Federal and state estate taxes are based on the value of property owned by a decedent at the time of death. Estates aren't liable for these taxes unless and until their net values after deducting certain expenses exceed a threshold called an exemption.
The amount of these exemptions can vary. It's $11.7 million at the federal level as of 2021, while it's only $1 million in Oregon.
It can obviously benefit an estate to claim as many allowable deductions as possible to whittle away at net value and possibly dodge this tax, particularly when the estate is nudging up against passing over the exemption threshold. Funeral expenses are recognized as legitimate estate tax deductions, subject to certain rules.
Estates with net values that don't reach exemption thresholds can't deduct funeral expenses because it serves no purpose. They're not liable for an estate tax and don't have to file estate tax returns.
Funeral Costs as Qualifying Expenses
An estate tax deduction is generally allowed for funeral expenses, including the cost of a burial lot and amounts that are expended for the care of the lot. Bequests for masses or other religious observances are allowed as deductions as well.
The estate must directly pay these costs. It will lose the deduction when a funeral is paid for by a family member or another benefactor, such as the Veterans Administration.
The costs of funeral expenses, including embalming, cremation, casket, hearse, limousines, and floral costs, are deductible. The cost of transporting the body for a funeral is a funeral expense, and so is the cost of transportation of the person accompanying the body.
Expenses for the purchase and erection of a monument, gravestone, or marker on the decedent’s burial lot or final resting place are also deductible. The cost of a funeral meal is usually allowed.
Travel expenses for members of the family to attend the funeral are not deductible as funeral expenses. These are considered to be personal expenses of the family members and attendees, and funeral expenses are not deductible on personal income tax returns.
Funeral expenses are never deductible for income tax purposes, whether they're paid by an individual or the estate, which might also have to file an income tax return.
Expenses Must Be "Reasonable and Necessary"
Deductions are allowed only if they're considered reasonable and necessary, and this can depend on the decedent’s station in life and the size of the estate. What's reasonable and necessary for a multi-millionaire would logically be significantly more than what's reasonable for someone who's estate just barely nudges over a $1 million state exemption.
The federal estate tax also limits deductions for funeral expenses to the extent that they're allowable under state law. The IRS is only bound by decisions of a state’s highest court, so it's possible to have amounts permitted as funeral expenses by the county Orphan’s Court yet have the deduction denied by the IRS for the federal estate tax.
The Executor's Role
The duty of an estate's executor is primarily one of payment, not one of selection of the burial site or employment of the undertaker. An executor should nonetheless consider advising those arranging the funeral that their right to reimbursement from the estate is limited to what will be considered reasonable.
The person making arrangements assumes the risk of personal liability for the excessive costs if the funeral is too elaborate. Special care should also be taken if there's a chance that the estate might be insolvent—the decedent's debts will exceed the value of his assets. The state court might allow only a nominal sum for the funeral in this case.
What About the Decedent's Wishes?
Common law has historically taken the position that a decedent’s remains are not “owned” by the estate. Rather, “ownership” of the body belongs to the next of kin.
That said, extravagant burial directions are generally not honored as a matter of public policy because such practices could well result in grave robbing. The movie star who wants to be buried in her Ferrari is a good example. Directions for internment in a solid silver or solid gold casket are in the same category.
A decedent’s wishes expressed in the will are not necessarily binding, either, although they're given a lot of weight, particularly with regard to disposition of the body. In the event of dispute, the general order of preference recognized in case law is usually:
- The wishes of the surviving spouse if the marriage existed at the time of death
- The wishes of the decedent, especially if they were strongly and recently expressed
- The wishes of the next of kin according to their relationship or association with the decedent
The court has exclusive jurisdiction of the control of the decedent’s burial in the event that a dispute arises that cannot otherwise be resolved.
How to Take the Deduction
Assuming an estate is large enough to be taxable at the federal level, the executor would be responsible for preparing and filing IRS Form 706, the United States Estate (and Generation Skipping Transfer) tax return. Schedule J of this form is dedicated to funeral expenses. They go on line 1 of Section A of Schedule J.
State estate tax returns can vary, so check with a tax professional or estate-planning attorney.