My mother, 80, owes $400,000 due to a failed family business and my late father’s unpaid taxes. What could be seized?

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Dear MarketWatch, 

I’d appreciate some help understanding which of my mother’s assets are protected and which are not. My father passed away a few years ago and, while we understood some of what had been going on, we have more information now — and we are concerned.

In the 2008 crash, my parents’ business folded and they defaulted on a Small Business Administration loan with personal guarantees of $ 200,000. In addition, the Internal Revenue Service has been sending notices for payment and penalties for another $ 200,000, indicating that dad had not paid taxes on some of his earnings.

Mom is 80, has a house with a mortgage and a lien from the SBA. Her Social Security is being garnished for the loan. She does have some funds in an IRA account. We have help going back and forth with the IRS and are seeking relief, but it’s been several years with no resolution. There is a lot of stress around what could be seized or forced for payment.

Would you give us some general guidance on what is protected and what is not?

Concerned Child

Dear Concerned Child, 

It sounds like you are rightfully concerned about your mother’s finances and I can see that it’s stressful for all of you. Unfortunately, this may be a situation that all of you will have to deal with for some time, at least until your mother’s final affairs are settled.

Discharging debt, especially money owed to the IRS, is a difficult process. It might not get paid until final payments come out of your mother’s estate. In that case, the debts would not be passed on to you, but the creditors would get their payments first, before you get any inheritance. 

So what can you do now to help your mom? You say you have help with the IRS, which I assume is a tax professional who specializes in tax litigation and not just a tax preparer. If not, get to a higher-level specialist through an IRS search or a referral from somebody you know.

You might also want to engage more help on a broader scale with your mother’s situation. To forestall any asset seizures, your first stop should be to lawyers, to see if there’s some way bankruptcy or another debt-restructuring process could help her.

“If they’re trying to figure out who can collect from them, from the mom, it’s an estate-lawyer matter,” says Jeanne Wiener, an estate and trust tax specialist who practices in California. 

Little wiggle room

There’s probably little wiggle room for your mom to get out of owing the money altogether, though. If your parents were in business together, and her name was on the loans involved and other paperwork, there’s probably little chance of severing outright her ongoing responsibility to repay the debts. That goes especially if your parents live in a community-property state, where all marriage assets and debts are jointly held. “If you’re in a community-property state, everything sticks to you like glue,” says Wiener. 

Discuss with a tax professional whether your mom has any claim as an “innocent spouse” in dealing with the back taxes owed specifically to the IRS. “If mom is not really involved, then I’d try to get some legal paperwork that says it’s all dad’s and this is his debt. Try to work with an attorney and a tax preparer,” says Mary McDonald, a CPA with Hansen House in Duluth, Minn.

If you have that documentation showing that your mom did not know that your dad was not paying taxes on their joint return, she may have some relief, but there are a lot of conditions. One of them is that it would only apply to taxes owed on her portion of the income, not for the business. 

“My advice for future people: Talk to an attorney about how things are set up,” says McDonald. 

While it may be too late to restructure your parents’ failed business to shield your mother, it can serve as a cautionary tale to others to take care when you are setting up a business structure.

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