This article examines the federal estate tax funeral expense deduction, featuring a discussion of allowable expenses, practical tips for maximizing the deduction, and arguments that the reasonableness restrictions in the regulations are invalid. Congress made all funeral expenses deductible under I.R.C. § 2053(a), if those expenses are allowable under the applicable probate law. Although Congress did not create a separate reasonableness requirement under federal law, Treasury Regulation § 20.2053-2 creates a negative implication that certain categories of funeral expenses must be reasonable to be deductible. As there is no federal reasonableness requirement in the statute for deductibility of funeral expenses, the regulation may be invalid because it seeks to impose an extra requirement on some funeral expenses.
Send in the Funeral Clowns
Two entrepreneurs thought families might want to “Let [their] loved one go down with a smile,” so they chose to offer a service “so ubiquitously terrifying that Stephen King wrote a novel about [it].” Kathy Benjamin, Funerals to Die For, 216-17 (2013). Inspired by what has been called “the worst idea . . . ever,” id., their clown company offered to deliver the usual clown antics like squirting flowers and balloon animals, and as a bonus, the two clowns would fall into the grave on cue if requested. “[T]his trend seems to be catching on, and there are rumors of Eastern European mourning clowns, including one whose specialty is [making inappropriate bodily noises] during particularly sad parts of the [funeral] service.” Id. Coulrophobia sufferers and others may find funeral clowns disturbing, but could the cost be tax deductible?
Rocket My Ashes into Outer Space
Cremation rates are smokin’ burial rates these days. In 1947, only 4 percent of US decedents were cremated, and 96 percent were buried. The US cremation rate passed the burial rate around 2017, and in 2019 almost 55 percent were cremated and only 39 percent were buried. The National Funeral Directors Association predicts that by 2040 the cremation rate will exceed 78 percent. NFDA News Release: Cremation Is Here to Stay, July 15, 2019, http://www.nfda.org/news.
When it comes to the disposition of ashes, it seems the only limits are the human imagination and good taste. Starting at about $1,000, some of your ashes can join Star Trek creator Gene Roddenberry and famous Star Trek actor James “Scotty” Doohan in outer space. Benjamin, supra, at 189-190. (Scotty was blasted up; there’s no evidence he was beamed up.) Depending on where you want to go and when, and the amount of ashes, the cost can get very high, but will it be tax deductible?
Policy for the Federal Estate Tax Funeral Expense Deduction
For decedents dying in 2021, the federal estate tax applies only if the decedent’s taxable estate (plus lifetime taxable gifts) exceeds $11.7 million ($23.4 million for married couples). The Tax Policy Center estimates that post-2017, fewer than 2,000 estates pay the federal estate tax each year, which is a tiny fraction of the 2.8 million people expected to die in the United States each year.
As a matter of policy, the estate tax is a transfer tax seeking to tax the amount the decedent could transfer to his family or other beneficiaries at death. At death, the common law imposes an obligation on the estate to pay for the respectful disposition of the decedent’s corpse. See Percival Jackson, The Law of Cadavers and of Burial and Burial Places 70 (1936). Thus, to an extent, funeral expenses are involuntary. See Boris Bittker & Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts ¶ 131.2, at *2 (2020). This justifies an estate tax deduction, at least for the minimum cost of respectful disposition.
The Funeral Expense Deduction—Federal and State Law Tests
The key statutory language allowing an estate tax funeral expense deduction essentially has been unchanged since 1916. It permits a deduction for “funeral expenses . . . as are allowable by the laws of the jurisdiction . . . under which the estate is being administered.” I.R.C. § 2053(a)(1) (emphasis added). Thus, a preliminary test is whether the particular expense qualifies as a funeral expense under federal law. Also, under the state probate laws, the executor must be allowed to pay for the alleged funeral item from estate assets. This is a classic example of a federal tax deduction that turns, in part, on the application of state law. Richard B. Stephens, et al., Federal Estate, and Gift Taxation ¶ 5.03[a], at S5-6.
Federal Tests—Defining “Funeral” Expenses and Other Tests
The meaning of a term in a federal statute generally is a question of federal law. Lyeth v. Hoey, 305 U.S. 188, 193-194 (1938). Although neither the statute nor the regulations define the phrase “funeral expenses,” Treasury Regulation § 20.2053-2 mentions expenditures for a tombstone, monument, mausoleum, a burial plot “for the decedent or his family . . . including a reasonable expenditure for its future care . . . [and] the cost of transportation of the person bringing the body to the place of burial.” A court also allowed a deduction for the costs of cremation, a minister, a musician, a singer, a niche for an urn, and an obituary notice. Estate of Davenport v. Comm’r, 92 T.C.M. (CCH) 324 (2006). The Tax Court has stated: “The traditional focus of a funeral [is] eulogizing and laying to rest the deceased.” Id.
In contrast, courts have concluded that the following expenditures were not funeral expenses and therefore could not be deducted: transportation costs for family members (unless necessary to transport the body or the ashes, or to arrange a tombstone setting), Estate of Berkman v. Comm’r, 38 T.C.M. (CCH) 183 (1979); a $3,639 special “funeral luncheon” for the decedent’s caregivers after the funeral, Estate of Davenport v. Comm’r, 92 T.C.M. (CCH) 324 (2006); a gift in the name of the decedent to a religious order for scholarships to educate priests, Estate of Calcagno v. Comm’r, 58 T.C.M. (CCH) 1042 (1989), and the cost of a burial plot for the decedent’s family members, or the perpetual care of such burial plot, if the decedent is not buried at that plot. Estate of W. M. Tuck v. Comm’r, 56 T.C.M. (CCH) 827 (1988).
Other federal tests for deductibility include whether the estate, rather than a surviving spouse or another party, had the obligation to pay the funeral expenses. Also, the funeral expenses must be paid from assets subject to claims of the estate or must be paid within nine months of death. See generally Bittker & Lokken, supra, ¶ 121.2, at *2.
If a family member or other person actually paid the funeral expenses, and then the estate reimbursed that person, the deduction should be available to the estate as long as the estate was obligated to pay. See id. ¶ 131.2, at *1 (citing Loeb v. McCaughn, 20 F.2d 1002 (E.D. Pa. 1927)). But the tax deduction may be lost if the probate estate is closed before the funeral expenses are paid. In Carter v. U.S., 1 USTC ¶ 238 (E.D. Mo. 1927), the executor closed the probate estate and transferred the remaining estate property to a trust authorized by the decedent’s will, and then the trust paid for a $332,616 mausoleum (in 2020 dollars). The court refused to allow the tax deduction because the trust paid instead of the probate estate.
State Law “Allowable” Test
Laws differ from state to state on the funeral expenses an estate may pay, but state law rules in three circumstances appear to build on each other. First, in the case of insolvent decedents, the executor can pay the funeral expense before creditor claims because funeral expenses have priority over creditor claims, see Jackson, supra, at 73, but the amount may be limited by statute to a small, specified dollar amount. See generally A.W. Gans, Amount of Funeral Expenses Allowable Against Decedent’s Estate, 4 A.L.R.2d 995 (1949) (discussing the approaches taken in different states). Second, if the decedent was solvent, but the decedent’s will allowed the executor some discretion in paying funeral expense, state law often will allow the executor to spend only a reasonable amount. See Nat’l Metro. Bank v. Joseph Gawler’s Sons, Inc., 168 F.2d 571 (D.C. App. 1948) (restricting allowable funeral expenses when the will directed the executors to pay funeral expense “in such amounts as they deem proper”). Third, if the decedent was solvent and clearly specified the funeral expenses the executor should pay, cases hold that the estate is allowed to pay those expenses, regardless of amount, under the doctrine of testamentary freedom (sometimes described pejoratively as “dead-hand control”).
For example, in the case of In re Baeuchle’s Will, 82 N.Y.S.2d 371 (N.Y. Sur. 1948), aff’d 94 N.Y.S.2d 582 (N.Y. App. 1950), aff’d 301 N.Y. 582 (N.Y. 1950), the decedent died in 1944. After leaving token sums to her family members and friends, her will left almost her entire estate, approximately $2 million in 2021 value, for her burial. The next of kin (her five siblings) sued, arguing that spending the equivalent of $2 million for a single grave was totally outrageous, particularly because of the overall family financial situation. Interestingly, the court never discussed the family’s financial situation or what would be a reasonable amount to spend on a burial given the family’s wealth. Instead, the court stressed the importance of testamentary freedom—the decedent’s right to direct where her property goes at death. 82 N.Y.S.2d at 375. The court said there were only two restrictions on testamentary freedom—namely, laws and doctrines preventing a deceased spouse from disinheriting a surviving spouse and mortmain statutes restricting death-bed, or excessive, bequests to charity. Because those doctrines were inapplicable to this factual situation, the court concluded the testator was free to direct the executor to pay the entire residue for funeral expenses if all creditors would be paid. The court stated, “It does not seem that the folly or the wisdom of [the decedent’s burial] directions are the concern either of her kin or the court.” Id. at 377.
Other cases reached a similar conclusion. One court eloquently stated: “A testator may provide for any extravagant exhibition at his funeral he chooses, and those to whom his estate passes would not be denied the pleasure of contributing to the cost of most any kind of spectacle that catches their fancy.” Houston’s Estate, 21 Pa. D. 395 (Orphans Ct. 1911). Also, in Hammond v. Stringer, 258 S.W.2d 46 (Ark. 1953), the decedent’s will left only $1 to her next of kin and directed that the executor sell her real estate and after paying other amounts, “use the balance . . . in the care and upkeep of the cemetery lot containing [my grave].” The balance was $2,700, and the evidence indicated that a fund of only $500 was needed to generate sufficient income to pay for perpetual care. The decedent’s heirs at law argued that the decedent made a miscalculation, and the court had equitable power to grant the $2,200 excess to the heirs. Although the amount directed was more than five times the amount needed, the court refused to deviate from the testator’s directions, noting that the decedent’s “wishes were clearly set out,” id. at 48, the decedent had testamentary freedom, and the excess transfer was not contrary to public policy. See also Waller v. Sproles, 22 S.W.2d 4 (Tenn. 1929); see generally, George Bogart et al., The Law of Trusts and Trustees: Monuments—Cemetery Trusts—Upkeep Trusts § 377.
“Allowable” May Be Affected by Other Doctrines
Although the court in Baeuchle’s Will discusses only two restrictions on testamentary freedom, there are at least two more. The public policy doctrine is vague and malleable. “[S]imple and precise rules of validity or invalidity frequently cannot be stated.” Restatement (Third) of Trusts § 29, cmt. i (Am. Law Inst. 2013). Generally, the public policy doctrine may invalidate a testamentary direction that is injurious to the public welfare in certain ways, benefits no living person, and is inconsistent with the natural desires of a normal person. Id. Courts have invalidated directions to destroy all of the testator’s cash on hand, Rice County v. Scott, 93 N.W. 109 (Minn. 1903), to raze the decedent’s home, Eyerman v. Mercantile Trust Co., 524 S.W.2d 210 (Mo. App. 1975), or to build 11 statues, each costing a minimum of $134,000 (in 2021 dollars), commemorating the testator and each member of her immediate family, when the statues all would be inside a private structure so that the public would have no access. M’Caig Trustees v. Kirk-Session of United Free Church of Lismore, 1915 S.C. 426 (Scottish case) (finding that the statues would be wasteful and not a natural desire of a normal person).
Also, a related trust law doctrine invalidates trusts established for capricious purposes. The common example involves a testator leaving $1,000, in trust, with directions for the trustee to throw the money into the sea. In that situation, a Restatement comment provides that the private express trust will be invalid, and, if the trustee throws the money into the sea, the trustee is personally liable to the beneficiaries. Restatement of Trusts (First) § 124, cmt. g (Am. Law Inst. 1935). In the burial context, a settlor might contribute substantial amounts to a trust to provide for the perpetual care of a mausoleum and the surrounding plot. Leona Helmsley, the real estate baroness and so-called Queen of Mean, contributed $3 million to such a testamentary trust.
A related Restatement comment contains a sentence directed at trusts for funeral expenses. It states: “Such purposes [for a trust] as the erection or maintenance of tombstones . . . is not capricious unless the value of the property devoted to those purposes is unreasonably large.” Restatement of Trusts (First) § 124, cmt. g (Am. Law Inst. 1935). The same sentence appears in the Second Restatement of Trusts, § 124 cmt. g (1959). A negative inference could be drawn that a trust created to pay an exorbitant amount for a tombstone and its maintenance would be capricious and unenforceable. But it appears no reported case has quoted the Restatement language on tombstones. Also, a testator could simply avoid this sentence by not using a trust and directing the executor to pay the funeral expenses promptly after death.
Even if the public policy doctrine would limit funeral expenses or the amount of a trust for perpetual care to a “reasonable” amount, whether funeral expenses are “reasonable” has been determined, traditionally under state probate laws, in light of the size of the estate and the decedent’s social status. See generally A.W. Gans, supra, at 1003. Thus, a court might conclude that a wealthy testator was entitled, reasonably, to direct that very large sums be spent on his burial or the maintenance of the tomb.
Practical Tips for Maximizing the Deduction
For multiple reasons, it’s often stated that the client’s will is not the ideal document in which to describe his or her funeral and burial wishes. See generally Tracie M. Kester, Note, Uniform Acts—Can the Dead Hand Control the Dead Body? The Case for a Uniform Bodily Remains Law, 29 W. New Eng. L. Rev. 571, 579-80 (2007).
Nevertheless, the estate generally has the burden to pay for the funeral and burial, so it is appropriate for the client’s will to include detailed provisions regarding payment. As discussed above, even in a solvent estate, when the will grants the executor discretion to incur and pay funeral expenses, state law may restrict the amounts the executor is allowed to spend from the estate on funeral expenses. This similarly will restrict the amount the estate can deduct on the estate tax return. Thus, merely including a stock phrase such as “the executor shall or is authorized to pay all [appropriate, necessary, or proper] expenses of the testator’s last illness and funeral” may not maximize the tax deduction. Similarly, the following language used by the testator in In re McQuade, 132 N.Y.S.2d 196 (N.Y. Sur. 1954) was insufficient: “I direct my executors to use the balance of my estate for the keeping of my grave and to use the money as they see fit for same.” In that case, the court approved only $1,000 for maintaining the grave and awarded the balance to the decedent’s next of kin in intestacy.
On the other hand, if the client’s will is sufficiently specific about the funeral, burial, and perpetual care costs, the Baeuchle’s Will case and others indicate there may be no limit on the amount of funeral expenses as long as the estate still can pay all creditors. In Baeuchle’s Will, the court emphasized the testator’s will was clear and unambiguous that her real and personal property should be sold, and the entire residue of her estate should be used for her burial. She specified the nominal amounts her next of kin would receive, and she was clear that no more money should pass to them by intestacy.
For the decedent wishing to deduct amounts for the perpetual care of a gravesite and mausoleum, there are multiple options. If the cemetery would negotiate a contract for perpetual care, the executor could be directed to enter into a bona fide, arms-length agreement with the cemetery. This could help demonstrate that the amount is not wasteful, capricious, or otherwise out of the ordinary when compared to what other estates pay for the same services. Similarly, it may be possible for the estate to contract for regular maintenance and renovation of the mausoleum or tombstone with an outside firm, which again may help demonstrate the arm’s-length nature of the transaction. See Laine Kaplan-Levenson, Living for the Dead in Above Ground Cemeteries, Oct. 20, 2016, https://bit.ly/36PXXHh (discussing New Orleans firms that maintain, repair, and renovate mausoleums).
Instead, if the decedent chooses to create a trust for the perpetual care of the tomb or mausoleum and related plot, the decedent’s trust document, or a will creating the trust, could specify the actions required and the expenses to be incurred that justify the amount contributed to the trust. For example, the last will of Leona Helmsley established a $3 million trust for the perpetual care of her mausoleum and specified that the facility must be “acid washed or steam cleaned at least once a year” and that the trustee must arrange for the mausoleum to be inspected at least quarterly. See Living Trust Network, Last Will and Testament of Leona Helmsley, Article I.C(2), http://www.livingtrustnetwork.com. The trust also could require repairs when appropriate, periodic floral or other displays, and additional landscaping.
Including a clear direction in the will that the executor pays all funeral and burial expenses may avoid a challenge that the estate was not obligated to pay. Also, paying all funeral and burial expenses within nine months of the decedent’s death will avoid potential problems with items being paid from assets that are not subject to claims. Finally, in regards to post-mortem planning, IRS regulations adopted in 2009 provide that an estate may rely on a local probate court’s determination that a funeral expense is allowable if certain requirements are met. See Treas. Reg. § 20.2053-1(b)(3)(i); Jonathan G. Blattmachr, et al., Final Regs. on Deducting Expenses and Claims Under Section 2053-Part 1, 37 Est. Plan. 3, 8 (2010). Thus, it may be helpful to obtain a court determination.
“Reasonableness” Restriction on Certain Funeral Expenses in the Regulation—Is It Valid?
Treasury Regulation § 20.2053-2 creates a negative implication that certain categories of funeral expenses must be reasonable to be deductible. The regulation provides: “A reasonable expenditure for a tombstone, monument, or mausoleum, or a burial lot, either for the decedent or his [or her] family, including a reasonable expenditure for its future care, may be deductible under this heading, provided such an expenditure is allowable by the local law.” The regulation does not address all funeral expenses, so, for example, the cost of a solid silver casket could be deductible if allowable under the applicable state probate law, regardless of the IRS regulation. Stephens, et al., supra ¶ 5.03[a], at S5-6. Some caskets sell for $30,000 to $40,000, and a solid jade urn sells for $60,000. Benjamin, supra, at 116-117. The regulation also fails to mention reasonableness in connection with corpse transportation costs, the funeral home’s bill (including embalming), flowers, prayer cards, the guest book, the minister, the musician, the singer, and the cost of publishing the obituary. The regulations also fail to mention the cost of cremation, an urn, or a niche for the urn. The regulation gives no indication why some funeral expenses must be reasonable, though others need not be reasonable.
The regulation may be invalid because it seeks to impose an extra requirement on some funeral expenses, yet there is no federal reasonableness requirement in the statute for any of the funeral expenses. Generally, a regulation is invalid if “Congress has directly spoken to the precise question at issue.” Estate of Millikin v. Comm’r., 125 F.3d 339, 343 (6th Cir. 1997) (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984)). If Congress has directly spoken, the IRS and the courts must give effect to the Congressional intent.
In 1916, in I.R.C. § 2053(a), Congress made all funeral expenses deductible if allowable under the applicable probate law and did not create a separate reasonableness requirement under federal law. This makes sense because, as discussed above, state probate laws tend to impose a reasonableness requirement when the executor has discretion; in contrast, the testamentary freedom approach of Baeuchle’s Will can apply, and there is no reasonableness requirement when the decedent’s testamentary directions are clear and all creditors will be paid. As the Third Circuit observed (before the IRS issued the regulations), the deduction of funeral expenses is an “instance where Congress, rather than attempting uniformity [by imposing a federal standard] specifically . . . contemplated that local law determines the quantum of the deduction.” Comm’r v. Cardeza’s Estate, 173 F.2d 19 (3rd Cir. 1949).
It appears that no reported court case has quoted the regulation, discussed its validity or invalidity, and permitted a deduction for part of a funeral expense, and then disallowed the remainder of the expense because the extra amount was unreasonable under the regulation. A similar IRS attempt to add an extra requirement for deducting administrative expenses (but not funeral expenses) under I.R.C. § 2053(a)(2) has led to a split among the circuit courts on the validity of those regulations. See Estate of Millikin, 125 F.3d at 344 (indicating that the majority of jurisdictions considering the question hold the administrative expense regulations valid); but see Joint Committee on Taxation, Sources of Complexity in the Present Law Federal Tax System 12 (Comm. Print 2001), available at 2001 WL 36044086 (stating the “courts currently disagree” on the enforceability of the administrative expense regulations). For a thorough discussion of the law before the Millikin case, see Michael H. Tow, Note, Estate of Love and 2053(a)(2): Why State Law Should Control the Determination of Deductible Administrative Expenses, 12 Va. Tax Rev. 283 (1992).
State probate cases emphasize testamentary freedom and support the view that there is no restriction on the amount that may be spent for funeral expenses when the testator’s will is drafted as described above. The doctrine of public policy is unpredictable, but courts have not yet chosen to apply it to funeral expenses. This translates into a potentially unrestricted funeral expense deduction for federal estate tax purposes. Whether this is good policy is a question for another day and another article. Federal law can restrict the types of items that qualify as funeral expenses, but the Tax Court has allowed deductions for the costs of a singer, a musician, an urn, and a niche for the urn. If a testator wants two clowns instead of a singer and a musician and wants part of his ashes blasted into outer space instead of placed in an urn in a niche, it all sounds deductible under current law.