As the executor of an estate, settling the estate’s tax liabilities is a primary responsibility. For larger estates (those valued over $5,490,000 as of 2017), federal estate taxes come into play. Accounting for specific types of expenses and taking advantage of allowable deductions can reduce the estate tax burden. Below are some categories to remember.
Funeral and Burial Expenses
The taxable estate value may exclude expenses associated with the funeral of the deceased. The estate must actually pay for the funeral before those expenses can be deducted. These funeral and burial expenses include: transporting the body to its burial location, tombstone and burial plot, memorial service, and other funeral related items.
Estate Administration Expenses
The estate may deduct only those expenses necessary to administer the estate. Estate administration expenses must relate to collecting assets, paying debts and distributing assets to beneficiaries. You will likely need an attorney to navigate the probate process, if necessary. These attorney or accountant fees and commissions are also tax-deductible.
Outstanding Debts Left by the Deceased
Before distributing assets to heirs, the estate should pay any valid debts left by the deceased. The probate process generally establishes what debts the estate owes. The probate process varies by state, so be sure to check with a lawyer if you have questions. Executors typically use estate funds or proceeds from the sale of assets to pay outstanding debts and administrative expenses. However, if the decedent had a Trust, there may be language allowing Trust funds to be used particularly for the payment of Estate taxes and administrative expenses. Note-creditors have different deadlines to submit a claim to the Executor as determined by state law.
Charitable Donations Made After Death
Gifts made to charities as directed upon the death of the decedent, typically receive estate tax deductions. A charity must generally have a 501(c)(3) IRS designation to quality. Before leaving a gift to a charity, have an attorney verify that the organization meets the IRS designation for tax-deductible donations. Gifts given prior to the donor’s death qualify for deductions toward income tax, rather than estate tax.
Death Tax Deductions: State Inheritance Tax and Estate Taxes
For federal estate tax purposes, any state estate or inheritance taxes qualify for a federal estate tax reduction. Eleven states and Washington, D.C.1 have their own estate tax and six states2 levy an inheritance tax (Maryland has both) as of 2020.
If you are the Executor of an estate and need assistance managing the estate expenses, contact a Fifth Third advisor.