Escape from taxes, if not from death?

[Paul84]

What is the name of your state (only U.S. law)? Connecticut

If a person dies owing money to the IRS and to other creditors but has no heirs or estate, does the death extinguish all monies owed?

 

[FlyingRon]

What is the name of your state (only U.S. law)? Connecticut

If a person dies owing money to the IRS and to other creditors but has no heirs or estate, does the death extinguish all monies owed?

Heirs have nothing, whatsoever to do with it. And there is always an estate, there just might not be anything significant in it. If the deceased owned property, even though there is no equity, the IRS (or others) may still have a lien against it. So the strict answer is, while the debts may be uncollectable, they are not extinguished. I suspect the real question you're asking is if they can go after anybody else for it, and that answer is no.

The debt becomes extinguished when the creditor formally abandons (forgives) the debt.

 

[FlyingRon]

Thanks for the reply, FlyingRon. The key point from your answer is that creditors, including the IRS, cannot go after anybody else for the debt. So whether they formally abandon the debt-collection effort should concern only themselves.

That is correct.

 

[Paul84]

That is correct.

If the decedent had a joint interest in a property as a remainderman in a quitclaim deed, but owed more money to his estate's administrator than the value of the property interest, can the administrator subordinate the IRS debt to his own claim on the estate--e.g. to repay money spent in covering urgent debts such as funeral expenses and unpaid rent due to a landlord, as well as past miscellaneous unpaid debts owed to the administrator by the decedent? Or does the IRS ipso facto always have precedence over all other claimants and claims?

Upon further research, this may be moot. A contract related to the joint-property interest of the decedent named a still-living beneficiary in the event of decedent's death, so that asset should avoid probate and, thereby, presumably also avoid the taxman's reach.

 

[LdiJ]

If the decedent had a joint interest in a property as a remainderman in a quitclaim deed, but owed more money to his estate's administrator than the value of the property interest, can the administrator subordinate the IRS debt to his own claim on the estate--e.g. to repay money spent in covering urgent debts such as funeral expenses and unpaid rent due to a landlord, as well as past miscellaneous unpaid debts owed to the administrator by the decedent? Or does the IRS ipso facto always have precedence over all other claimants and claims?

Upon further research, this may be moot. A contract related to the joint-property interest of the decedent named a still-living beneficiary in the event of decedent's death, so that asset should avoid probate and, thereby, presumably also avoid the taxman's reach.

Anything that passes outside of the estate escapes the tax debt.

 

[Paul84]

Anything that passes outside of the estate escapes the tax debt.

Thanks, LdiJ.

And yet, at least in Connecticut, even for non-taxable estates, it seems you still have to file a form 706-NT as well as a federal form 706 with the local probate court, not with the Dep't of Revenue Services (the state's equivalent of the IRS). In these estate returns, you have to itemize everything in the estate, including the assets that do not "pass through probate". So is this process just for informing the court and the IRS, "Hey, there's nothing taxable here, and by the way, you cannot collect on the unpaid tax debt of the decedent or put a lien that might prevent the sale of the decedent's remainderman's interest, now owned by someone else"?

 

[LdiJ]

Correction to heading: non-probatable, not proratable.

I recently read online that in some states such as Connecticut, Medicaid goes after the assets of the deceased, including non-probatable ones, to cover medical costs incurred while they were alive. In my brother's final three months of shuttling between hospital and nursing home, I expect the medical expenses reached $40,000 or more. He was poor and on Connecticut's Medicaid plan for the indigent (Husky Health, Plan D). To help provide an income for him before he fell sick, my mother paid for and started a single-life-with-cash-refund annuity for him, naming my other brother as beneficiary for what now is about $168k. She also gave my now-dead eldest brother a remainderman share in a condo with the share worth about $43,000 and that share transferred to me in the event of his death via joint tenancy with right of survivorship. He was living in the condo where the $215k annuity paid for its monthly fee and utilities. We will soon list the condo for sale.

Question: Is it unlikely that Medicaid will claw back its expenses from these two non-probate assets of an otherwise insolvent estate--where even the cost of cremation exceeded his total probatable assets? According to the following recent amendment to Connecticut law (via Obamacare), https://www.cga.ct.gov/current/pub/chap_319s.htm#sec_17b-93 .

Sec. 17b-95 (Formerly Sec. 17-83g). State’s claim on death of beneficiary or parent of beneficiary. Sums due pursuant to an annuity contract.

(a) ..."Notwithstanding the provisions of this subsection, effective for services provided on or after January 1, 2014, no state claim pursuant to this section shall be made against the estate of a recipient of medical assistance under the Medicaid Coverage for the Lowest Income Populations program, established pursuant to Section 1902(a)(10)(A)(i)(VIII) of the Social Security Act, as amended from time to time, except to the extent required by federal law.”

Does my interpretation seem correct, or should I be concerned? My dead brother also had $12k in debt to the IRS from '10 and '11 for penalties from early withdrawal of an inherited IRA. Could the IRS also come after its debt from the surviving brother beneficiaries by putting, e.g. a tax lien on the condo?

Once again, creditors, which include both Medicaid and the IRS, can only go after assets that go through probate. Any asset that has a beneficiary passes outside of probate. It is NOT necessary to open probate if the estate has no assets. It is not necessary for any potential heir to open probate if that heir does not wish to go after what minor assets might exist or believes that the debts will greatly exceed the assets.

Either the IRS or Medicaid, or any other creditor can opt to open probate on a deceased person if that creditor believes that there might be assets to tap. Generally however, that is not going to happen. They usually are not interested in throwing good money after bad.

 

[quincy]

I received your private message, Paul84, and have forwarded it to the moderator. I hope you do not show the same attitude to others on this forum that you showed to me in your message.

Again, all related questions should be kept to a single thread. Those who know best about probate law on this forum (which include LdiJ and FlyingRon) can find your thread here and address your questions here.

 

[NIV]

Upon further research, this may be moot. A contract related to the joint-property interest of the decedent named a still-living beneficiary in the event of decedent's death, so that asset should avoid probate and, thereby, presumably also avoid the taxman's reach.

Contrary to the generally true statements made by others in this thread, your further research may not be correct. In Connecticut, if a lien has attached, see Conn. Gen. Stat. 47-14f:

Sec. 47-14f. Attachment of or lien on tenant’s interest. During the life of any joint tenant his interest may be attached, made subject to a mechanic’s lien, judgment lien or other lien authorized by law, or sold on execution, all in the same manner as if he held his interest as a tenant in common; provided, upon the death of any joint tenant owning that interest, the attachment or lien or execution, unless and until it becomes invalid or unenforceable for some reason other than that death, shall likewise continue valid and enforceable against that interest as and when it accrues to the surviving tenants or tenant by reason of that death, but it shall not otherwise affect the rights or interests of any of the joint tenants, nor prevent any severance from being effected by any appropriate act pertaining to the interest of any of the joint tenants.

The IRS collections manual at https://www.irs.gov/irm/part5/irm_05-017-002.html points out other exceptions to the general rule.

 

[LdiJ]

Contrary to the generally true statements made by others in this thread, your further research may not be correct. In Connecticut, if a lien has attached, see Conn. Gen. Stat. 47-14f:


The IRS collections manual at https://www.irs.gov/irm/part5/irm_05-017-002.html points out other exceptions to the general rule.

I do not think that anyone would disagree that a perfected lien would remain in effect against a property.

 

[NIV]

I do not think that anyone would disagree that a perfected lien would remain in effect against a property.

The IRS would. See the manual I linked under joint tenants. Connecticut is one of the exceptions.

editediteditedit

In most states, if the individual, against whose property a federal tax lien attaches, dies before any of the other joint tenants, then the lien ceases to attach to the property. However, if the same individual is the last survivor of the joint tenants, the tax lien then attaches to the entire property. In a few states, however, this is not the rule. Wisconsin is an exception to the general rule: if the federal tax lien has attached to the interest of one joint tenant who then dies, the surviving joint tenant takes the property encumbered with the federal tax lien. United States v. Librizzi , 108 F.3d 136 (7th Cir. 1997). Connecticut is also an exception to the general rule. Conn. Gen. Stat. 47-14f. See also Paternoster v. United States, 640 F.Supp.2d 983 (S.D. Ohio 2009). Accordingly, state law should always be consulted to determine whether there is an exception to the general rule.

 

[Paul84]

The IRS would. See the manual I linked under joint tenants. Connecticut is one of the exceptions.

editediteditedit

Thanks, NIV (and LDiJ). Based on the link to the IRS site, I think a lot depends on when, whether, and where the IRS filed a Notice of Federal Tax Lien (NFTL) to perfect its interest. The IRS notices of tax and penalties due still list my brother's Massachusetts address, even though he moved to Connecticut in 2015.

Six months ago, to help my brother, I executed a notarized purchase-and-sale agreement extending over ten years with monthly payments to buy out his share of the property. That notarized, (but until recently, unrecorded) contract specified that the remaining share, including my own wholly owned portion, would revert to the surviving brother in the event that either of us died. I believe that Connecticut's adherence to the principle of equitable conversion applies, making me a "purchaser" at the time of contract and thus free and clear from any subsequent NFTL, or any prior NFTL, as I was also an "innocent buyer", with no knowledge of such lien if any indeed exists. See, e.g., US v. 74.05 Acres of Land, 428 F. Supp. 2d 57 (D. Conn. 2006).