Am I Responsible for a Deceased Loved One’s Unpaid Tax Bills?February 15, 2021
Dealing with a loved one’s death is tough in itself, paying off their estate shouldn’t be—Read up on how you can manage a decedent’s tax liabilities.
*Editor’s Note: This blog has been updated as of February 15, 2021 for accuracy and comprehensiveness.
Have you recently experienced the death of a loved one? Wondering how their outstanding tax liabilities will be paid off after you and the estate’s executor have exhausted the decedent’s remaining cash and assets? This is a common situation, and luckily there are a few things you can do to ensure that the process of paying off a loved one’s taxes will be as painless as possible.
How do the debts get paid?
The decedent’s estate’s executor is responsible for negotiating and paying any debts left by an individual, using the decedent’s remaining money and property. If a decedent’s estate is insufficient to pay all debts (referred to as an insolvent estate), federal income and estate income taxes must be paid first.
Do relatives have to settle unpaid taxes with personal funds?
When a decedent’s assets are insufficient to cover his/her federal income and gift tax liabilities, relatives are not responsible for the remaining balances (unless a relative is the estate’s executor). The only person who might be held personally accountable for the tax bill would be the estate’s executor, if:
- The executor distributes assets to heirs and beneficiaries before paying the taxes,
- The executor pays off other debts of the estate before paying the tax liabilities, or
- The executor is aware of the insufficient funds and inability to pay the taxes and spends the assets otherwise.
Are there any instances where relatives have to pay?
Besides the exceptions listed above for relatives who double as estate executors, there are payment obligations for the following individuals when tackling a decedent’s debt:
- Anyone who co-signed for a loan with the decedent,
- Anyone who was a joint account holder with the decedent,
- Residents of community property states, like California, where a surviving spouse might be held accountable for debts,
- Residents of states where law requires a surviving spouse to pay off some of the debts—namely health care expenses, and
- Anyone who shares in any debt of the decedent
- There is no federal inheritance tax, but some states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) tax some assets inherited from the estates of deceased persons.
- If Income in Respect of a Decedent (IRD) assets like IRAs or 401(k)s are owned by the decedent and are distributed to their beneficiaries, this money would be taxable to the beneficiary in the year they receive it.
Make sure to check your state’s requirements and review loans or accounts, if any, that you have shared with the decedent.
Questions? Contact any member of our Private Client Services Team.