If you are (or will be) serving as the Personal Representative (aka Executor) of an Estate, one of your jobs may be to file a federal and/or Massachusetts estate tax return and pay estate taxes. If estate taxes are due, there may be expenses of estate administration or debts of the decedent that can be deducted on the estate tax return, reducing the tax bill. The attorney or CPA preparing the estate tax return for you will ask you for a list of deductions. But, you may be wondering… what is actually deductible? Here are my “Top 10 Common Estate Tax Deductions”.
#1 – Decedent’s Debts
Debts of the decedent paid from estate assets are deductible. This includes bills owed at death, such as outstanding credit card bills. It also includes the decedent’s final medical expenses that aren’t covered by health insurance or Medicare.
#2 – Funeral Expenses
Funeral expenses paid by the estate are deductible. This includes the funeral, burial/cremation, and gravestone. It also includes the expenses of a memorial service, celebration of life, family dinner, wake, or shiva, for instance. Ancillary expenses paid by the estate – such as clothing for the decedent, flowers, and an obituary publication – are also deductible.
#3 – Attorney and Accountant Fees
Fees paid to your estate attorney for estate administration legal advice are deductible. Also, fees paid to an accountant to file a fiduciary income tax return for the estate are deductible. On the estate tax return, these fees can be estimated as the work may not be done by the time the return is filed.
#4 – Executor or Personal Representative Fees
The Personal Representative or Executor may take a fee for his or her work, and if so, that fee is deductible. As above, the fee can be estimated on the estate tax return as the work may not be done by the time the return is filed.
#5 – Expenses of Administration
Other expenses associated with estate administration and preparation of the estate tax return are deductible. These expenses typically include real estate appraisals, business valuations, death certificates, and postage, for example.
#6 – Real Estate Maintenance Expenses
If the decedent owned real estate, the Personal Representative is obligated to maintain the real estate for the period of estate administration. For that reason, the real estate maintenance expenses – including insurance, landscaping, oil, snow removal, and real estate taxes – are deductible for a period of time, until the property can be distributed or sold.
#7 – Tangible Personal Property Expenses
All of the decedent’s tangible personal property (clothes, furniture, jewelry, and artwork, for example) needs to be moved, transferred, or thrown out and that is the job of the Personal Representative. For that reason, expenses associated with shipping or moving tangibles, cleaning out the residence, and insuring or maintaining valuables are deductible.
#8 – Losses
Losses from property damage or theft during the period of estate administration are deductible. For example, if decedent’s residence flooded after his or her death and the Personal Representative spent money to repair the damaged property, the repair expenses are deductible. Although uncommon, these deductions can be significant.
#9 – Charitable Deduction
Charitable gifts paid to eligible charitable organizations under the terms of decedent’s estate plan are deductible. Note, however, that the tax rules governing charitable deductions on an estate tax return are different from the tax rules governing charitable deductions on an income tax return.
#10 – Marital Deduction
Any assets passing directly to a surviving spouse are eligible for the marital deduction. Also, assets passing in trust for the benefit of the surviving spouse are eligible for the marital deduction, if the trust qualifies as a QTIP trust (qualified terminable interest property) and a QTIP election is made. The amount of the marital deduction is unlimited for US citizen spouses. The marital deduction is a very important estate tax planning tool. By placing this deduction last on my list, I admit I “buried the lead”, but this is a complex topic for another day….