How to Handle Unexpected Debts on an Estate
By: Barry E. Haimo, Esq.
October 28, 2021
Taking the time to plan your estate is a critical step in ensuring your legacy and assets are protected after you are gone. But what if you have outstanding debts after you pass that you did not foresee? Or you will be responsible for the estate tax debt of a loved one? Unexpected debts can place undue financial stress on families during an already difficult time.
Understanding the process of handling a decedent’s debts, along with the support of trusted legal counsel, can help alleviate the stress of unexpected estate tax debt.
Estate Tax Debt After Death
“Don’t mess with the IRS” is a familiar warning to anyone who has filed taxes, and it applies even after death. Any unsettled IRS tax balance assessed in the five years prior to your death is still delinquent.
If your individual or estate tax debt is outstanding, your family and heirs can be subject to liability and collection.
Who Debts Affect
- Your Estate. In the event of delinquent tax debt, your bank accounts and property can be seized without proper estate planning protection.
- Your Spouse. If you filed a joint tax return with your spouse that has unsettled debt, your spouse can be responsible for any outstanding amount after your death.
- Your Heirs. Any assets you plan to leave your heirs or family can be at risk if you have any tax debt. In the event of your death, your outstanding debts must be paid first before your estate can be divided among your beneficiaries. So selecting legal counsel who understands tax debt is key to guiding the personal representative through the process.
The Role of an Estate Administrator
An estate administrator, or personal representative, is an appointed individual who is responsible for handling a deceased person’s estate matters after their death. This includes handling their debts. They must use the assets of the estate to settle the outstanding debts and costs of administration, then they can distribute the remaining assets among the estate’s beneficiaries.
Estate Administrators must follow the following steps regarding debt:
- Create a record or list an estate’s outstanding debts
- Determine the legitimacy of the debt
- Settle the estate’s debts
An estate with debt greater than the assets is referred to as “insolvent.” Federal income and estate tax debts take precedence over all other outstanding debts, and must be paid first. Other administrative preferences also have priority, including medical bills and benefits and funeral expenses.
Is the Family Liable?
Perhaps the most daunting part of estate tax debt is worrying that it will fall on your loved ones in your absence. Fortunately, this isn’t usually the case. In the event that an estate’s funds cannot cover the deceased’s federal income and tax liabilities, the surviving family isn’t expected to open their pocketbooks.
In an insolvent estate, the family would not inherit the assets they may have hoped for, but they aren’t personally responsible for outstanding balances. That being said, there are a few exceptions when a family member may be responsible for estate debt:
- A family member who is the designated estate administrator
- Family who were co-signers on loans, property, or accounts with the deceased
- Spouses who filed joint taxes
- Any family subject to the laws living in “community property states” (Florida is not a community property state)
If you are currently involved in handling the estate of a family member, it’s important to review their will and trusts closely, and any loans or estate tax debt they have. Also, educate yourself on the current state tax laws and requirements.
Knowing how to plan ahead and handle unexpected estate tax debt isn’t always easy. Engaging in asset protection and estate planning are great ways to protect your estate from surprise debt. Having a trusted attorney in your corner can help.
Haimo Law has a 4-step unique proven process, which makes leaving a legacy you can be proud of easier than you think. Call us to get started today at 954-228-3369.
Barry E. Haimo, Esq.
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