Probate courts settle people’s affairs after their deaths by making sure their debts are paid and their property is turned over to heirs. It’s not the court’s job to police the heirs' finances. If you owe back taxes, the probate court is not authorized to take your inherited house or report your status to government agencies. But once you take ownership, it’s likely tax liens will be placed on the house.
Michigan's Probate Process
A personal representative, known as an executor in other states, is in charge of settling the estate with the probate court’s oversight. The personal representative collects the estate’s assets, pay its debts and distributes property to heirs. The probate process usually takes a minimum of six months in Michigan. More likely, it will be closer to nine months or a year before an heir gets an inherited house. Some states allow early distribution of assets before an estate closes, but not Michigan. Michigan wants all of the estate’s tax matters handled before property is distributed.
Enter the IRS
If you owe federal taxes, the Internal Revenue Service can attach a lien to the inherited house once you are the owner. A federal tax lien heralds the government’s interest in your property for unpaid taxes. A federal tax lien is automatic once the IRS determines you owe taxes, sends you the bill and you don’t pay. The IRS has the legal authority to seize the house if you don’t pay, but that’s unlikely. Generally, the agency is not so cold-hearted it will take your personal residence. It’s usually easier for agents to seize your bank accounts, stocks or retirement accounts to satisfy the tax debt.
If you owe taxes to Michigan, the state will also put a lien on the inherited house. The state process is essentially the same as the federal. The Michigan Department of Treasury figures out the amount you owe and sends you a bill. If you don’t pay in full within 35 days of the date on the final bill, the state puts a tax lien on your property. The state lien would be subordinate to the federal lien, meaning the IRS gets its money first. If you end up selling the house to pay the tax bill and the proceeds don’t cover the federal and state bills, Michigan can put a lien on your personal property, such as automobiles.
Keep the House
There are ways to keep the house without paying the debt immediately. The IRS will, on a case-by-case basis, offer a payment plan to taxpayers who owe $25,000 or less, provided they pay off the debt on an installment plan within five years. Michigan will allow installment payments for state taxes, but for only two years. The state seldom reduces the amount of the tax owed or penalties. If there is enough equity in the home, the taxpayer may be able to borrow against that equity to pay the debt and get the lien removed immediately.