Serving as an executor for an estate in Virginia comes with many responsibilities. One of the most important tasks is ensuring the payment of all taxes owed by decedents and their estates.
Understanding taxes that effect estates
When someone passes away, their estate may owe taxes at both the federal and state levels. This can include income taxes, federal estate taxes and possibly even inheritance taxes. Executors must file the necessary tax returns and pay any outstanding taxes before distributing the estate’s assets to the beneficiaries.
Executors may overlook certain tax liabilities, such as unpaid property taxes, income taxes from the final year of the decedent’s life or even outstanding estate taxes if the estate is large enough to meet the estate tax thresholds.
Though Virginia does not impose an estate tax, the Department of Taxation requires estates to file a state fiduciary income tax return if income was received during the year.
The consequences of unpaid taxes
If taxes remain unpaid, the IRS or the Virginia Department of Taxation can impose penalties and interest on the amount owed. In some cases, the government may even place a lien on the estate’s property or assets, which could delay the distribution of inheritance to the beneficiaries.
The IRS imposes a penalty and interest for every month the taxes are overdue. The Failure to File penalty is 5%, and the Failure to Pay penalty is 0.5% on the amount of unpaid estate taxes, to a max of 25%.
Furthermore, the authorities can hold executors personally liable for any unpaid taxes if they distribute the estate’s assets without settling all tax obligations first. Unpaid estate expenses are the responsibility of the executor, and if assets have been distributed from the estate prior to the satisfaction of all estate liabilities, the executor could be at risk of further retribution.
Beyond the potential for increased expenses out of the estate, another consequence of unpaid taxes is delayed distribution of estate assets.
Avoiding tax consequences
To avoid these risks, executors should take the time to carefully review the decedent’s financial records. It is worth the time and effort to consult with tax professionals to address all potential tax liabilities. Executors should also ensure tax obligations have been settled before making final distributions. Additionally, keeping thorough documentation of the financial activity of the estate can protect the executor from liabilities of misconduct to the government, or beneficiaries of the estate.
There can be a large risk associated with unpaid tax obligations, and the responsibility is on the executor to ensure the estate is in good standing. Understanding the risks and being fully aware of their duties is the best way executors can protect themselves during estate administration.