To put it bluntly, administering an estate is expensive. Between property maintenance, potential legal fees, and memorial expenses, the bills can add up quickly. If you are left wondering how one is able to afford this expensive and seemingly endless work, then read on for information and helpful tips.
The Five Expense Categories of Estate Administration
Below we have grouped the costs and expenses of an estate administration into five categories;
- Last debts.
- Property maintenance/management expenses.
- Distribution expenses.
It is important to note that while some expenses the estate may incur will be income tax-deductible, even if some are not income tax deductible, they are likely still permissible to be paid by the estate rather than out of an executor’s pocket.
In some instances, it may be prudent for an executor to pay a timely expense that woud ordinarily be paid by the estate out-of-pocket and reimburse himself or herself from the estate (for instance, weather related expenses on the deceased’s home while awaiting court approval to formally open the estate). However, decisions like this should be evaluated by an executor and his or her counsel on a case-by-case basis.
The deceased’s last expenses - These expenses include but are not limited to: medical expenses, debts, personal expenses (credit cards, cell phone, etc.). Some of these may be tax-deductible, but not others. When you prepare the income tax return for the deceased (or the estate itself), you should speak with a tax professional (i.e., an accountant) about which can qualify, and, if an estate income tax return is required, whether or not the deduction should be taken on the deceased’s return vs. the estate’s return.
Funeral expenses - An estate tax deduction is generally allowed for funeral expenses, including the cost of a burial lot and amounts that are expended for the care of the lot. The estate will lose the deduction when a funeral is paid for by a family member or another benefactor, such as the Veterans Administration. The costs of funeral expenses, including embalming, cremation, casket, hearse, limousines, and floral costs, are deductible. The cost of transporting the body for a funeral is a funeral expense, and so is the cost of transportation of the person accompanying the body. Expenses for the purchase and erection of a monument, gravestone, or marker on the decedent’s burial lot or final resting place are also deductible.
Memorial expenses - Expenditures by the estate for masses or other religious observances are generally allowed as deductions. The cost of a funeral meal is usually allowed. Travel expenses for members of the family to attend the funeral are not deductible as funeral expenses. These are considered to be personal expenses of the family members and attendees, and funeral expenses are not deductible on personal income tax returns.
Property maintenance/management expenses
Carrying costs of assets - These are expenses that the estate may pay to maintain the real and tangible property owned by your deceased loved one. As the executor/personal representative/administrator, you are responsible for maintaining (and ultimately selling and/or distributing) the property that they owned. Thus expenses related to this should generally be paid from the estate. Some examples are expenses like property taxes, security systems, insurance, and reasonable property maintenance (lawn mowing, etc.). Some of these expenses such as property taxes may even be a deductible expense on the income tax return of the decedent or estate, and it is worth having a conversation with your tax professional (i.e., accountant, CPA, etc.) to determine when and what deductions should be taken.
Closing costs on property sales - This includes things like realtor’s commissions, title company fees, title insurance, etc. Closing costs would be clearly outlined in the closing documents received prior to closing on the sale of the deceased’s property.
Investment management fees - There are costs associated with having certain assets such as stocks, bonds, mutual funds, and partnership investments, etc., professionally managed. If someone holds these types of assets (usually in a brokerage or other investment account), the investment management fees which typically average 1% or more of that account, would be an expense of his/her estate when he/she passes away.
Appraisal fees - Appraisals are used fairly frequently during the course of an estate administration. Often, the Executor or Personal Representative needs to determine the fair market value of certain property owned by the decedent as of his or her date of death for tax purposes and also if distributions of property are going to be made “in kind” (i.e., a piece of tangible property distributed directly to a beneficiary rather than sold to a third party and making a cash distribution to that beneficiary instead).
Cleaning and moving - Nearly every estate where real property is being sold requires clean up of the home/land and organization, sales, distribution and/or disposal of the personal items of the deceased loved one. These cleaning and moving expenses can be paid for by the estate.
Junk removal - An extremely difficult process for people is often figuring out what to do with all of their deceased loved one’s personal items that do not carry any true monetary or sentimental value. It is an awful experience to have to choose between/throw away items that your deceased loved one cherished. Even simple items like an old driver’s license, notepad, or paperwork can be excruciating for someone to dispose of. Estate executors, personal representatives, and administrators can hire someone to do this hard and often emotional work for them and pay those professional fees from the estate.
Shipping of tangible property - Though sometimes people will explicitly state in their wills that they want the shipping of certain items to be charged to the specific beneficiary of the item or his/her share of the residuary estate, if any, usually the shipping of certain movable goods such as furniture, artwork, cars, etc., can be charged to the estate as an estate expense. However, executors must be careful to read the deceased person’s Will to make sure payment for this wasn’t to be handled in a different way.
Transportation -You can reimburse yourself for the mileage spent on driving/flying, etc., back and forth to your deceased loved one’s home/properties so long as such transit is reasonable. This is particularly important when flights and larger travel expenses are involved and the executor is needed in a particular location to handle estate business.
Postage - Usually the estate administration process involves many mailings, and the costs of postage can add up. Postage for estate documents and estate communication is generally considered an estate expense and can be paid and/or reimbursed by the estate.
Fiduciary commissions - Estate executors, personal representatives, and administrators are legally entitled to take a “commission” on the value of the estate as a fee for their services in these roles. The fee amount and timing for when the fee can be taken is determined under relevant state law and is based on the value of the estate and the income it generates. It is typically a blended rate of around 3.5% of the estate.
Probate/court filing fees - Probate filing fees can vary widely depending upon the applicable state/county, and are an estate expense.
Notary fees / Medallion Signature Guarantee fees - Many documents during the estate administration process require notarization or a medallion guarantee. Often, notaries and others will charge a fee for these services that can be paid by the estate.
Ordering copies of death certificates - If you cannot obtain extra copies from the funeral home where your loved one was laid to rest, you can purchase through vitalchek.com. However, there is a fee for each copy as well as a processing fee. These too can be paid by the estate.
Legal fees - In addition to probate filing fees, many people hire a lawyer to help them with the estate administration. There are scenarios where this is very wise: i.e., when family members are fighting over the estate, when the will is unclear, handwritten, or improperly signed, or when estate or inheritance tax return needs to be filed. However, these fees can be costly, and typically range anywhere from $5,000-$50,000 for the average estate, depending on how much work is needed, since many lawyers bill hourly for the estate administration work. The legal fees associated with the estate can be charged to the estate as an estate administration fee.
Accounting fees - Many estate representatives hire accountants to prepare the estate or inheritance tax returns for the estate, as well as the income tax returns. However, not every estate requires an accountant. If an estate does require an accountant, these fees can be paid by the estate.
Someone wise once said that the only guarantees in life are death and taxes. What they missed, was that death itself can trigger certain taxes that don’t affect the living.
Wealth Transfer Taxes a.k.a. “Death Taxes” -
- Estate tax - The estate tax is a type of “wealth transfer tax” and is paid by the estate. In layman's terms, it is a tax assessed on the net worth of a deceased person because such net worth is about to be transferred to another person/other people (i.e. the estate’s beneficiaries). Note that the mere receipt of the inherited estate by the beneficiary(ies) is not considered “income” to the beneficiary for tax purposes. The taxing authority (IRS for federal, and state departments of taxation for state), will measure that “net worth” number by requiring that the Executor/personal representative/administrator file an estate tax return which shows the exact value of each and every asset owned by that deceased person on the date they passed away (called “date of death values”). As you can imagine, there is often debate and tax-savings techniques used to determine what “ownership” actually means as well as what the value of certain assets are. The job of a great estate planner is to work with people during their lives to minimize that “ownership” where possible so they die owning less assets for tax purposes without completely losing control of those assets. Luckily, it may not be something you have to worry about. Estate tax generally applies to only the very wealthy (at the federal level, it currently only affects people/estates with a net worth of over $12.06M) and only those living in certain states with varying degrees of net worth. Click here to learn more.
- Inheritance tax - Inheritance tax is a type of wealth transfer tax. It is not paid by the estate itself, but rather is paid by the beneficiary that is receiving the asset(s) of the estate. Inheritance tax is assessed only in certain states and circumstances, and is based on the relationship between the deceased person and the beneficiary. Click here to learn more.
Income tax -
- Individual income tax - When someone dies, the executor / personal representative / administrator of his/her estate is required to file an income tax return for the last year that the deceased person was living. In fact, even if they die at the beginning of the year, a final income tax return should be filed for them in that year if the deceased person generated enough income prior to death to bring them over the filing threshold. Filing thresholds vary by filing status and year, so it is important to work with an accountant to determine the filing threshold of the deceased.
- Estate income tax - Just as a living person is required to file an income tax return and pay income taxes each year, so is an estate, if the assets owned by the estate generate income that is high enough to require filing an income tax return. The return that must be filed is an IRS Form 1041. (Note that the filing threshold for an estate or trust is $600, which is considerably lower than that of an individual.)
Though you should seek guidance on your particular situation, most of the expenses below would be considered deductible for either estate or income tax purposes. In general, the IRS considers the following administration expenses to be deductible for estate purposes, provided you have not already used the deduction on an estate income tax return:
- Fees paid to the fiduciary for administering the estate;
- Attorney, accountant, and return preparer fees;
- Expenses incurred for the management, conservation, or maintenance of property;
- Expenses in connection with the determination, collection, or refund of the estate's tax liability.