Expenses associated with the decedent’s funeral are deducted from the gross estate. The cost of transporting the body to where it is interred is deductible as a funeral expense. The purchase of a tombstone or monument for the deceased is also deductible so long as the cost is reasonable and permitted by local law. The estate must actually pay for the funeral before the expenses can be deducted.
Any debts the decedent owed when he died are generally deductible for estate tax purposes. The debt is deductible if the estate pays the full amount. Generally, all of the debts the estate will owe are established during the probate process. The probate process varies by state, but generally the executor is required to contact all individuals and businesses the decedent owed money to and request they present documentation detailing the decedent’s debts. The executor is also generally required to publish a notice in a local newspaper notifying the public of the decedent’s death. This notice should also invite potential creditors to come forward if the decedent owed them money.
Only those expenses that are necessary to administer the estate are deductible for federal tax purposes. The costs must be tied to the executor’s attempts to collect the decedent’s assets, pay off his debts and distribute his property to his heirs. Administration expenses include any reasonable commission paid to the executor and attorney’s fees. Any expense incurred for the benefit of an individual heir or beneficiary that is not absolutely necessary for settling the estate as a whole is not deductible. An example of such an expense might be paying for an heir to come in from out of town so she could collect her share of the estate.
State Death Tax Deduction
Any state estate or inheritance tax paid by the estate is deductible for federal tax purposes. Unlike an estate tax, an inheritance tax is imposed on people who receive property for a decedent’s estate. Sixteen states have an estate tax while another six have an inheritance tax.