Yes, inheriting tax debt from a family member or loved one is possible. However, you generally do not have to shoulder the financial stress of paying off a huge tax debt out of your own pocket. Inherited tax debt often becomes a genuine concern only if the amount is too big for the estate to pay off.
Who pays for the deceased’s tax debt?
When someone passes away, their estate becomes responsible for settling any outstanding tax debts. Heirs or beneficiaries often do not become personally liable for the debt.
Generally, the government has a claim against all back taxes the deceased owes from the estate before any named beneficiaries can receive their inheritance with some expceptions. While you do not directly inherit the deceased’s tax debt, you may still feel its impact on the assets you stand to inherit.
In the case of insufficient estate assets
If the tax debt is larger than the estate’s value, you may have nothing left to receive. The IRS may write off any balance left on the tax debt as a loss. This holds true even if the debt and estate you were supposed to receive are under your parents’ names.
In some cases, the IRS may try to collect payment for sizable unpaid taxes from the deceased’s beneficiaries. The agency can do this using the concept of “transferee liability” or “transferee theory.” However, this sometimes happens in cases involving significant tax evasion or fraudulent activities.
Indirect ways you can inherit tax debt
Take note that there are some cases where you may indirectly inherit tax debt or deal with issues related to unpaid taxes. These include:
- Inheriting property with a tax lien
- Being named executor of an estate with unpaid taxes
- Receiving assets from a trust with outstanding tax debts
- Being a co-signer or joint owner of a property with back taxes
What to do if you inherit tax debt
If you want to keep a particular property or asset rather than use it to help pay off your loved one’s sizable debt, it may be possible to negotiate a payment plan with the IRS. Don’t hesitate to seek professional legal advice. Consulting a tax attorney can help you understand your situation and obligations, as well as find the best solution for your circumstances.