That said, I'm all in favor of the attempt by Farm Bureau and small business org's to repeal the estate tax entirely (or move the exemption level up to something _really_ sizable) but realistically it just "ain't agonna' happen".
I assume you mean the final income tax return, if there is one. A lot of folks die with just SS and some minimal interest or other income, below the level where there is any tax due or need to file. Medical bills *might* be deductible, but only if you itemize deductions and the medical expenses exceed 10% of adjusted gross income.
Even then, it seems bad to put in a will. All creditors really should be dealt with equally. At the very best, giving preference like that could lead an executor to make a very bad decision. Let's say the estate only has $25K in assets and there are $25K in medical bills. The executor just follows the bad instructions, pays the medical bills, and there is no money to pay all the other debts that total another $20K? Now, good chance you could have some legitimate lawsuits, because those folks got unfairly screwed.
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(Another) Good reason to avoid NJ... :)
My problem with the Estate Tax is that it is not a revenue raising tax, never really has been. Even the supporters note that the main reason for it is that people shouldn't be able to keep family money above a certain level that offends the writers of the tax. To keep dynasties from forming. Yeah, like the Rockefellers, Kennedys, etc. are all destitute. It is an artificial event from a tax standpoint. Personally I would do away with the estate tax, but also do away simultaneously with cap gains ramp up at death. So any capital gains taxes (really the only tax that makes sense in this context) would only be collected when somebody sold the item (be it stock, family farm, etc) and it wouldn't matter if the seller was first generation or 12th.
BINGO!
All this talk about the wealthy (who pay the vast majority of the taxes) and their tax benefits, and everyone else gets a step up in basis for FREE! Billions and Billions in lost tax revenue.
Of course Obummer has a different idea: keep collecting the death tax AND eliminate the step up in basis for those who paid the death tax. I don't even know how many whammies that is, but it is sure more than a double whammy.
Aside from a question mark at the end of your question, you are missing the tax implications.
By authorizing the executor to pay the medical expenses "immediately", the will is seeking to obtain a possible double tax benefit: 1) deduct from the decedent's final personal income tax return; and 2) have the value of the estate reduced by the amount of the medical expenses paid. If the medical expenses are not paid within the proper time limits, tax benefit #1 is lost.
From IRS Pub. 559:
Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. This includes expenses for the decedent, as well as for the decedent's spouse and dependents.
In 2014, medical expenses exceeding 10% of adjusted gross income (AGI) may be deducted, unless the decedent or their spouse is age 65 or older. In that case medical expenses exceeding 7.5% of AGI may be deducted.
Qualified medical expenses are not deductible if paid with a tax-free distribution from an HSA or an Archer MSA.
Election for decedent's expenses. Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). However, if medical expenses for the decedent are paid out of the estate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred.
If you make the election, you can claim all or part of the expenses on the decedent's income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). You can deduct expenses incurred in the year of death on the final income tax return. You should file an amended return (Form 1040X) for medical expenses incurred in an earlier year, unless the statutory period for filing a claim for that year has expired.
The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7.5% of adjusted gross income if the decedent or the decedent's spouse was born before January 2, 1950). Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return.
Having a limit of one year after the date of death to pay the medical bills in order to have them qualify for a tax deduction I see. How that translates into boilerplate in wills that directs the executor to "immediately" pay all medical bills, that I don't get. It would seem to me that it sets up the possibility for a naïve executor to royally screw things up. If there aren't enough funds to pay all the debts being one example. Follow that direction, the other legitimate debtors get nothing? It would seem it would make more sense to just point out the one year time clock. Plus, a lot of estates, there isn't even going to be any possibility to deduct medical expenses, because they don't have enough income to even pay taxes.
While it doesn't apply to parents, children, spouse/partner or grandchildren, it does, oddly, apply to siblings of the decedent as well as non-relatives.
On 05/15/2015 10:20 AM, taxed and spent wrote: ...
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Nothing there has any real urgency and hence the urging of "immediate". As long as the election is made and the expenses paid within the year, it's all immaterial as to whether it's the day after or 364 days after.
As trader also says, nothing posited so far providee any reason for such a clause being included.
I haven't been in a situation where there weren't sufficient assets as his concern raised poses so I don't know just what precedent is; I'd assume there would be rules that state who's first in line just as there are in bankruptcy and that'll get sorted out as part of the closing of the estate. Surely do agree that just writing a check for everything to one individual creditor even if they have a legitimate claim is unlikely to be the (right) answer.
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My "problem" so to speak isn't "family money" but more related to capital assets, etc., of family businesses and the like. Think of the land value that is tied up in a working farm as just a common example and the one the Farm Bureau particularly is concerned over. Owing to the recent land evaluations it doesn't take much in some areas of the country before one is in the bind and then family succession is often difficult or even impossible since despite the on-paper valuation, there's often nowhere near enough liquid assets nor cash flow to be able to handle it. Consequently, land ends up having to be sold to pay taxes. That "just ain't right!".
I don't know about that one...haven't really pondered it deeply enough but on first blush I'm sorta' ok that needs to be a step up in basis somewhere, somehow, any way.
So the lawyer advises the client to instruct the executor to attend to the medical bills immediately. Otherwise, the lawyer may not be able to give the inheritor his money in time to get into law school.
All of those are even further reason to absolutely _avoid_ any rush to immediate action.
But ensure, meanwhile, possibly paying out more than might be necessary if judicious care were taken for 2) and 3) in resolving any claims as economically as possible for the estate's benefit. Just 'cuz the principal's gone doesn't relieve the executor from his fiduciary responsibility to manage the assets prudently and to the benefit of the estate/ultimate inheritors.
It's still "just nonsense" as posited by OP; it would be interesting to see an actual sample clause that raised the question rather than simply a paraphrasing of an intent.
+1
Seems if paying medical bills within the one year limit for tax purposes is the issue, then the more logical thing to do is just explain that issue in some detail in a letter to the executor that goes along with the will. That way the executor understands the issue, knows what the deadline is, can get tax advice if needed, and proceed accordingly.
And, of course, those are _current_ tax rules; who knows what would be the actual rule at the time? Tax advice, etc., doesn't got in the will at all; details _will_ be different.
As I noted (in less detail) earlier, the only reason I can see for something like the OP's original purported verbiage would be in the case of a draft document drawn up by an attorney on a medical institution's payroll and hence working for the institution and them then making this available as a purported "service". Sleazy, but not out of the realm...
The doctor gave my friend 3 months to live. When he told the doctor he couldnt' pay the bill yet, he gave him another 3 months.
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