Classification of funeral expenses as estate liabilities in the context of funeral insurance policies
In connection with the tax treatment of funeral expenses, the question regularly arises as to whether and to what extent the payment of a funeral insurance policy still allows the deduction of these costs as estate liabilities within the framework of inheritance tax. The issue essentially concerns the distinction between deductible and non-deductible expenses in light of Section 10 Paragraph 5 No. 3 Inheritance Tax Act (ErbStG) and is often recalibrated by court rulings. Most recently, the Federal Fiscal Court (BFH) addressed the question of to what extent the payout from a funeral insurance policy taken out for the deceased affects the deductibility of funeral expenses as an estate liability (Case No.: II R 31/21, Judgment of 27.11.2024).
General principles on the deductibility of funeral expenses
Pursuant to Section 10 (5) No. 3 Inheritance Tax Act (ErbStG), so-called expenses for a dignified funeral are counted among the estate liabilities that may be deducted when determining inheritance tax. These include direct funeral expenses as well as other costs incurred in connection with the burial. However, the decisive factor is always the extent to which the heir is actually and economically burdened. This is particularly significant if other earmarked third-party funds, such as so-called funeral insurance policies, are available to cover the funeral expenses.
The role of funeral insurance in the context of estate liabilities
Funeral insurance policies are typically taken out in favor of heirs, estate administrators, or other third parties, with the aim of covering the costs associated with a funeral. The central tax law question is whether the heir—despite receiving such insurance benefits—may still claim the full deduction of funeral costs as an estate liability, or whether the insurance payments received reduce the deductibility of these expenses.
In its recent decision, the BFH emphasized that the amount received from a funeral insurance policy must generally be set off against the tax-deductible funeral expenses, to the extent that it is actually used, as intended, to settle the incurred funeral expenses. Consequently, deductions are only possible to the extent that the heir’s actual economic burden from the costs can be substantiated and has not been neutralized by the insurance benefit.
Distinction from other contributions and case-by-case assessment
When examining to what extent funeral insurance payments are excluded from deduction, a distinction must be made between earmarked third-party funds (such as funeral insurance) and non-earmarked gifts or voluntary payments by third parties. While the latter generally do not affect the deductibility of the expenses, earmarked payments reduce the economic burden. Particular attention must also be paid to the question of entitlement: If it is not the heir but a third party who receives the insurance benefit, the situation must be assessed differently. The actual payment flows and the earmarking of funds must therefore be substantiated in detail and evaluated on a case-by-case basis.
Consequences and relevance for inheritance tax practice
The current case law sharpens the contours of Section 10 (5) No. 3 Inheritance Tax Act (ErbStG) considerably. It makes clear that tax advantages resulting from the deductibility of funeral expenses cannot be claimed independently of financial compensation payments. For tax assessment purposes, this means that in inheritance tax returns, the receipt of proceeds from funeral insurance policies must always be reviewed and documented. Proof of the actual burden is to be provided to the tax authorities; merely submitting invoices may be insufficient in light of the duty to set off the insurance amount. Particularly in cases involving multiple heirs, payments to third parties, or commissioned funeral homes, this may necessitate a complex factual assessment.
Summary conclusion
The determination of inheritance-tax-deductible funeral expenses in connection with payments from funeral insurance policies is subject to a differentiated review. The decisive factor is proof of the actual economic burden that remains with the heirs after earmarked insurance payments have been set off. The current BFH ruling strengthens legal certainty, but also imposes high demands for documentation and proper allocation of payments.
Anyone faced with questions concerning estate settlement and inheritance tax—especially in the context of complex financing or insurance contracts—can benefit from individual legal assessment that centers on the current legal situation and case law. The attorneys at MTR Legal assist companies, investors, and high-net-worth individuals in clarifying complex tax and civil law matters at both national and international levels.
