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Deductible Funeral Expenses and the Federal Estate Tax

by Peter Klenk, Esq.

Our law firm focuses exclusively in the area of Wills, Trusts, Will Challenges and Estate Administration. On a daily basis we are drafting Federal Estate Tax Returns (IRS Form 706) for estates. One of the many deductions allowed on the 706 is the cost of the decedent’s funeral. As you can imagine, costs of funerals may vary.

Some of our clients spend very little on their funeral, opting for cremation and their ashes being sprinkled in a favorite spot. Other funerals are extensive catered affairs and the casket is buried in ornate and expensive crypts or mausoleums. A quick search of the net will reveal several firms in the United States that design and build fabulous burial vaults that easily exceed $1,000,000.00 each. One of my clients met extensively with his architect in designing what he felt was the perfect final resting place for both he and his family.

When preparing an IRS Form 706 Estate Tax Return, the question arises as to how much of a deduction will be allowed for funeral expenses? A Will or Revocable (Living) Trust might direct the executor or personal representative to spend estate assets on such an ornate mausoleum or on a huge party for friends and family, but will the IRS allow that expense as a deduction against the Federal Estate Tax?

Before speaking about the Federal Estate Tax deductions, it is important to understand just what the Federal Estate Tax is. The Federal Estate Tax is a transfer tax, a tax on the transfer of wealth from one person to another at death. It is not a sales, use or income tax. Think of it as the same tax you might pay when selling your house. When you sell a house there is a transfer tax taxing the transfer of title from the seller to the buyer. The state and county deem this transfer a taxable event and collect a fee. When you die you transfer everything; cash, land, IRA, shoes, socks….. they all pass to someone else (you can’t take it with you!). The IRS requires that you add up the value of all your things less the debts you owe to arrive at your Gross Federal Taxable Estate. From the Gross Federal Taxable Estate you subtract certain expenses such as the cost of your estate attorney, the executor’s fee and the cost of the funeral. This gives you the Net Federal Taxable Estate from which the Estate Tax due is calculated.

Logically, you want the deductions to be as large as possible (reducing tax) while the IRS wishes the deductions against the Gross Federal Taxable Estate to be as small as possible (increasing revenue).

Given the IRS’ desire for large Net Taxable Estates, what funeral expenses are deductible on the IRS Form 706?

First, what qualifies as a funeral expense on the IRS Form 706? Generally all expenditures actually incurred in connection with the funeral and burial services are potentially deductible for Federal Estate Tax purposes. Such expenditures include, but are not limited to, expenses for the casket, burial vault, urn, undertaker’s fee, flowers provided by the estate, food for mourners, clothing purchased for burial, and transportation of the deceased to the place of burial as well as the tip your executor might make to your chosen religious representative. What is not a funeral expense? Over the years our clients have had us attempt many imaginative expenses that have subsequently been rejected by the IRS, including the transportation expenses of various relatives to attend the funeral, new cloths for the widow to attend the funeral and the kennel fees incurred by the deceased’s sister so that she could attend her brother’s funeral without her Doberman.

Now that you have a list of acceptable funeral expenses, how extensive can these expenses be while still remaining deductable against the Federal Estate Tax?

One way the IRS limits funeral expenses is by questioning whether the expense was truly a “funeral expense” (incurred as part of the funeral or burial service) or whether it was simple a decision by the executor to spend the money during or around the time of the funeral. When our clients inform us they wish to have a large party as part of their funeral we document this request clearly and carefully in the Will or Revocable or Living Trust to support the claim that the expense was part of the funeral. Proper documentation is vital. If this expense is not clearly articulated by the deceased it opens the door to an IRS claim that it is not a “funeral expense”. Therefore it is important that approval for expensive parties or meal surrounding a funeral be documented ahead of time to improve the chances of those expenses being deductible against the Federal Estate Tax. It is my practice to document these expenses extensively and attach them to the Federal Form 706. I find it is better to address potential IRS Form 706 objections up front.

The ability for the IRS to object to certain funeral expenses may be limited by state law. Many clients wish to set aside large sums for perpetual care of a cemetery lot or mausoleum. The IRS will allow these deductions (subject to the “reasonableness” test that follows) on the Federal Estate Tax return if the rules of the deceased’s home state allow the deduction. For example, Pennsylvania allows the personal representative of an estate to deduct amounts paid for perpetual maintenance of a family mausoleum as a funeral expense; therefore these amounts are also deductible for federal estate tax purposes. By contrast, Florida law prohibits such deduction, and consequently amounts expended for perpetual care would not be deductible on the federal estate tax return for a Florida estate.

IRS Regulations also limit the amount that can be deducted for funeral expenses by requiring that such expenses be “reasonable” in amount. The IRS, however, usually does not challenge the reasonableness of such expenses. In fact, the IRS instructs its examining agents to accept any “reasonable judgment made in good faith by the executor or administrator as to what he considered necessary for the estate at the time of incurring the expense.” Additionally, the Regulations provide that a decision of a local court as to the amount and validity of an expense will ordinarily be accepted. Courts are generally fairly liberal with respect to this determination, particularly where larger estates are concerned. For example, more than seventy-five years ago, one court held that $21,000 was not an unreasonable amount to pay for the construction of a mausoleum. “Reasonable” can differ from case to case and depend on the size of the given taxable estates. A $500,000.00 mausoleum for a person whose estate is valued at $5,000,000.00 might be “reasonable” while perhaps not for an estate of $1,500,000.00. Given the flexibility of the word “reasonable”, it is our practice to work closely with our clients to document their wishes so the executor is armed with as much proof as necessary to show that the expenses are most certainly, “reasonable”.

Given that the federal estate tax at times has been up to 55% it is easy to see why some of our clients have decided on building elaborate mausoleums and “hosting” expensive funeral parties. In these cases, fifty-five cents of each dollar spent on the party or mausoleum is actually the IRS’. These clients would rather spend money on their goodbye party and their final resting place than giving the majority to the IRS. But to ensure that a portion of this expense is shifted to the IRS it is vitally important that a plan be made and documented prior to the date of death. If a plan is not clearly laid out the IRS may successfully claim the expense is not “reasonable” or not a “funeral expense”, and rather the executor’s non-deductible extravagance.

If you are interested in planning a going away party or an expensive final resting place and want to increase the chance of that expense being deductible against the Federal Estate Tax, contact the lawyers at the Law Offices of Peter Klenk, Esquire who focus exclusively on Wills, Trusts, Will Challenges and Estate Administration. This is all that we do!

This article is not intended to constitute legal advice, and should not be construed as a substitute for professional legal advice from a licensed attorney.