Settling an estate can be a complicated and sometimes time-consuming process. It’s the job of the executor to inventory assets, determine what expenses need to be paid and distribute the remainder of the estate to the deceased’s beneficiaries. If you’re set to inherit, you may be wondering what estate expenses are paid by the beneficiary. The answer can depend on what assets are passed on to you when a family member or loved one passes away.
For more help with estate issues, consider working with a financial advisor.
What Are the Expenses of an Estate?
There are numerous costs that may need to be paid to settle an estate when someone passes away and the probate process begins. Some of these costs may be borne by the estate itself, while others may be left for the beneficiaries to cover.
The main expenses of an estate include:
- Outstanding debts. When someone passes away their debts don’t automatically disappear. The executor is responsible for notifying creditors that the deceased has passed so that they have time to make a claim against estate assets.
- Taxes. There are different taxes that may need to be paid when someone dies, including estate tax, inheritance tax and income tax. If the deceased person has an outstanding property tax bill for real estate or other tangible assets, those bills will need to be paid as well to avoid a lien.
- Fees. Settling an estate may require hiring an estate planning attorney or accountant, both of whom are entitled to collect fees for their services. There may also be fees associated with filing documents to begin the probate process, serving notice to creditors or recording transfers of property with the local register of deeds. The executor is also entitled to collect a fee for their services.
- Property maintenance and distribution. An estate that includes real property may incur expenses for maintenance and upkeep of the property until it’s distributed to beneficiaries or liquidated to pay creditors. Likewise, there may be additional costs involved to transport property or persons involved in the settling of the estate.
- Final expenses. Funeral, burial, cremation or interment costs can be considered part of estate expenses, though these may not be covered by estate assets. Instead, they may be paid out of the death benefit associated with the deceased person’s life insurance policy.
What Expenses Are Paid by the Estate?
Many of the costs associated with settling an estate are paid by the estate itself. Again, it’s the executor’s job to determine what needs to be paid and when as part of the settlement process.
Some of the most important expenses paid by the estate include:
- Outstanding debts, such as credit cards, medical bills or liens
- Repairs or maintenance costs for estate property
- Appraisals that are necessary to determine the value of estate assets
- Closing costs associated with the sale of a home
- Fees paid to any professionals associated with the settling of the estate, including the executor, attorneys, accountants or real estate agents if a home or land is being sold
- Taxes, including income tax, estate tax and property tax
- Incidental costs, such as recording fees, mileage reimbursements for the executor and notary fees
- Fees to obtain the initial death certificate
The executor should keep a careful accounting of any expenses paid by the estate out of estate assets. While only the executor is entitled to see the deceased person’s financial records, beneficiaries have the right to review financial records showing what expenses are paid by the estate.
Estate Expenses Paid by Beneficiary
What estate expenses you’ll pay as a beneficiary can depend on what you inherit and whether any special provisions are included in the deceased person’s will or a trust they’ve established. Generally, you can expect to pay the following costs as a beneficiary:
- Final expenses not covered by the estate or by a life insurance policy
- Personal travel expenses
- Legal fees should you decide to contest the will
- Property maintenance or transportation costs not covered by the estate
Whether you’ll pay any of these costs out of pocket can depend on the circumstances. A life insurance policy, for example, can spare you the expense of paying for a funeral or memorial service directly. You can use part of the death benefit to pay those expenses.
If the decedent left a house behind as part of their estate, basic upkeep, maintenance and repairs should be covered by the estate. But if you want to make renovations to boost its value in anticipation of selling it once the property is passed on to you, you’d have to pay for those expenses yourself.
Deducting Estate Expenses on Taxes
Certain estate expenses are tax deductible on IRS Form 1041. The executor must file this form for estates that earn over $600 in income or have a nonresident alien as a beneficiary. The same rule applies to trustees who oversee a trust on behalf of one or more beneficiaries.
The IRS allows for a number of deductions for estate expenses, including:
- State and local tax payments, including property taxes
- Fees paid to the executor or trustee
- Fees paid to other professionals, including attorneys or accountants
- Expenses related to the maintenance of estate property
- Funeral and burial expenses
- Charitable contributions from the estate
- Qualified business income
- Prepaid mortgage interest or mortgage insurance premiums
- Tax preparation fees
Under IRS rules, the executor can deduct eligible costs as an expense against estate tax or the income tax of the estate, but not both.
The IRS doesn’t offer any personal tax deductions for funeral expenses. That means if you had to travel to attend a funeral, you wouldn’t be able to write off anything you paid for flights, hotels or meals. You also can’t claim a personal deduction for any funeral or burial expenses paid out of your own pocket.
If you anticipate being named as an executor, beneficiary or both for someone’s estate, it may be a good idea to have a chat with your financial advisor. An advisor can walk you through the tax implications of settling an estate or inheriting from someone else so that you better understand how to prepare financially.
The Bottom Line
Settling an estate often means sorting out numerous financial and legal issues. The good news is that the list of estate expenses paid by the beneficiary is small, as the estate itself typically covers most costs. You may, however, be responsible for paying travel costs or legal expenses should you decide to contest the decedent’s will.
Estate Planning Tips
- Consider talking to a financial advisor about what to expect if you’ve been named as an executor or beneficiary for someone else. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you haven’t started working on your own estate plan yet, there’s no time like the present. Drafting a last will and testament is a good place to begin, as this document is used to specify how you’d like your assets to be distributed to your heirs. You can draft a will at home using an online will-making software program. In addition to a will, you might consider the benefits of establishing a trust if you have a larger estate to manage.
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