Can You Write Off an Executor's Out-of-Pocket Expenses?
The role of executor is vital to settling an estate after a decedent dies. The executor gathers assets, notifies creditors, and pays the decedent's debts and taxes, sometimes liquidating tangible assets to raise the funds. The executor then oversees transfer of the remaining assets to beneficiaries. Executors are entitled to write off expenses that are necessary to settle an estate, but they are not entitled to write off expenses that directly benefit any of the individual heirs of the estate.
Allowable administrative expenses that are qualified tax deductions for an executor include attorney's fees, executor's commissions and certain miscellaneous fees such as court costs and accountant fees.
Executor's Fees and Expenses
Executor fees and expenses typically involve small expenditures, such as postage, copying fees, and long-distance phone calls but can also include mileage reimbursement for the estate executor. More significant administrative costs, such as appraisals, professional fees and court filing fees, are estate expenses paid by the beneficiary and are usually paid directly from estate funds. If an executor keeps track of all these extra little costs that the estate doesn't pay for, the executor is entitled to reimbursement.
The estate repays the executor for these expenses, and the payment or payments qualify as administrative costs, but the expenses must be necessary to settling the estate. For example, if the executor buys a beneficiary lunch, the cost isn't deductible to the estate nor is the executor entitled to reimbursement from estate funds. Executors may also be entitled to compensation for performing their duties.
Petitioning the Court
If the will doesn't provide for such payment, the executor can petition the court and ask for permission to be paid out of estate funds. Assuming the request is in line with statutory guidelines, a judge will typically approve such payment. This compensation is in addition to reimbursement for out-of-pocket costs, and the estate can deduct this payment expense as well, either on Form 706, its estate tax return, or Form 1041, its income tax return. If the will provides that the executor should receive a bequest in lieu of payment, the Internal Revenue Service doesn't allow a deduction for the bequest's value.
Evaluating Estate Tax
Few estates actually owe estate taxes, but calculating whether they're due depends on totaling the value of all assets, then making allowable deductions. If the resulting number amounts to $11.4 million or more, as of 2019, estate tax is due on the balance over $11.4 million at rates as high as 40 percent. Therefore, if an estate is large and hovers near that $11.4 million mark, every deduction may count.
Exploring Income Tax Issues
Even if your estate is worth less than $11.4 million and estate taxes are not an issue, the estate might have to file an income tax return if it took in any money during the probate process, such as because assets earned interest. This is income to the estate, and the estate must pay taxes on it separately from estate taxes, which are based on the value of the estate.
The executor can take deductions for administrative costs on Internal Revenue Service Form 1041, the estate's income tax return, but can't deduct the same expenses on both Form 1041 and Form 706, which is the basic estate tax return. A deduction for administrative costs on the estate's income tax return, rather than on the basic estate tax return, can result in less income tax due and more money available for disbursement to beneficiaries when the estate closes.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.