The probate process is often an important aspect of estate administration. Probate courts oversee estate administration and expect to receive assets from an estate going through the probate process.
What heirs and presumptive beneficiaries often fail to consider is that there may be financial obligations that take priority over their right to inherit from the estate. The personal representative administering the estate has to ensure that they cover certain financial obligations with estate resources before making any distributions to beneficiaries.
In some cases, those financial obligations can consume a significant portion of the assets in an estate or may leave people without any property to inherit. What financial obligations may arise during probate court proceedings and limit what people inherit?
1. Probate court costs
Probate court oversight isn’t free. In fact, it isn’t cheap. The estate has an obligation to pay for all relevant court costs. It may even need to pay for the legal representation secured by the personal representative. Those costs generally take precedence over distributions to beneficiaries and many other financial obligations.
2. Outstanding taxes
There are several kinds of taxes that the estate may need to cover. Typically, personal representatives file an income tax return on behalf of the decedent. They may have to cover income tax responsibilities with estate resources.
If the personal representative must sell estate assets, the state itself may have to cover income taxes. In scenarios involving multi-million-dollar estates, there could also be estate taxes due. Personal representatives typically have to handle those tax obligations or risk becoming personally responsible for them.
3. Personal debts
The property belonging to a deceased individual becomes the property of their estate when they die. Any debts that they owe become the responsibility of the estate. End-of-life medical care could create tens of thousands of dollars in debt that the estate must cover.
People may die with large credit card balances or unpaid student loans. Those personal debts generally require repayment before the representative of an estate can transfer resources to heirs or beneficiaries.
Understanding the obligations that may reduce the value of an estate can be beneficial for those expecting to inherit and for those engaged in estate planning. Depending on the terms of an estate plan, financial obligations can be a major issue for both personal representatives and those expecting to inherit from the estate.