What Expenses Are Included in Estate Costs?

When a person passes away, their assets collectively become an estate. Before any of these assets can be passed on to heirs, a series of costs must be paid. These are known as estate costs, and they encompass all the debts, taxes, and expenses that are settled directly from the decedent’s property. The total value of the estate is reduced by these outlays, meaning the net amount available for distribution is what remains after all financial obligations have been met. An executor or administrator manages this settlement process.

Administrative and Legal Fees

An administrative cost is the fee for the executor or administrator, the individual tasked with managing the estate. This compensation can be a percentage of the estate’s value as defined by statute, ranging from 1% to 5%. Alternatively, it can be a “reasonable” fee subject to court approval.

Legal guidance is another administrative expense. An estate attorney advises the executor on legal requirements, from interpreting the will to navigating the probate court system. Attorneys may charge for their services on an hourly basis, a flat fee, or a percentage of the estate’s value.

The probate process itself generates direct costs as court and filing fees. When an estate is submitted to probate court, fees are required for filing the petition, validating the will, and submitting other legal documents. These costs are fixed amounts established by the local court or county.

Certain assets within an estate require a formal appraisal to determine their fair market value. Real estate, business interests, or valuable collections of art often need valuation by a qualified professional. This step is necessary for tax reporting on IRS Form 706 and to ensure equitable distribution among beneficiaries.

Decedent’s Debts and Final Expenses

The estate is responsible for settling the personal financial obligations of the deceased. This includes final medical bills from an illness or injury not covered by health insurance. These costs are treated as debts of the estate and must be addressed before assets are distributed.

Consumer debts left by the decedent also fall under the estate’s responsibility. This category includes outstanding credit card balances and personal loans. The executor must notify creditors of the death, allowing them to file a claim against the estate.

For secured debts like mortgages or auto loans, the estate must continue payments to prevent default and foreclosure. These payments must be maintained until the associated asset is either sold or formally transferred. If the asset is sold, the loan is paid off from the proceeds.

Funeral and burial costs are an expense paid from the estate that receives high priority for payment. Costs can include services from the funeral home, the purchase of a burial plot and casket, or expenses related to cremation.

Federal and State Transfer Taxes

A significant cost in settling an estate comes from taxes levied on the transfer of wealth. The federal estate tax is imposed on a decedent’s taxable estate, but a high exemption amount means most estates are not subject to this tax. For 2025, the federal exemption is $13.99 million per individual, meaning an estate must file a return only if its gross value exceeds this threshold. This exemption is scheduled to be reduced by about half at the end of 2025.

Separate from the federal system, twelve states and the District of Columbia impose their own estate tax. These state-level taxes have exemption amounts that are much lower than the federal equivalent. Consequently, an estate not large enough to owe federal estate tax might still be liable for a state estate tax.

An inheritance tax is levied by five states and is paid by the beneficiaries who receive the assets. The tax rate is determined by the beneficiary’s relationship to the decedent. Spouses are exempt, while close relatives pay a low rate, and more distant relatives pay the highest rates. Maryland is the only state that has both an estate tax and an inheritance tax.

Asset Management and Liquidation Costs

During the estate settlement period, the executor is responsible for maintaining the decedent’s property until it can be sold or distributed. For real estate, this includes ongoing expenses such as utility payments, property taxes, and homeowners insurance. These costs are paid from estate funds to preserve the property’s value.

The process of converting non-cash assets into cash to pay debts or facilitate distribution also incurs costs. When selling a decedent’s home, the estate is responsible for paying the real estate agent’s commission. Selling stocks or bonds may involve brokerage fees, and liquidating valuable personal property might require hiring an auctioneer.