Settlement Agreement Payment

[QuestionFromMe]

I was included in my Dad’s Will as a beneficiary of his Estate and was also named by him to be the Executor of his Estate.

At the time of his death, I was a Joint Owner with Right of Survivorship to one of his bank accounts. One of the other beneficiaries to his Estate filed a Petition with the Court contesting the survivorship provision of this Joint Ownership Account. I decided to enter into a Family Settlement Agreement rather than a protracted process to resolve this issue.

Under the Family Settlement Agreement I personally paid some of the beneficiaries a certain sum. The Family Settlement Agreement also stipulated that the bank account being questioned was, in fact, a Joint Account with Survivorship to me.

Since I PERSONALLY paid an amount in settlement, how do I go about claiming this as a deduction on my personal income taxes.

[tagteam]

You should contact the attorney who drafted the settlement agreement, but it is almost a certainty that you will not be able to deduct the payment from your federal income tax return. 

Had the beneficiary prevailed in court, the payment to the beneficiary would have been considered funds you were not entitled to in the first place. Since you entered into a settlement agreement, you essentially admitted that you were not entitled to the funds you paid to the beneficiary. Either way, there would be no personal income tax deduction for the amount of the payment.

Again, consult the attorney who drafted the settlement agreement.

[Opus 17]

You have nothing to deduct.  The money was never included in your taxable income in the first place, and you can't deduct something that was never included in your income in the first place.

To briefly expand, a cash inheritance is not taxable to the heir.  Suppose the bank account was solely owned by your father.  The money would have been inherited according to the Will, with each heir getting the specified amount or percentage, not being taxable.  Instead, you were the sole heir, but you still paid no income tax.  So the fact that you gave some money to a relative (it doesn't matter if the money was freely given or given under pressure) doesn't create a tax deduction for you, because you never paid tax on the money in the first place.  It's just a gift (possibly) or a personal legal settlement (possibly), and neither is tax deductible.  You inherited less, that's all.

I can't actually think of a situation where you could take a personal tax deduction for any expense associated with an estate.  The estate should pay its own legal fees and costs, before distributing the residue.  And even if there are legal proceedings that reduce your inheritance, that just means you get less free money and property.  

I believe that the legal fees you incurred as executor can be deducted from the balance of the estate before the residue is distributed.  You shouldn't pay those out of your personal bank account.

[tagteam]

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@Opus 17 wrote:

....Instead, you were the sole heir......

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@QuestionFromMe was not the sole heir with respect to the JTWROS account per the will because the account passed to @QuestionFromMe by operation of law (outside of the estate). 

Any terms of the will to the contrary with respect to the JTWROS account would have no effect; the account would pass to @QuestionFromMe automatically. 

Apparently, the nature of the account (the survivorship component) was the target of the claim initiated by a potential heir (named in the will or otherwise). If the claim had been filed in probate court, then the costs and attorneys' fees would be deductible on an estate income tax return (or an estate tax return, 706, in the unlikely event one were being filed).

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@Opus 17 wrote:

It's just a gift (possibly) or a personal legal settlement (possibly)....... 

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The payment can't possible be considered a gift since there was no donative intent; the settlement payment was the result of @QuestionFromMe trying to avoid further time and expense in defending a claim against either him personally or the estate.

Again, @QuestionFromMe should consult the attorney who drafted the settlement agreement (or by whom the estate was represented in court) to determine whether any personal funds expended should have been taken and distributed, on a pro rata basis, from the assets of the estate.