Who Pays Taxes When Someone Dies: The Estate or the Heirs?
When someone dies, one of the questions families often ask is, “Who pays the taxes—the estate or the heirs?” The answer depends on the type of tax involved, the size and assets of the estate, and how those assets are distributed.
Proper estate planning can help your family understand what taxes may be owed, who is responsible for paying them, and how assets should be distributed. It can also help prevent heirs from receiving an inheritance only to discover later that additional taxes are due.
For families in St. Charles and throughout Missouri, working with experienced St. Charles estate planning attorneys in Missouri can help ensure that tax issues are considered as part of a comprehensive estate plan.
Does the Estate Pay the Taxes When Someone Dies?
Generally, the personal representative of an estate is responsible for identifying and paying taxes owed by the deceased person and the estate before distributing the remaining assets to beneficiaries. The IRS explains that an executor or administrator generally collects assets, pays creditors and taxes, and then distributes what remains to heirs and other beneficiaries.
There are several different types of taxes that may need to be considered.
1. The Deceased Person’s Final Income Taxes
Death does not eliminate income tax obligations that existed before death. The personal representative may need to file a final individual income tax return for the deceased person and pay any balance due from the estate’s assets.
2. Income Taxes on Estate Assets
An estate can generate income after someone dies. For example, the estate may earn interest, dividends, rental income, or other income while assets are being administered.
If the estate has sufficient income, the personal representative may need to file an estate income tax return, generally using IRS Form 1041, and pay any tax that is due.
3. Federal Estate Tax
Federal estate tax is different from income tax. It is a tax on the transfer of certain property at death and generally applies only to estates above the federal exclusion amount.
For people who die in 2026, a federal estate tax return generally is required when the gross estate, adjusted taxable gifts, and applicable amounts exceed $15 million. A Form 706 may also be filed in some circumstances, including to elect portability of a deceased spouse’s unused exclusion.
Importantly, most estates are not subject to federal estate tax. The fact that an estate must file a tax return does not necessarily mean that estate tax will ultimately be owed.
4. Missouri Estate Tax
Missouri currently does not impose a Missouri estate tax for deaths occurring on or after January 1, 2005. The Missouri Department of Revenue states that no Missouri estate tax return is required for those deaths under current law.
However, that does not mean that Missouri estates are free from all tax obligations. Missouri may impose fiduciary income tax on qualifying estates and trusts, depending on the income they receive and other circumstances.
Can Heirs Ever Be Personally Responsible for Estate Taxes?
Yes. Although estate taxes are generally handled by the estate and its personal representative, there are circumstances in which a beneficiary or other person who receives estate property can become personally liable for unpaid federal estate tax.
This is an important reason why an executor or trustee should not simply distribute all of an estate’s assets as quickly as possible.
Federal law provides circumstances in which transferees, including certain beneficiaries and recipients of non-probate property, can be personally liable for unpaid estate taxes, generally subject to the value of the property they received.
That means an heir who receives an inheritance could potentially face a tax problem later if taxes that should have been paid by the estate remain unpaid.
Why Executors and Trustees Need to Be Careful Before Distributing Assets
Consider an estate that has significant assets but also has unresolved tax issues. If the executor or trustee distributes everything to the beneficiaries before determining whether additional taxes may be owed, there may be no money left in the estate to satisfy a later tax assessment.
The IRS has explained that estate tax liens can apply to property included in a taxable estate and that certain recipients of non-probate property may have personal liability for unpaid estate taxes.
This does not mean that every heir is automatically responsible for the deceased person’s taxes. Rather, it means that the administration and distribution of an estate should be handled carefully, particularly when there may be outstanding tax liabilities.
A Real-World Example of Heirs Facing Estate Tax Liability
A case involving the estate of the founder of Gulfstream illustrates why estate administration and tax planning can become complicated.
According to the Forbes article cited in the original version of this post, the individual’s estate was valued at approximately $200 million. The estate initially reported its estate tax liability and elected to pay the tax over time because a significant portion of the estate consisted of a business.
The IRS later challenged the reported value of the estate. After litigation, additional estate taxes were determined to be owed. By that point, however, the estate’s assets had been distributed to beneficiaries, and the estate and trust no longer held sufficient assets to make the required payments.
The IRS sought payment from individuals who had received property from the estate. The resulting litigation demonstrates an important estate-planning lesson: distributing assets to beneficiaries does not necessarily eliminate potential tax liability associated with those assets.
Federal law specifically provides for circumstances in which certain beneficiaries, trustees, and other recipients of estate property can be personally liable for unpaid estate tax.
What Should an Executor or Trustee Do Before Distributing an Estate?
Before making final distributions, an executor or trustee should work with the estate’s legal and tax professionals to determine whether:
- The deceased person’s final income tax return has been completed.
- The estate has income tax obligations.
- A federal estate tax return is required.
- Federal estate tax is actually owed.
- State tax obligations exist.
- There are unresolved IRS or state tax issues.
- Assets should be retained until potential tax liabilities are resolved.
- Beneficiaries have received the appropriate tax information concerning inherited property.
For estates required to file a federal estate tax return, the executor may also have reporting obligations concerning the tax basis of property distributed to beneficiaries. The IRS uses Form 8971 and Schedule A for certain estates to report estate tax values to beneficiaries.
Estate Planning Can Help Your Family Avoid Unnecessary Problems
Estate planning is about more than deciding who receives your property after you die. A properly prepared plan can address who will administer your estate, how assets should be distributed, and how tax obligations should be handled.
A knowledgeable executor or trustee is particularly important when an estate includes businesses, real estate, investment accounts, trusts, or other substantial assets.
The goal is not simply to distribute an estate as quickly as possible. The goal is to properly administer the estate, satisfy legitimate debts and tax obligations, and then distribute the remaining assets according to the estate plan.
For families in St. Charles, St. Charles County, St. Louis County, and throughout Missouri, experienced St. Charles estate planning attorneys in Missouri can help you develop an estate plan that addresses these issues before a crisis occurs.
Talk to a Missouri Estate Planning Attorney
Questions about taxes after death can become complicated quickly, particularly when an estate includes substantial assets, real estate, business interests, trusts, or assets that pass outside probate.
An experienced estate planning attorney can help you understand your responsibilities as an executor or trustee and help you create an estate plan designed to make administration easier for the people you leave behind.
Contact Beck, Lenox & Stolzer Estate Planning & Elder Law, LLC for all of your estate planning needs by booking a call: https://beckelderlaw.com/book-a-call/
Reference: Forbes (June 21, 2023) “Heirs Can Be Personally Liable For Estate’s Taxes”