When a loved one dies, their debts don't disappear, and that includes debts and taxes owed to the Internal Revenue Service. The estate administrator must settle the debts, including back taxes owed to the IRS and any taxes owed for the current year to the extent the estate has funds to pay them. One of the estate administrator's duties will be to file any outstanding tax returns and taxes for the final year of the decedent's life.
If the decedent was married, all of the couple's community property is generally available to settle the tax debt. Arizona law does provide up to $37,000 in “statutory allowances” for a surviving spouse and any dependent children. These statutory allowances protect some of the couple's assets from creditors like the IRS, but they can still go towards compensation a personal representative or the estate's attorney fees.
Assets Protected from Debts & the IRS
There are some assets in an estate exempt from debts, including tax debt.
1. Life Insurance Benefits
These benefits go directly to the named beneficiaries and don't go through probate. The benefits are exempt from the debt unless the beneficiary also agreed to be responsible for the debt. If a couple incurred the tax debt and one of them dies, naming the other in a life insurance policy, part of the life insurance benefit will be subject to the tax debt. Under Arizona law, however, $20,000 of the benefits is exempt from debts for a surviving spouse and children.
2. 401K Retirement Account
The assets in a 401K investment account are typically also exempt from IRS debt. The account holder names a beneficiary when creating the account, and the assets in the 401K pass directly to the beneficiary without going through probate. The exception is if the 401K holder owed back child support.
If an estate is insolvent, a determined creditor can go after assets that didn't pass through probate but were inherited by beneficiary designation. So, if the decedent had a bank account with a “pay on death” designation, the IRS or other creditors could go after those assets.
Determining an estate's tax obligation after the death of a loved one can be a complex process. You need an experienced tax lawyer to ensure that you meet all federal and state tax requirements. Call Senior Partner, Tax Controversy Attorney, Brandon A. Keim at (602) 200-7399 today.