Testators thinking about their legacy and beneficiaries evaluating what they might inherit often overestimate the value of estates. This mistake occurs in part because people focus too much on the assets that belong to the estate and not enough on the financial obligations that arise during estate administration.
The probate process can actually take months to complete, and personal representatives have an obligation to cover many specific expenses before distributing the most valuable assets from the estate to beneficiaries. Certain obligations can significantly reduce the overall value of the estate. For example, the three financial obligations noted below can directly influence what resources beneficiaries ultimately inherit from an estate.
Estate administration costs
Probate proceedings are not free. It costs money to initiate the probate process. There are court costs associated with every hearing in court. The personal representative also generally receives compensation, usually around 2.5% of the total estate value. There may be legal fees to cover as well. Those costs can have a significant impact on the total value of the estate.
Tax obligations
There are several types of taxes that may apply during estate administration. The estate typically covers any outstanding income tax obligations owed by the decedent after the personal representative files their final income tax return. If the estate administration process involves an estate sale, the estate itself might technically owe income tax. If the estate is particularly large, then estate taxes might apply. Fulfilling tax obligations typically takes priority over asset distribution to beneficiaries.
Personal debts
Maybe the decedent had student loans still due from their college and postgraduate education. Perhaps they had medical debt from recent treatment or high balances on their credit cards. Personal representatives usually have to cover significant debt before distributing all of the property from the estate to beneficiaries. If they make mistakes and improperly distribute assets, they could be at risk of personal liability for certain financial obligations.
Recognizing how certain expenses might diminish the value of an estate can help people temper their expectations regarding an inheritance. Personal representatives usually need to take care to ensure that they fulfill financial obligations to protect themselves from personal liability during estate administration.