Estate settlement costs are the cumulative expenses incurred during the transfer of property previously owned by a recently deceased individual. It's important to take these expenses into account when planning for retirement. Estate settlement costs may include funeral services, medical expenses, federal and state taxes, legal fees, accountant fees and other administrative costs.
Estate settlement costs can negatively affect the ultimate value of a transferred estate. With proper planning, these settlement costs can be reduced or eliminated.
Estate settlement costs can be divided into three general classifications: taxes, costs of dying and administrative costs. Taxes include both federal and state taxes. Costs of dying include fees for funeral services and any accumulated medical expenses at the time of death. Administrative costs include accounting fees and legal fees (probate fees, attorney fees, executor fees and appraisal fees).
The size of the estate will determine the estate settlement costs. Larger estates will cost more in taxes than smaller estates. As a rule of thumb, you can use between 3 percent and 6 percent of the estate's fair market value to estimate settlement costs. The website Investopedia defines "fair market value" as the price that a property would fetch within a reasonably informed and free marketplace.
Taxes owed as part of the estate settlement can be reduced with the use of deductions. The marital deduction is one such deduction. Any property that is transferred to a surviving spouse is eligible for this tax deduction.
Any part of the estate that is transferred to a charitable organization is eligible for a charitable deduction. In addition, any fees related to mortgages, loans and administrative expenses (as outlined in the previous section) are subject to deductions of varying amounts.
One cost-reduction technique is known as balancing the estates. By balancing estates, you can reduce estate settlement costs. Balancing estates simply means evenly dividing the estate between both spouses while they are both still alive. Thus, only half of the estate is subject to settlement costs in the event that either spouse passes away.
Another cost-reduction technique is to transfer the estate into a legal entity, such as a trust or life estate. These legal entities are seen as "individuals," distinct from their owners. Any property held in such an entity isn't subject to probate in the event that the owner passes away.
- Ohio State University: Costs Involved in Transferring Property (PDF)
- IRS: Frequently Asked Questions on Estate Taxes
- Virginia Cooperative Extension; Managing Prosperity: Estate and Retirement Planning for All Ages. Probate and the Probate Process; Jesse J. Richardson, Jr. and L. Leon Geyer; May 2009
- Ohio State University: Estate Planning Considerations for Ohio Families
- Investopedia: Fair Market Value
- Comstock/Comstock/Getty Images