Estate planning often focuses on reducing the value of the estate, which can lower the tax burden. For instance, federal inheritance taxes may only apply at a certain level. Using a trust to reduce the value of the estate can get it under that level so that the bulk of the estate goes to the beneficiaries.
But there are other types of taxes that need to be considered as well. For instance, after someone passes away, they may still need to pay property taxes on real estate that they owned that year. They may need to file their income taxes for the year, if they were still working or if they had investments and other streams of income.
Who is in charge of handling this outstanding tax debt? Do the beneficiaries have to pay it themselves?
The estate executor
The person who was named as the estate administrator or the estate executor has to pay off these taxes. It’s their job to administer the estate in accordance with the estate plan, locating assets and distributing them to the beneficiaries. But they often have to pay the taxes first.
For instance, someone may be leaving $50,000 to their beneficiaries, but they still have an outstanding property tax bill of $20,000. The executor would pay the $20,000 first from the estate, so they would only have $30,000 left to divide. The beneficiaries don’t personally have to pay off the taxes, but they still may feel like they “lose” assets that they expected to inherit.
Tax issues with estates are certainly complicated, and these are just a few examples of how they can happen. Estate executors and beneficiaries need to be well aware of the legal rights that they have, their obligations and the steps that they can take to resolve these financial issues.