Can I Deduct Legal Fees I Paid for My Deceased Father's Estate?

Only rarely can beneficiaries take tax deductions that rightfully belong to the estate.
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Legal fees relating to your deceased father's estate are tax deductible. The question is who gets to deduct them. In most cases, it's not the decedent's kin or beneficiaries. If his estate is large enough that estate taxes are an issue, the estate can deduct legal fees incurred in the probate process when the executor files the estate tax return. As of the time of publication, however, the federal estate tax exemption is $5.43 million. The value of everything your father owned would have to amount to more than this before the executor would have to file an estate tax return.


Deductions Taken on Personal Returns

If you itemize on your tax return, you can deduct some legal costs you incur during the tax year. As miscellaneous expenses, your legal fees must relate to your employment or to collecting taxable income. Personal legal expenses generally aren't deductible, including the fees you might have paid a lawyer to draft your father's will before his death. Even if you pay an attorney to challenge the will, any inheritance you might receive as a result isn't taxable income, so this doesn't qualify either. There's no inheritance tax at the federal level, but if your state is one of those that imposes an inheritance tax, speak with a tax professional to find out if you can take a deduction for legal fees on your state return.


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Administration Expenses of the Estate

Legal fees -- such as attorney's fees, probate filing fees and other court costs -- are estate expenses. Responsibility for paying them falls to the estate's executor, and she would do so from estate funds; heirs and beneficiaries aren't liable for them. If you're the executor and there's not enough cash in the estate to handle the fees, the court allows you to sell assets to raise cash; you shouldn't have to dip into your own pocket. As administrative expenses of the estate, the Internal Revenue Service allows the executor to deduct legal fees from the estate's value before calculating tax due on any balance over $5.43 million or the amount of that year's exemption. It's indexed for inflation, so it goes up periodically.


Other Tax Rules

If your father's estate is large enough that estate taxes are due, the IRS imposes a few more rules for administrative expenses. Deductions for legal costs must be actual and necessary. This means the estate must have legitimately paid them and for a good reason. If the executor paid a lawyer $5,000 to review the deceased's will, this probably would not be considered necessary. If she paid him $50,000 to defend the estate against a will contest, this is necessary: The estate can't close until the litigation is settled. Any fees incurred for the benefit of beneficiaries, heirs or creditors would not be deductible by the estate.


Deductions That Pass to Beneficiaries

The IRS allows beneficiaries to take tax deductions related to an estate under one isolated circumstance. If your father's estate had more deductions than income in the year the estate settled and closed, the surplus passes to beneficiaries to be shared equally among them. This applies to income tax, not estate tax. Estates must pay income taxes, too, if they take in any money during probate, such as earning interest on investments.



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