A lot of the estate planning expenses used to be tax deductible, but that has changed recently. The IRS has made much of the costs of estate planning no longer eligible to be tax deductible. Although there are a few expenses that you can deduct, but only in specific cases. 

Overall, estate planning is an important part of financial management, making sure that your assets are appropriately passed on according to your wishes. Yet a lot of people question the costs of estate planning – specifically whether or not these expenses are tax deductible.

In this complete guide, you'll take a look at estate planning and more particularly tax deductions related to estates, from the basics of tax deductions for estate settlements to what the IRS has to say about some potential write-offs.

Understanding Estate Planning

Estate planning is simple when you break it down into its most practical definition: organizing your affairs so that your assets end up right where you want them to after you die. This will generally involve producing legal papers like a will, trust, and power of attorney. Estate planning, when done right can help reduce tax, avoid probate, and provide for your loved ones after you’ve gone.

But it can be costly. Estate planning does not happen overnight. It takes time to plan your assets, liabilities, and financial goals. You’ll need to factor in your family circumstances, dependents, desired inheritors, and how you want your assets distributed. 

It is also wise to periodically review and update your estate plan, especially upon key life events such as marriage, divorce, birth of children, or the purchase of a new asset. These changes can affect your estate plan and you should make adjustments to keep current with the new situation.

Why is Estate Planning Important?

If you do not have a proper estate plan, the state can decide how your assets are distributed instead of you. This can result in beneficiary disputes, additional taxation and even cause needlessly complex legal issues. 

Estate planning not only works to have your assets passed in accordance with your wishes but also gives you the comfort and peace of mind that your loved ones will be provided for.

When you have an estate plan, you get to name the guardians for your minor children and set directives for your own medical decisions if you're incapacitated. If you are looking to protect your legacy, and the people you love most in the world, you do it through estate planning. 

Estate planning usually involves the creation of trusts to care for your beneficiaries over time versus just cutting them a check and hoping they know how to manage it. We can create trusts for virtually any need such as education, special needs care, charitable giving and much more. The trust is a flexible tool to direct your estate and its assets the way you want. 

You should also know that estate planning is not solely about what happens when you are gone. You can plan your estate to help handle your assets while you are still alive. That may mean creating ways to manage your money and property if you should become incapacitated. 

The Concept of Estate Tax Deduction

The problem with estate planning is that it’s a big job. And because you need a group of professionals (lawyers, tax planners, financial advisors…etc), the costs can quickly rise. So, you would look to see if estate planning is tax deductible as a way to help cut down those costs. 

But in recent years, the way the IRS views estate planning has changed. And it’s likely to change again within the next couple of years. Let’s have a look at how we can think about tax deductions.    

Defining Tax Deductible

Tax deductions are the costs of doing business that you can subtract from your total taxable income, This could potentially reduce your overall tax liability. Certain expenses associated with the estate planning process may be deducted from an individual's estate.

Knowing what deductible expenses you have can play a major role in your planning efforts. For instance, a good portion of your legal costs related to drafting wills, creation of trusts, or even executing charitable giving strategies can frequently be regarded as deductible.  

How Tax Deduction Works in Estate Planning

There are a number of ways in which tax deductions may come into play with your estate plan. As of now, you’ll have to focus mainly on the legal and advisory fees related to formalizing your estate. 

Depending on the kind of cost, it might be classified in a different way under tax law. Some examples may be fees paid for services to plan for taxes or advice on your financial affairs.

On top of that, some expenses like attorney fees and appraisal costs can be deducted from estate income tax at the grantor’s death. These deductions could help reduce the total taxable estate. 

There are many variables that can come into play, so make sure you seek advice from a tax professional who is knowledgeable on estate stuff. Talking to an experienced estate planner can also unveil certain deductions that may not seem immediately apparent, which means you have the opportunity to structure your tax in the most efficient way given of course, that it falls within legal constraints.

The IRS and Estate Planning

The tax laws about estate planning deductions are always changing. The IRS currently is applying the Tax Cuts and Jobs Act, which severely limits your tax deduction options. But that’s set to expire in 2025. Always check with your tax planning professional about relevant tax law changes and amendments.  

The IRS provides guidelines about which costs for estate planning are income tax deductible. Even though these rules can be complicated and often change, a thorough understanding of the most up-to-date demands is vital for an efficient estate strategy. 

Estate planning is more than just making a will; it covers a whole lot of financial and legal topics such as trusts, powers of attorney, and healthcare directives. These parts all carry along different tax liabilities and deductions and it is incredibly important to understand the IRS laws around each of them.

In relation to estate planning, it is equally important to know what will incur tax consequences as it is to be aware of potential deductions. They will help you make your estate plan compliant with IRS regulations, but also as tax-efficient as possible. 

Remember that tax deductions can apply on both ends of the estate plan – first when you set it up and all the associated costs, and also on the other end when you pass away and your estate is eligible for estate tax deductions.  

IRS On Estate Planning Expenses

The IRS generally treats estate planning costs separately. Although not stated as clearly, many people appear to believe that all attorney fees and law-related costs are deductible. This is not true. 

Recognizing where the lines are with deductions in terms of what counts and what does not count will save estate planners large amounts of dollars, along with possibly steering clear of audits by the IRS.

For example, while the costs associated with creating a will or trust may be deductible, it depends on how they impact the taxable estate. That said, you should keep in mind that many of these possible IRS deductions are for personal expenses and not related to the estate at all. 

On top of that, the IRS can take a closer look at estate planning expenses to see if they fall under the guidelines of the Tax Cuts and Jobs Act. This attention to detail highlights the need to maintain scrupulous records and thorough documentation of all costs associated with estate planning.

Claiming Estate Planning Expenses: What’s Deductible and What’s Not

Rather than attempt to be current with state and federal tax laws, we’ll provide you with an overview of what to expect for estate planning deductions. Instead, speak with a tax planning professional to know what your state allows you to deduct, and what the federal level regulations are like. 

Common Estate Planning Deductions 

• Attorney Fees – Creating a Will or Trust
• Costs for Tax Planning Advice
• Costs of Estate Administration
• Valuation and Assessment Fees
• Estate Tax Return Filing Fees

By creating a detailed record of these costs, you can increase the tax benefits you receive. This comes in handy especially when you are getting ready to submit tax forms, so you collect all possible deductions. 

It may be beneficial to also speak with a tax professional who specializes in estates as they can give advice on deductions and strategies you may not know about and ones that apply directly to your situation. For example, certain costs associated with maintaining the estate property (such as repairs or insurance) may also be deductible so long as they are necessary to maintain the value of your estate.

Non-Deductible Estate Planning Costs 

There are many costs that are related to estate planning that can be deducted, but not all expenses fall into this category. Some key costs which are not deductible can include:

• Personal financial planning fees, uncoupled from an estate context
• Expenses for personal benefit, not estate planning 
• Donations or bequests to charities not given through an estate plan

If you misfile and attempt to deduct these fees from your estate plan, you could incur a tax penalty. It may also be necessary to separate your estate administration from your personal financial management when it comes to expenses. 

Estate Planning: Beyond The Tax Deductions

Trying to save money on your taxes isn’t the only way to cut down costs related to estate planning. Rather than relying on deductions, you can find alternate ways to save some taxes and spend less money on estate planning. 

Strategies for Tax Deduction

If you’re committed to finding the best deductions, you’ll have to use some of these strategies. 

• Professional Consultation: Consideration with a qualified estate planning attorney or CPA to find potential deductions and tax compliance.
  
  
• Proper documentation: Good tax reports come from good paperwork. Keep records of everything that might be related to deductible expenses.
  
  
• Review and Amend: As tax laws change, you’ll find new opportunities for estate planning deductions. Keep a regular schedule to review your estate plan over time to find those deductions. 

By utilizing these techniques, you could even reduce your tax liability. Many people consider trusts as part of their estate plan. Trusts (both revocable and irrevocable) can be useful not just out of necessity in managing assets during your lifetime but also carry with them significant tax planning benefits. 

An irrevocable trust, for example, can remove your assets from your taxable estate (and therefore may help reduce the estate taxes that will be owed when you die). While this is a high-guidance and high-impact strategy that requires some planning and professional guidance, the long-term payoff could be massive.

Tax Pitfalls and How to Avoid Them

There are some common mistakes and pitfalls in misclassifying expenses, falsely claiming deductions, or failing to keep accurate records. If you want to avoid these pitfalls, here’s what you should do.

• Understand the IRS rules for deductions: When it comes to tax deductions for estate planning, be sure you know what will and will not qualify on your taxes.
• If there is confusion about what can be deducted, check with a professional.
• Set a time each year for a financial review of your estate plan.

Also, remember about the timing of your deductions. Some expenses are deductible right away, in the year they are incurred, while others have to be capitalized and deducted over time. Knowing all of these different nuances can allow you to plan your expenses in order to capture the maximum amount of deductions during the tax year.

Summary

In summary, if you’re planning your estate, you need to account for the possibility of tax deductions as a way to save costs. But there are better ways to maximize your tax efficiency. 

For starters, a trust is a solid way to minimize your taxes while also protecting your assets. The right trust can be a powerful tool for estate planning and asset preservation. 

But if you don’t know where to start, we can help. We can guide you through the trust creation process, designing a trust that meets all your needs and sees you succeed in managing your wealth. 

Fill out the form below and we can get started on a trust that works for you. 

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