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Can IRS Debt Be Passed Down to Children?

October 16, 2023

Coping with the loss of a loved one is challenging on its own, settling their financial matters shouldn't add to the burden. Wondering how you can manage a decedent’s tax liabilities? We can help.

What happens when a deceased person owes taxes? While an uncomfortable subject, it’s important to understand how their outstanding tax liabilities will be paid off after you have exhausted their remaining cash and assets. We explore this below.

What happens when a loved one dies owing money to the IRS?

Unfortunately, while some debts absolve after the debtor dies, that’s not true of tax debts. The debt becomes an obligation of the deceased’s estate, which is subject to an IRS lien. If the estate includes a home or other property, the lien will reflect that. The bad news is, none of the estate’s assets can be distributed to beneficiaries or used to pay off debts.

Who has to pay off the debt?

Unless you are your parent’s estate executor, you are not on the hook to cover their federal income and gift tax liabilities if their assets are insufficient to cover the remaining balances.

As estate executor, you might be held personally accountable for the tax bill 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.

What other instances would relatives have to cover debt?

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

In conclusion, a decedent’s estate is responsible for any tax debt and if there is an executor of the estate caution should be used prior to making any beneficiary distributions from the estate.

June Landry CTA

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