The death of one’s parents is a very emotional event for people and to compound the matter it comes with all sorts of legal matters, including the settling of the parents’ estate. And, in some cases, the estate brings with it taxes still owed. However, taxes owed by your parents don’t automatically pass onto descendents. The possibility of transfer depends very much on how the taxes were filed.
The Basic Rule
Parents, like anyone else, are responsible to pay the taxes they owe in their lifetime. That means if they pass away, their estate is responsible to take care of the tax obligation. This tax payment needs to occur prior to any of the estate assets being distributed per an inheritance. This includes assets such as a home, cash in bank accounts, investment securities, property and collectibles, and more. The executor of the estate is responsible to make sure the tax payments happen.
Estate Taxes Happen After Death
Estate taxes under federal law are owed when an estate is created by a person’s death. There is currently a one year exemption in 2010 that increases the value of an estate higher than most people have, but the ceiling drops again to an estate value of $1.5 million in 2011 when taxes begin to be owed. These taxes also must be settled by the estate executor or beneficiaries.
In addition, state governments have estate taxes that come due at death as well. These work very similar to federal estate taxes, being based on the estate value. The details vary from state to state.
IRS Treatment of Death
Taxes aside from estate tax, as mentioned earlier, are the responsibility of the parent. However, this is not the case if the parent filed his or her income taxes jointly with an adult child. In this case, the tax debt then becomes the entire responsibility of child on the tax filings. There is no partial adjustment for death.
What Happens When There is No Estate to Liquidate
Sometimes people die with literally no assets to their name. Instead they have a whole lot of debt on the books, including taxes owed. If the executor confirms that the estate was in the red and has nothing of value to make payments with, then the Internal Revenue Service (IRS) will shut the debt down as non-collectible on its books. That said, the IRS may make a mistake and will need to be reminded with documented proof that the parent is actually dead (order multiple copies of the death certificate for just this reason).
Estate Accountability Responsibility
The executor named in the dead parent’s will or by the court is responsible for settling the estate and all related taxes. As a result, this person is charged with taking care of all the necessary inventory work, notification, filing, payments, and responding to IRS and tax agency audits if necessary. Only after all relevant taxes are paid can the Executor then distribute remaining assets per the will and court probate direction.
- MSN Money: The Death Tax is far from Dead
- San Diego Union-Tribune: If Parent Dies, Debt Isn’t Kids’
- IRS-Hitman Blog: Will Death Stop the IRS, or Will They Expect the Family to Pay?
- U.S. Internal Revenue Service: Topic 356 Decedents - Executor Responsibility
- Government Printing Office. "Title 26: Internal Revenue Code: Sec. 2032. Alternate Valuation," pages 2383-2384. Accessed Aug. 26, 2020.
- Internal Revenue Service. "Topic No. 313 Qualified Tuition Programs (QTPs)." Accessed Aug. 26, 2020.
- Internal Revenue Service. "Topic No. 506 Charitable Contributions." Accessed Aug. 26, 2020.
- Internal Revenue Service. "Publication 525: Taxable and Nontaxable Income." Accessed Aug. 26, 2020.
- Internal Revenue Service. "Instructions for Form 706." Accessed Aug. 26, 2020.
Since 2009 Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services. His education includes a Bachelor of Arts in English and political science from Saint Mary's College and a Master of Business Administration in finance and marketing from California State University, Sacramento.