Estate taxes have been in the news over the past year, and the 2011 Federal estate tax exemption is now $5 million. This is only temporary, as this law expires in two years, leaving the future of the Federal estate tax, once again, unknown. But who is responsible for paying estate taxes? Do your heirs or beneficiaries, those who receive an inheritance, have to pay it?
No, the estate itself pays estate taxes. When a person dies, the executor of the estate is named when the estate is probated, the legal process that administers an estate. The executor is in charge of gathering up the estate’s assets and distributing them in accordance to the decedent’s Will. Depending on how much a person owns at his or her death, there is a possibility that an estate tax might be due.
Prior to distributing the assets of an estate the executor must pay all estate taxes owed. This becomes important if you have an estate of mostly real estate or other difficult-to-sell assets and little cash. The executor must file both a federal and state estate tax return within a specified time, normally nine months from the date of death.
Unless an extension is requested, in most cases, the full tax payment will be due within that time frame. In the event that one dies with a large amount of real estate or other difficult-to-sell assets and little cash, the executor may be forced to liquidate some of the real estate assets to get the cash needed to pay the taxes. This may impact the amount that your beneficiaries receive, so in essence, they do ultimately pay.
The estate tax, along with any of the other debts of the estate, must be paid before heirs receive their inheritances. An estate planning attorney can work with you to ensure that your estate has not only addressed any estate tax burden, but to ensure that you have estate planning tools in place to provide enough cash to get the bills, including the tax bill, paid.