Tax season is upon us. While taxes may not have an obvious connection to your end-of-life planning, staying current on your taxes is actually an important part of putting your affairs in order.
If you’ve fallen behind on filing your taxes over the years, this liability doesn’t automatically disappear once you pass on. In fact, in can haunt your heirs in perpetuity. Today we examine what happens to your back taxes following your death:
Responsibility of your executor
Once you pass on, all of your assets become your estate. If you have any outstanding tax debt, the IRS puts an automatic lien on your estate to claim the money it is owed. The IRS must receive payment before any of your assets can be distributed to your heirs. If your executor-or administrator-distributes such assets before the IRS lien has been paid off, then this person now inherits your tax liability-a heavy burden.
Influence on your heirs
You may have set aside a significant portion of your assets for your heirs to inherit. But in the ladder of priorities, your tax debt overrides your heirs’ inheritance. In other words, your tax debt could reduce the amount your heirs stand to receive.
What if I set up a trust?
If you’ve been consulting with an estate planning attorney, you’ve probably heard of the advantages of setting up a trust for your estate. A trust offers many benefits to your heirs. It can allow your heirs to avoid a lengthy probate process and reduce the taxes they owe on inheritance. However, creating a trust does not protect your assets from your tax obligations.
Death does not nullify your tax debt. Don’t leave your loved ones to inherit this burden from you. Talk to your estate planning attorney to create a plan that factors in your tax repayment.