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Estate has unpaid taxes and potential lawsuit.

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Not IC

Junior Member
GUAM

Pretty sure some of you guys know me from my other posts. This one is related to my father passing away 2 years ago and my mother potentially filing a lawsuit on behalf of his estate. They filed jointly for most of their marriage. So long story short the lawsuit could be worth a large amount of money like $1.5 or more million. We live in a community property state. It is based on a contract and is for unpaid hours worked. My parents also have a large federal tax debt close to the value of the potential lawsuit value. Since he passed already how would this situation be handled? I know the IRS would treat it as income, but would they go for the full amount owed or a percentage? So i know the regular income tax would come out, but what would happen after that? Would all the back taxes have to be paid from the balance of the settlement? Could family allowance and expenses come out first? Any loopholes or options?
 


Not IC

Junior Member
Also someone told me my mother has the right to go after the money directly through intestate succession, because it is held jointly with rights of survivorship and we are a community property state. what would happen in that situation? I know the taxes will not disappear, but I'm hoping my mother can keep as much as possible.
 
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LdiJ

Senior Member
For sure you are right. We already spoke to a lawyer who told us we have a case. However my mothers worried after the taxes it might not be worth it.
It would be worth it to get some or all of the tax debt you mentioned off your mother's back, even if she ended up not getting to keep any of the money.
 

Not IC

Junior Member
It would be worth it to get some or all of the tax debt you mentioned off your mother's back, even if she ended up not getting to keep any of the money.
See that’s what I’m wondering I know with probate they can require taxes to be fully paid before dispersing it. If she can do the lawsuit directly would it be different? I know what your saying is the best route, but it would be nice if she could keep at least a small portion. Currently she doesn’t have much. Maybe she could do a offer to pay a big chunk upfront and then start a payment plan or something? If she was able to file a lawsuit directly and recover that money what would the law require her to do then?
 

Not IC

Junior Member
Your mom needs an attorney. Really.
Like I said we don’t have a lot. The lawyer we spoke to wants $5k retainer and to be paid hourly. Throwing a possible $20-30k on possible legal fees is a huge deal for us, but It’s not impossible. It’s $3k to do probate so $8k just to start if we do probate.
 
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PayrollHRGuy

Senior Member
Like I said we don’t have a lot. The lawyer we spoke to wants $5k retainer and to be paid hourly. Throwing a possible $20-30k on possible legal fees is a huge deal for us, but It’s not impossible. It’s $3k to do probate so $8k just to start if we do probate.
$20k-$30k is a lot less than a $1.4 Mil tax owed.
 

Not IC

Junior Member
$20k-$30k is a lot less than a $1.4 Mil tax owed.
My father was on a payment plan after he passed they interviewed my mother she doesn’t make enough for them to go after her I guess. She’s just getting by. The $20-30k would be coming from me. Plus whoever wins the suit gets attorneys fees reimbursed so if we lost we can add their fees to that.
 

Taxing Matters

Overtaxed Member
So long story short the lawsuit could be worth a large amount of money like $1.5 or more million. We live in a community property state. It is based on a contract and is for unpaid hours worked. My parents also have a large federal tax debt close to the value of the potential lawsuit value. Since he passed already how would this situation be handled? I know the IRS would treat it as income, but would they go for the full amount owed or a percentage?
Your post indicates Guam as the jurisdiction, but then you say that "we live in a community property state". (Underlining added.) The jurisdiction matters very much as bona fide residents of Guam file income tax with the Guam government, not the IRS. Guam is, however, not a state, so I'm not sure what the relevant jurisdiction is. So where is it that the estate is located and where your mother is resident?

If it is actually a state, then the lawsuit award will, based on your statement that it is a contract claim, be taxable income to the estate. If it is considered community property then it is income split between the estate and the surviving spouse.

If the amount they owe the IRS is from joint income tax returns, then the federal tax lien will attach to the lawsuit award. As to the estate's share of it, federal tax law gives an income tax liability a priority much like a judgment lien. (This is different from the estate and gift tax liens, which get a higher priority). The estate may typically burial expenses and legitimate estate expenses before paying off the federal tax lien. Also, any judgments that the estate owes that were perfected before the IRS filed its notice of federal tax lien would also generally get priority. But the estate executor must not distribute assets to the beneficiaries of the estate before ensuring the debts of the estate, including the tax liabilities of the estate are paid.

Bottom line is that from the facts you gave the lawsuit award may get entirely taken by tax claims or other debts. That does not mean it's not worthwhile. Your mother getting out from under that large tax liability would be a significant benefit for her. She (and the estate executor, if different) ought to see a tax lawyer in her jurisdiction to figure out exactly what happens as I don't have all the facts needed to tell you that.
 

Not IC

Junior Member
Your post indicates Guam as the jurisdiction, but then you say that "we live in a community property state". (Underlining added.) The jurisdiction matters very much as bona fide residents of Guam file income tax with the Guam government, not the IRS. Guam is, however, not a state, so I'm not sure what the relevant jurisdiction is. So where is it that the estate is located and where your mother is resident?

If it is actually a state, then the lawsuit award will, based on your statement that it is a contract claim, be taxable income to the estate. If it is considered community property then it is income split between the estate and the surviving spouse.

If the amount they owe the IRS is from joint income tax returns, then the federal tax lien will attach to the lawsuit award. As to the estate's share of it, federal tax law gives an income tax liability a priority much like a judgment lien. (This is different from the estate and gift tax liens, which get a higher priority). The estate may typically burial expenses and legitimate estate expenses before paying off the federal tax lien. Also, any judgments that the estate owes that were perfected before the IRS filed its notice of federal tax lien would also generally get priority. But the estate executor must not distribute assets to the beneficiaries of the estate before ensuring the debts of the estate, including the tax liabilities of the estate are paid.

Bottom line is that from the facts you gave the lawsuit award may get entirely taken by tax claims or other debts. That does not mean it's not worthwhile. Your mother getting out from under that large tax liability would be a significant benefit for her. She (and the estate executor, if different) ought to see a tax lawyer in her jurisdiction to figure out exactly what happens as I don't have all the facts needed to tell you that.
Oops I guess I meant I live on Guam and we follow community property laws similar to California. And yes we pay local tax and we also pay tax to the irs it gets sent in through the mail.

The tax debt is from filing joint returns and the only income was from my father though. Thanks for your answer
 

justalayman

Senior Member
Oops I guess I meant I live on Guam and we follow community property laws similar to California. And yes we pay local tax and we also pay tax to the irs it gets sent in through the mail.

The tax debt is from filing joint returns and the only income was from my father though. Thanks for your answer
Is there some reason you pay to the IRS when the other Guam residents (barring some unusual situation) pay their taxes to the Guam government?
 
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