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Don’t make your heirs pay your estate tax bill

The prospect of inheriting property is, for most people, pretty appealing, for obvious reasons. In some situations, though, inheriting property can be a frustrating experience. That is certainly the case when the estate of the deceased person failed to adequately provide for the payment of the estate tax.

When an estate fails to pay estate taxes, beneficiaries can be held personally liable, as can trustees. That being said, the IRS does have a limit as to how far back in time it can reach for unpaid estate taxes. In most cases, the limit is three years, and in some cases six years. 

When an estate fails to fully pay its tax debt, the estate’s personal representative is required by law to pay the IRS first. Failure to do so puts the personal representative personally on the hook.

When a beneficiary becomes liable for tax debt, it may force him or her to liquidate the assets they inherited in order to pay the bill. That is clearly not a situation anybody wants to run into.

There are a variety of ways to avoid this situation that fit a variety of different circumstances. The important thing is to set aside adequate money to take care of tax bills that will accrue to the estate. This is often done by means of life insurance policies. Whatever the means used, it is important to get an adequate sum in place. That way, beneficiaries will not end up on the hook for tax debt because of a failure to plan ahead. 

Source: Forbes, “When Estates Don’t Pay Tax, IRS Chases Beneficiaries,” Robert W. Wood, June 28, 2013.