1041 Estate Questions Travel

[GLGACCT]

Out of state client is settling her father's Estate, she needed to travel two different states.  Is mileage tax deductible on the 1041?  Also, one house was damaged in the recent storm, and she needed to travel once again to another state, would that also be deductible as the house has not yet been transferred out of the Estate?

[Catherine]

Travel to see to the safety of assets held by an estate is indeed an acceptable estate expense. Think of it this way: if a professional was hired to administer the estate, would they be eligible for mileage? Then an amateur is, too.

[Sara EA]

It may depend on whether the executrix is a beneficiary.  If her travel was to get the house ready for sale, and she will share in the proceeds, probably not deductible.  Take a look at Sect 20.2053-1(b).  The estate can reimburse her travel, but I'd be reluctant to deduct it on the 1041.

[DANRVAN]

If her travel was done while carrying out her duties of executor, then I see no reason why she would not be reimbursed by the estate, and expense deducted on form 1041.  I don't see an issue if she is also a beneficiary, otherwise she is donating toward the benefit of other heirs.

The expense is allowable under 20.2053-3(d)(3) which overlaps with Sect 20.2053-1(b) as referred to by Sara.

[Sara EA]

She is not donating!  The estate can reimburse her travel, so she is made whole.  The question is whether the estate can deduct the expense from its income.  Since she is a beneficiary, I think not.  For example, estates commonly reimburse beneficiaries for funeral expenses they paid out of pocket, but funeral costs are not deductible on the 1041.

[Gail in Virginia]

Sara, I don't know enough about this to have a real opinion.  But funeral costs are never deductible, regardless of whether they are paid directly by the estate, reimbursed to a beneficiary, or reimbursed to a total stranger.  Whereas business expenses may be deductible so I don't see why the fact that she is a beneficiary as well as executor would come in to play.  However, if they are not deductible expenses to begin with, then if the estate cannot deduct them and the executor receives a fee, can she deduct them as an expense of earning that fee and get the benefit of the deduction that way? 

[Sara EA]

She can charge a fee if the will permits and/or Probate approves.  The amount will be taxable income to her, not subject to SE.  To claim expenses, she'd have to report the income on Sch C, subject to SE.  (And since she's not in the business of administering estates, Sch C is just wrong.)  Why bother?  Just let the estate reimburse her out of corpus.

[DANRVAN]

On 11/16/2022 at 5:59 PM, Sara EA said:

She is not donating!  The estate can reimburse her travel, so she is made whole

I misunderstood you the first time, thinking you said she could not be reimbursed by estate.

However, I do not see why the estate would not take a deduction for an allowable expense paid for and reimbursed to the executor; regardless of whether he/she is also a beneficiary.

What if he/she paid for legal or accounting fees out of pocket?  Are you saying the estate can reimburse but not take the deduction if she is also a beneficiary?

[Sara EA]

Legal and accounting fees, taxes, etc. are specifically allowed by the Code and are fully deductible by the estate.  It can reimburse whomever paid them and take the deduction.  Travel is a little iffy.  It is not listed among administrative expenses in the 1041 instructions. See the instructions for Line 15a, "other deductions," which states that costs that would normally be incurred by someone who owns a property are not deductible unless allowed under other sections of the Code (e.g., taxes).  Sect 67 of the Code only allows "Deductions for costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred if the property were not held in such estate or non-grantor trust."  If someone owns vacant investment property and travels to check on it or prepare it for sale, travel is not deductible because there no longer are misc itemized deductions.  (Different if it was rental property.)  The beneficiary can be reimbursed, just as she would be if she paid for the funeral, but the estate can't deduct either cost.

Does this estate have so much income that it needs the deduction? 

[DANRVAN]

 

"Legal and accounting fees, taxes, etc. are specifically allowed by the Code" 

Agree with you on that, for example legal fees are deductible per 20.2053-3(c).

Then when you scroll down, to 20.2053-3(d)(2) the following is stated:  "Expenses for selling property of the estate are deductible to the extent permitted by § 20.2053-1 if the sale is necessary in order to pay the decedent's debts, expenses of administration, or taxes, to preserve the estate, or to effect  distribution".

2 hours ago, Sara EA said:

Travel is a little iffy.  It is not listed among administrative expenses in the 1041 instructions.

But keep in mind the instructions are not all inclusive.

In this case, it appears the travel cost in an ordinary expense allowed under 20.2053-3(d)(2).

On 11/13/2022 at 12:49 PM, GLGACCT said:

Also, one house was damaged in the recent storm, and she needed to travel once again to another state, would that also be deductible as the house has not yet been transferred out of the Estate?

I believe the answer here is also yes per 20.2053-3(d)(1) " Expenses necessarily incurred in preserving and distributing the estate, including the cost of storing or maintaining property of the estate."  Cost of travel was for preserving and maintaining assets, so why not?

[DANRVAN]

On 11/13/2022 at 6:42 PM, Sara EA said:

  If her travel was to get the house ready for sale, and she will share in the proceeds, probably not deductible.

That would be true if a beneficiary (non trustee or executor) on her own accord (but not necessarily a Honda Accord) decided to travel across several states to wash the windows and polish the brass monkeys,  with the idea her efforts will increase her share of the sell price.  In that case then deduction would not be allowable per § 20.2053-1(b)(2)(ii)(B) since the following is not true "The nature of the claim or expense is not related to an expectation or claim of inheritance.".

 

[GLGACCT]

Thanks for the informaton.

To clarify the executrix is a beneficiary along with another sibling.

Each beneficiary wanted a house, travel was required to both states in order to settle the estate.  

However, the executrix's inherited house was damaged in the storm and was in the process of being deeded over to her.  While still in the Estate at the time of the storm, it is technically hers.

[Sara EA]

In this case I would definitely not deduct travel as the beneficiary will directly benefit from her expense.  Now I question whether the estate should reimburse her, which it can do because it still owns the house.  Doing so, however, will lower the amount available for the estate to distribute to both beneficiaries when it closes.  In other words, her sibling will be paying for half of her travel to a house she is inheriting.  Ask her if she really wants to do that.