2

The deceased owned the life insurance policy and named a single beneficiary to receive the insurance money (transfer on death).

That single beneficiary used all of the life insurance proceeds to pay bills associated with the deceased (funeral expenses, attorney, and repairs to the deceased's home).

Although the deceased specified that the insurance money was to be used for expenses, the beneficiary had no legal obligation to do so.

  1. Can the insurance beneficiary claim on their personal taxes any tax credits or deductions for the money spent on behalf of the deceased?

  2. What bearing, if any, does the answer to #1 depend on the source of the money to pay the bills of the deceased (i.e., insurance money vs. personal funds)?

Notes

Not sure if these items are relevant are not:

  • The insurance beneficiary was one of two co-representatives for the estate; both were also among a larger group of heirs.
  • The home was sold and proceeds distributed to all heirs.
  • No taxes owed on either the insurance policy or the home sale.
  • All heirs get along with each other; no concerns at all about any heir causing any trouble for the insurance beneficiary. All will be very happy for any tax break the beneficiary can receive on their personal taxes.
2

The deceased's final expenses should have been taken out of the estate before it was distributed in probate. Life insurance generally is not part of the estate. If the insurance beneficiary (B) was not obligated to cover the expenses, B could claim against the estate for those expenses. This could somewhat reduce everyone's inheritance.

The insurance money belongs to B. If the deceased wanted to "equalize" while making sure there was a source of ready cash, the deceased could have made a reduction to B's share of inheritance to reflect that B would also receive the insurance. That way, B would be made whole after spending the insurance and being reimbursed by the estate.

So the main issue is not whether B is entitled to get back ~25% of the money from the IRS, but rather 90%+ of the money from the estate (depending on the effect on B's own inheritance).

EDIT: To answer the question more directly, if B paid expenses for another without having an obligation to do so, this would generally be treated as a gift by B. Since the recipient of the gift (the estate) is not a charity, B does not get a deduction. In fact, if the amount was greater than $14k for 2017 or $15k for 2018, B may have to file a gift tax return.

In particular, a survivor does not get a deduction for paying for a funeral.

  • I appreciate the opinion, but I'm missing how it answers the question. – RJo Jun 15 '18 at 3:52
  • @RJo I reframed the question since it sounded like normal probate procedures weren't followed, and that would be the first-order issue to understand before getting to the second-order issue of tax consequences. A better answer might be possible if you clarify how the probate process led to B paying the deceased's final expenses without being reimbursed by the estate. Does B not want reimbursement or does B not know/believe that he/she is entitled to it? The fact that B received a life insurance payout seems like a red herring. ... – nanoman Jun 16 '18 at 5:51
  • @RJo ... As you describe it, B effectively made a donation to the estate. That seems very unusual, so it would help to know why. Was there some kind of side deal attached? This might affect the tax implications, if any. – nanoman Jun 16 '18 at 5:52
  • There were no side deals at ll. B is a good person and was simply following the instructions of the deceased to "...use the life insurance proceeds I've left to you to pay for my funeral and other debts." B could have legally ignored the instructions and taken the payout, but did not because (again) B is a good(!) person. I've posted the question because if B could claim a tax benefit, then I want to alert B about it. – RJo Jun 17 '18 at 19:31
  • @RJo Okay. I might interpret those instructions as "using" the insurance proceeds for purposes of liquidity, not necessarily for purposes of final accounting. That is, perhaps the deceased was making sure there would be ready cash, e.g., to pay for the funeral -- not necessarily asking B to eat that cost permanently. But I will take your premise that B chose to pay and not seek reimbursement. – nanoman Jun 18 '18 at 0:57

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