How Will Your Executor Pay For Inheritance Taxes and Federal Estate Taxes?Part 1 of 2

When a person dies, the Executor of the estate has a very limited time to pay for the taxes due to the IRS with repect to federal estate tax and to the Pennsylvania department of Revenue with respect to inheritance taxes.  How long does the executor have to pay and where does the money come from?

Ideally, in a well planned estate, the decease party has made provision for the payment of taxes.  However, taxes are due within 9 months of the date of death (with a tax credit for early payment of any taxes paid to Pennsylvania within three months of the date of death.

As youcan see, that tax deadline of nine months comes pretty quickly and with federal rates of 42% or more, the liability can be substantial.  Generally, the following options for payment exist:

First, the estate can pay using available cash.  This generally requires advanced planning and most estates subject to federal estate tax will no be liquid enough to pay te full amount of cash within the nine month deadline.

Second, in a well planned estate, some life insurance can provide the liquidity to pay such taxes.  If your estate is subject to federal estate tax, you would want to have the insurance owned by an ILIT (Irrevocable life insurance trust).  In this way, the insurance will not be taxable and the trust can purchase assets from the estate to provide liquidity to pay taxes, or can loan the executor and the estate the funds to promptly pay the tax until the assets can be methodically liquidated without substantial discounts.

For more see Paying For Estate Taxes Part 2 of 2.

David M. Frees III, Esquire
David Frees is an attorney who limits his practice to trusts, estates, wills and related estate
planning strategies.   He has offices located in Malvern, Phoenixville, and West Chester.
His offfices serve clients throughout Pennsylvania, and Chester County, Montgomery County and Lancaster County including Chester Springs, Ardmore, Bala Cynwyd,
Exton, Spring City and Royersford.