Can an insolvent estate due to back taxes be probated using monies from the estate first before the government?

Asked over 1 year ago - San Marcos, CA

Brother passed away intestate, with 10 year old minor as his sole heir. Decedent had no real property, just 2 checking accounts, one of them under the name of his own (S-Corporation) DBA, and a stock-brokerage account, but these assets prob. total less than $25K. Has personal items, and a car ($6K est.) which is paid off. The deceased has letters from the IRS and State of CA (dated late 2012) indicating that he owes $15K to $35K in taxes from 2010-11. 2011 taxes may not have been filed (though we have completed returns). This doesn't include taxes for 2012 (decedent worked as a 1099). Obviously the estate is insolvent. Question: Might this estate be administered or probated from its assets without out-of cost expenses to immediate family, or does the IRS take all before all else?

Additional information

We've received different advice, from "just walk away", to "take the money and run", but all sides of family want to end this cleanly, without potential liability to the lucky guy to be the personal administrator. Not to mention, the deceased's apt. needs to be cleaned out. Family is at a loss as to how to proceed, not being able or willing to provide much of a retainer for probate. Is this solvable ????

Attorney answers (6)

  1. John Bernard Palley

    Pro

    Contributor Level 13

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    Answered . The probate code says government first. However, in my experience you can probate the estate and pay out costs of administration, including administrator's fees, before paying taxes. Having said that, this sounds like a small estate so I am not sure it would be worth the hassle. I encourage you to find an experienced attorney to run all the facts by. Good luck. -John

  2. Barbara Gene Knox

    Contributor Level 4

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    Answered . Costs of Administration can be paid prior to paying the government. I guess what you need to decide is whether or not the gain is worth the work. A $25K estate is only worth $1,000 in fees. I doubt it you could hire an attorney to help you because there's lots of work. The son is not going to get anything if the facts stated are correct. The Administrator may be able to negotiate with the taxing authority, but in today's economic climate the government isn't going to be open to negotiation. The Administrator would also need to file the current taxes. The costs associated with the probate are paid from the assets, the family would be able to be reimbursed. The assets should be left alone if there's not going to be a probate, so that no personal liability attaches.

  3. Charles Adam Shultz

    Contributor Level 19

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    Answered . I agree with John. In addition, the one thing I would absolutely advise you not to do is "take the money and run." Doing so will more than likely open you to personal liability from the IRS for the amount of debt. If you act pursuant to a court order in the Probate you will have protection.

    The general advice above does not constitute an attorney-client relationship: you haven't hired me or my firm or... more
  4. Rosemary Jane Meagher-Leonard

    Contributor Level 15

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    Answered . I am sorry for your loss. I agree with John and Charles. The Probate code provides that all taxes must be paid prior to distributions. However, if your brother did not file his 2010 and 2011 taxes, these amounts indicated in the correspondences may not be accurate. When a taxpayer fails to file a return, the tax authorities will send out correspondence with their estimate of the taxes owed. These estimates are usually based on prior years’ filings or 1099s etc., but do not usually include all possible deductions or credits. So, there may be a significant difference between the taxing authorities’ estimates and what actually is due. If you have retained a tax profession to prepare the returns, this has probably already been explained to you. If you have not done so, I would strongly recommend that you consult with either an enrolled agent or CPA.

    Because the estate assets are less than $150,000, it is possible to collect the account funds using the Small Estate Affidavit or Declaration and certified copies of death certificates. However, if you choose to proceed under such an affidavit, you should place all funds into an account for the estate until the issues with the IRS and Franchise Tax Board are sorted out. As has been stated, you do not want yourself or other heirs to become personally liable for these taxes. As John has advised, there are procedures available through the Probate Court which would allow administration costs, including administrator fees etc., to be paid prior to the taxes. But, as has been pointed out, the size of the estate might make this cost prohibitive.

    If you have additional questions, you can add that to the “comments” section or you can email me directly. I am located in San Diego and would be happy to speak with you, as well.

    Disclaimer: The above answer does not create an attorney/client relationship. My responses are intended to provide... more
  5. Ruth A Phelps

    Contributor Level 3

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    Answered . You need court costs as the retainer for probate, not a part payment on the attorneys' fees. I suggest you talk to a good accountant or a tax attorney and ask what the possibilities are for settling the tax issues with the IRS and FTB so that there will be some funds remaining to distribute to the son. You will need to dissolve the S Corp and marshal the assets. You don't want to do this informally because those who accept the assets will find that the liabilities may follow.

  6. William Martin Burbank

    Contributor Level 12

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    Answered . In California the first to get paid is the executor and the attorney, then taxes. This is the public policy because there needs someone to carry out the probate so that at least some taxes get paid. In CA probate executor fees and attorney fees are statutory and are based on a percentage of the gross value of the estate. So even if there is significant debt or taxes due, then the executor fees and attorney fees can still be significant. You just need to find an attorney who understands all of the probate rules.

    Every situation is different, it is important to discuss your legal issue with a knowledgeable attorney in your... more

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