Estate administration or probate proceedings are not just about transferring assets to beneficiaries or heirs. The process also requires the fulfillment of the decedent’s financial obligation. Their personal representative has to communicate with and repay their creditors before the beneficiaries they named inherit anything from their states.
Not only do creditors take priority over the inheritance rights of beneficiaries and heirs, but there may be taxes to address as well. Several kinds of taxes require payment using estate resources. Some of those taxes can have a profound impact on the overall value of the estate.
What taxes does an estate potentially need to cover?
State and federal estate taxes
Although many states do not collect a local estate tax, Minnesota does. If the total value of the estate is $3 million or higher, the estate itself probably owes taxes. The personal representative has to file appropriate paperwork with state authorities and pay up to 16% of the total value of the estate in state estate taxes. If the estate is substantially larger than that, federal estate taxes might apply as well. In 2024, the federal threshold for estate taxes is $13.61 million. Estates worth more than that are subject to a tax rate of somewhere between 18 and 40%.
Income taxes for the deceased
The personal representative of an estate usually has to file a final income tax return on behalf of the person who died. They do this to ensure that they fulfill any outstanding income tax obligations owed by the decedent. Even if someone hasn’t worked in years, they may have some tax obligations at the time of their death. The estate has to cover those taxes before beneficiaries receive their inheritances.
Estate income taxes
An estate sometimes has an obligation to pay income taxes as well. Such obligations typically arise when the personal representative sells estate property. When the sale of estate resources generates $600 or more in revenue, the personal representative of the estate has to retain some of those funds to cover income taxes.
The failure of a personal representative to file the right tax paperwork and pay taxes as appropriate might lead to personal liability. Understanding the financial obligations associated with Minnesota probate proceedings can help reduce the risk associated with estate administration. Taxes are one of several obligations that can pass to a personal representative if they make mistakes during the probate process.
