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How to handle debts and taxes when settling a parent’s estate

On Behalf of | Oct 4, 2024 | Probate and Estate Administration |

An important but intimidating part of settling an estate is handling outstanding debts and taxes. In Pennsylvania, this process can be straightforward or complex, depending on how well you know the state’s laws.

By following the right steps, you can settle your parent’s estate more easily.

Paying off debts

In Pennsylvania, you must pay your parent’s outstanding debts before you can distribute any inheritance. Keep in mind that the estate is responsible for these debts, not you as an individual. Any creditor that tries to make you think you are personally responsible may be violating your rights. 

Debts can include things like credit card balances, medical bills, and personal loans, so gather all bills and statements to see what the estate owes. Once you know what debts exist, you can use estate funds to pay them off. 

If the estate does not have enough money, you may be able to settle some debts through negotiation. Secured debts, such as a mortgage, may need special attention since property backs these loans. If you decide to sell the property, you must pay off the mortgage from the proceeds of the sale.

Managing taxes

Pennsylvania requires estates to pay both state inheritance taxes and federal taxes, if applicable. The state’s inheritance tax depends on the value of the estate and who inherits the assets. For example, children and lineal heirs pay a 4.5% tax on what they inherit, while siblings pay 12%. However, certain assets (such as life insurance policies) do not get taxed, so check which parts of the estate are exempt.

Importantly, you must file and pay inheritance taxes within nine months of your parent’s death, but if you pay within three months, you can receive a discount. Also, check if any federal taxes are due. These taxes only apply to estates worth over $13.61 million for 2024, so most Pennsylvania residents won’t owe these taxes.

Handling the estate’s debts and taxes can seem complicated, but taking it step by step will help. By addressing these obligations first, you can settle your parent’s estate smoothly and focus on honoring their legacy.