate or trust liabilities are not properly paid in accordance with state and federal rules of priority, the executor/personal representative or trustee could face personal liability for the tax liabilities the estate or trust owes.
Seeking the guidance of an experienced and knowledgeable tax attorney can prove extremely helpful in navigating these sensitive issues.
Unfiled Tax Returns When Administering an Estate or Trust
The surviving spouse, executor, personal representative, or trustee is generally required by law to file the decedent’s final tax return. The executor/personal representative of the estate and the trustee of the trust are required by law to file all unfiled prior year tax returns and required estate or trust income tax returns (IRS Form 1041).
Preparing the decedent’s final tax return can be complicated and involves many issues such as whether to file married filing separately or jointly (if married), separating income between the decedent and the estate, determining whether assets pass as a matter of law or are included in an estate or trust, and if there are adequate assets to pay all tax liabilities owed before assets are distributed.
Importantly, unfiled tax returns must also be resolved to effectively administer the estate or trust’s tax liabilities because the IRS considers unfiled tax returns and unassessed taxes to be part of the estate or trust’s tax liabilities.
Our tax attorneys, CPAs, and tax accountants have the skills and experience to navigate the complex issues of preparing and filing a decedent’s final tax return and prior year unfiled tax returns, as well as estate and trust tax returns. Contact us today to discuss how we can help.
Tax Liabilities When Administering an Estate or Trust
The executor/personal representative of the estate or the trustee of the trust becomes responsible for managing the estate or trust assets and paying off any liabilities, including lingering tax liabilities. When estate or trust liabilities go unpaid or unresolved, the IRS has the authority to take enforcement and collection action against the estate, trust, the executor, and in some cases, heirs and beneficiaries.
When an estate or trust is insolvent, it means the total value of its liabilities exceeds its assets. This situation can create significant challenges for the executor/personal representative or trustee, especially regarding the estate or trust tax obligations.
Key Issues
Priority of Payments:
In an insolvent estate, the executor must prioritize debt payments according to state and federal priority statutes, which places federal taxes at the top of the list, followed by state taxes and then other liabilities.
However, some costs, such as funeral expenses and estate administration costs, may even take precedence over tax liabilities.
IRS Priority:
Under the Federal Priority Statute (31 USC 3713(a)), the IRS is generally entitled to payment of federal taxes before other creditors in an insolvent estate.
An executor who pays other liabilities before federal tax claims could be held personally liable for the unpaid income tax liabilities.
Executor’s Responsibility:
Many executors/personal representatives are surprised to learn that they may become personally liable for the tax liabilities of deceased individuals whose estates or trusts they are administering.
The executor is in charge of managing the estate’s finances and liabilities, including taxes, and has a duty to conduct a reasonable investigation into the decedent’s tax history and potential problems. This involves filing required tax returns for the deceased. Not doing so can lead to the executor being held personally responsible.
Tax Liabilities When an Estate is Insolvent:
If an estate doesn’t have enough money or assets to cover tax liabilities, the estate is generally still responsible. However, if the assets are inadequate, the IRS may not be able to collect all of the unpaid taxes.
Beneficiary’s Liability:
Typically, beneficiaries or heirs are not personally responsible for the deceased’s liabilities or taxes unless they have a joint financial obligation or live in a community property state.
Their inheritance might be reduced or delayed if estate assets are used to pay taxes and/or other liabilities.
Handling Unpaid Taxes: Seek Professional Guidance
Dealing with estate or trust tax issues after the death of a loved one is complex and challenging. Getting advice from an experienced dual licensed tax attorney-CPA can help navigate the process and avoid further issues. Reasonable legal and tax accounting fees incurred to resolve tax issues are generally an administrative expense payable from estate or trust assets.
Call us at 866-995-006 or reach out by completing our contact form to see how our team of tax attorneys, CPAs, and tax accountants can help!