What Estate Expenses Are Paid by the Beneficiary?

Settling an estate can be a complicated and time-consuming process. It’s the job of the executor to inventory assets, settle outstanding expenses and distribute the remainder of the estate to the deceased’s beneficiaries. If you will inherit property or financial assets, you may wonder which estate expenses you are responsible for as a beneficiary. The answer depends on which assets pass to you when a family member or loved one passes away.

For more help with estate planning and managing wealth, consider working with a financial advisor.

What Are the Expenses of an Estate?

Several estate costs may need to be paid to settle an estate when someone passes away and the probate process begins. Some of these costs may be the responsibility of the estate itself, while others are for beneficiaries to cover.

An estate has five main expenses:

• Outstanding debts. When someone dies, their debts aren’t automatically forgiven. The executor is responsible for notifying creditors that the deceased has passed, so they have time to make a claim against the estate’s assets.
• Taxes. There are three main taxes that are due when someone dies.
  • Estate tax
  • Inheritance tax
  • Income tax
  • Property tax
• Fees. In addition to executor fees, settling an estate may require hiring an estate planning attorney or an accountant, both of whom may charge for their services. There may also be fees for specific services, such as these.
  • Filing documents to begin the probate process
  • Serving notice to creditors
  • Recording transfers of property with the local register of deeds
• Property maintenance and distribution. An estate that includes real property may incur expenses for maintenance and upkeep of the property until distribution to beneficiaries or liquidation to pay creditors. Likewise, there may be additional costs for transporting property or professionals that help settle the estate.
• Final expenses. Final expenses may be part of an estate’s expenses, though these do not use estate assets. Instead, you can pay them using the death benefit associated with the deceased person’s life insurance policy. This covers several types of final expenses.
  • Funeral costs
  • Burial costs
  • Cremation costs
  • Interment costs

What Expenses Does the Estate Pay?

The estate pays many of the costs for settling an estate itself. It’s the executor’s job to determine what payments are due and when.

Some of the most important expenses the estate pays include these:

• Outstanding debts
  • Credit cards
  • Medical bills
  • 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
  • Executor
  • Attorneys
  • Accountants
  • Real estate agents, if selling a home or land
• Taxes
  • Income tax
  • Estate tax
  • Property tax
• Incidental costs
  • Recording fees
  • Mileage reimbursements for the executor
  • 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 the estate pays:

Estate Expenses Paid by Beneficiary

The estate expenses you must cover as a beneficiary depend on what you inherit and whether there are any special provisions in the will or trust.

Generally, you can expect to pay certain costs as a beneficiary:

• Final expenses not covered by the estate or by a life insurance policy
• Personal travel expenses
• Legal fees, if you contest the will
• Property maintenance or transportation costs not covered by the estate

Whether you will pay any of these costs out of pocket depends 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, the estate should cover basic upkeep, maintenance and repairs. However, if you inherit a property and want to renovate to boost its value before selling, you must pay for those expenses yourself.

Deducting Estate Expenses from Taxes

Certain estate expenses are tax-deductible on IRS Form 1041. ¹ The executor must file this form for estates earning over $600 in income or with a nonresident alien as a beneficiary. This requirement also applies to trustees managing a trust for one or more beneficiaries.

The IRS allows for a number of deductions for estate expenses, including:

• State and local tax payments, including property taxes
• Executor or trustee fees
• Other professional fees, including attorney or accountant fees
• Maintenance expenses for 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 from either estate tax or estate income tax, 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 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.

What Happens When the Estate Cannot Cover Its Expenses

Most estates have enough assets to pay their debts and still leave something for beneficiaries. When that is not the case, the order in which creditors are paid becomes the determining factor in what, if anything, beneficiaries ultimately receive.

An estate that cannot pay all of its debts is considered insolvent. When this happens, the executor must still follow a specific order of priority in paying creditors before making any distributions.

While the exact order varies by state, the general sequence typically follows this structure:

1. Secured debts and administrative costs
2. Priority unsecured debts, such as medical bills
3. General unsecured creditors
4. Beneficiaries

In practical terms, this means an insolvent estate may leave nothing for heirs. If the estate has already made distributions before all debts were accounted for, those distributions may need to be returned.

If an executor distributes assets to beneficiaries while creditors still have valid, unpaid claims, the executor may be personally liable. It is one reason the settlement process takes as long as it does.

As a beneficiary, you are generally not personally responsible for a deceased person’s debts simply because you inherited from them. The estate is the debtor, not you.

There are a few exceptions, including if you co-signed a loan or held a joint account. It also does not apply if you live in a community property state, ² like California or Texas, where certain marital debts may follow a surviving spouse. Inheriting an asset that carries its own debt, such as a home with a mortgage, also means inheriting the obligation attached to it.

If you are a beneficiary and believe the estate may be insolvent, consulting an estate attorney early gives you a clearer picture of what to expect and whether any distributions you received could be at risk.

How Beneficiaries Can Protect Themselves During Estate Settlement

Being named as a beneficiary does not mean you are simply a passive recipient. During estate settlement, beneficiaries have legal rights. Understanding how they work can make a meaningful difference if something goes wrong.

Formal Notice

You have the right to receive formal notice of probate. This will indicate you are named as a beneficiary.

If you are not notified, you may have grounds to challenge actions taken without your knowledge.

Estate Accounting

You also have the right to request a formal accounting from the executor. This is a detailed record of all assets inventoried, expenses paid and distributions made from the estate.

If the executor refuses to provide one or the accounting raises questions, you can petition the probate court to compel disclosure.

Mismanagement of an Estate

It is possible that the executor may mismanage the estate, whether through negligence, self-dealing or outright misconduct.

If you suspect this is the case, you have the right to petition the court for their removal. Courts take executor misconduct seriously, and a beneficiary with documented concerns can request a review.

Executors have a fiduciary duty to the beneficiaries of the estate, and a breach of that duty can result in personal liability. ³

Contesting a Will

Contesting a will is a separate matter from challenging an executor.

To contest a will, you generally need legal grounds such as lack of capacity, undue influence or fraud at the time the will was signed. These cases are complex and time-sensitive, as most states impose strict deadlines after probate opens for filing a contest.

Working with an estate attorney during the settlement process, rather than after a problem surfaces, puts you in a better position to catch issues early and respond before options narrow.

Bottom Line

Settling an estate often means sorting out numerous financial and legal issues. Fortunately, most estate expenses are the responsibility of the estate itself, leaving beneficiaries with minimal financial burden. 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 are 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 have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, begin 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 specifies the distribution of your assets 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.

Photo credit: ©iStock.com/Dean Mitchell, ©iStock.com/Weekend Images Inc., ©iStock.com/DragonImages