As Benjamin Franklin once astutely pointed out, "Nothing is certain except death and taxes." Unfortunately, one does not preclude the other -- at least with respect to the hope that death will prevent Uncle Sam from pursuing a tax lien. Under the current Internal Revenue Code, estate tax liens can haunt survivors and executors for up to a decade following the death of the debtor. The IRS can attach liens to virtually any piece of real or personal property, and the lien can follow property from seller to purchaser without notice. In addition, each state tax code contains provisions and guidelines for the payment of unpaid state and local taxes upon the death of the debtor.
Federal tax liens attach to any and all assets that are part of a deceased person's gross estate. This includes houses, land, vehicles, furniture and financial investments. It doesn't matter whether certain property is held in trust at death or passes through the probate process. Both probate and non-probate property are subject to a federal tax lien. The tax lien will attach to property inherited by heirs, and the new owner will be responsible for payment of the debt.
Sale of Property
In the past, executors have attempted to evade federal tax liens by transferring, liquidating or selling the debtor's property immediately before death. This will not deter the IRS because it has the right to pursue the transferee or purchaser for the unpaid bill. If the item sold was part of the decedent's probate and went through the court-supervised probate process, the lien will continue to attach to that specific piece of property. If a non-probate item is transferred through a trust or other estate planning mechanism, the IRS will attach a lien equal to the value of the item against the person who received the item as opposed to the item itself.
Satisfying the Debt
When the IRS is ready to collect a tax payment, it will make a claim in the probate court responsible for overseeing the distribution of the estate. The judge will then order the executor of the estate to pay the balance due out of the estate proceeds. If there is not enough money to pay the tax, items must be sold out of the estate so the proceeds can be used to pay the tax. A federal tax lien is the first debt that must be paid, after family allowances and funeral costs. If heirs collect personal or real property before the tax lien is satisfied, the IRS will file a judgment against the heir until the lien is satisfied. This can result in a levy, garnishment of wages or foreclosure of the property.
In any situation in which debts are being paid off or discharged, state and federal laws impose priority requirements. "Priority" refers to the order in which proceeds are used to pay off anxious creditors. This term is also prevalent in the foreclosure context. Current IRS rules mandate that a federal tax lien takes priority over any other creditor's interest in a property, even if the tax lien occurred after other debts were incurred. This rule is only trumped by a court order altering the priority status of creditors, unless a creditor had a reason to know a federal or state tax lien existed at the time credit was extended.
The IRS imposes special rules when the tax lien involves a closely held family business. If an estate tax lien is comprised mostly of income derived from a family business or farm, the IRS will conduct a special valuation and might be able to work with the surviving family members to assess a lower tax bill. One stipulation is that the family must agree to continue running the business or operation for at least 10 more years. These special tax liens are not assessed against subsequent purchasers of the property or business, but they do remain against the original family members even if the property is sold.
- Internal Revenue Manual: Estate Tax Liens
- Internal Revenue Code: Insolvencies and Decedent's Estates
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sep. 18, 2020.
- Experian. "Tax Liens Are No Longer a Part of Credit Reports." Accessed Sept. 18, 2020.
- Experian. "What Affects Your Credit Scores?" Accessed Sep. 18, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act 15 U.S.C § 1681," Page 22. Accessed Sep. 18, 2020.
Stephanie Reid has been writing professionally since 2007, with work published in the Virginia Bar Association's "Family Law Quarterly" and the "Whittier Journal of Child and Family Advocacy." She received her Juris Doctor from Regent University and her Bachelor of Arts in French and child development from Florida State University. Reid is admitted to practice law in Delaware and Maryland.