People often include burial instructions in their wills or leave separate instructions with their executor regarding their wishes for funeral arrangements. This cuts down on guesswork at an emotionally difficult time, ensuring loved ones and the will’s executor don’t have to wonder what the decedent might have wanted. Despite such preparation, there may still be an issue with how to pay for the funeral.
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Responsibility for Costs
Laws vary by state, but the decedent’s estate is usually responsible for paying funeral expenses. The executor is not personally obligated to pay these expenses, but must decide how to fund the burial before the estate is finally settled. Ideally, the decedent left cash accounts the executor can tap. Life insurance proceeds usually do not pay out until the executor provides an official death certificate, which can take weeks, and insurance proceeds might not be available to the estate if the decedent named a beneficiary. In that case, the money would bypass probate and go directly to that individual, so the executor would not have access to those funds. If a loved one pays for the funeral because the estate has no immediate cash, that person is entitled to make a claim against the estate for reimbursement.
Priority of Payment
In most states, funeral expenses receive top priority when an executor begins paying debts and expenses from estate funds. In Texas and New Jersey, for example, funeral expenses take precedence over taxes, mortgages, credit card balances and even debts secured by legal judgments. If the estate has any liquid assets, such as bank accounts, the executor can morally and legally use that money for the funeral without waiting for other creditors to submit claims to the estate for payment.
Sometimes an estate has greater expenses and debts than assets. These estates are said to be “insolvent.” In this case, a loved one might have to step in to pay for the funeral without the ability to request reimbursement later. Unless the estate is totally insolvent -- without any money or assets, funeral expenses are usually paid before other debts. For example, for an estate with $150,000 in debts and assets of $25,000, the executor may justifiably pay for the funeral or reimburse the loved one from the assets; the balance of the $25,000 would then be apportioned between remaining creditors after the funeral costs are paid.
The federal government levies estate taxes only on estates valued above a certain threshold, which changes each year. Many executors do not have to worry about filing a federal estate tax return, although some states impose estate taxes separately from the IRS. When an estate is taxable, funeral expenses are deductible; the executor pays taxes on the balance remaining after these costs are paid. The IRS requires such costs to be reasonable and usually defers to the laws of the state where the decedent died to determine what is reasonable. For example, Pennsylvania has an estate tax and allows a deduction for the perpetual maintenance of a family mausoleum. This might not seem like a reasonable cost, but if a decedent died in that state, the IRS would allow that same deduction. The IRS does not have an ironclad list of what is "reasonable"; it depends on the examining agent's interpretation and most agents are lenient.
References & Resources
- Klenk Law: Deductible Funeral Expenses and the Federal Estate Tax
- Hammond Law Group: Estate Planning – Paying Funeral Espenses
- North Carolina Legal Assistance for Military Personnel: All About Probate
- Bloomberg Businessweek: IRS Increases 401(k) Limits, Estate Tax Exemption for 2012
- Washington State Legislature: Order of Payment of Debts
- Law Office of Donald D. Vanarelli: Insolvent Estates and Related Issues
- John R. Vermillion & Associates: Who Pays for Funeral Expenses?