When Is a Federal Estate Tax Return Required to Be Filed?
Not all estates must file Form 706
Not all estates must file a federal estate tax return. IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, is required by the federal government only for estates that meet certain criteria.
Only about 1,700 estates were expected to owe an estate tax in 2018, according to the Tax Policy Center. This is down from 5,500 the year before. The drop is largely due to the provisions of the Tax Cuts and Jobs Act (TCJA), which roughly doubled the estate tax exemption in 2018, and only estates with values in excess of this exemption must pay the estate tax on the difference.
The Value of the Estate
Form 706 must be filed when a U.S. citizen's or resident's gross estate plus any taxable gifts he's given during his lifetime are valued at more than $11.4 million as of 2019. This threshold has been indexed for inflation, so it can be expected to increase incrementally year by year...for the time being.
The TCJA increased the exemption from just $5.49 million in 2017 to $11.18 million in 2018 when the new tax law went into effect. Inflation adjustments bumped it up to $11.4 million in 2019.
But the TCJA expires at the end of 2025 unless Congress acts to renew it. The federal estate tax exemption will revert back to the 2017 level if the TCJA expires, although it can be expected to be marginally greater than the $5.49 million figure from that year because of that inflation adjustment.
How to Calculate Value
Add the following to determine whether an estate tax return must be filed:
- Taxable gifts under Section 2001(b) made by the decedent after December 31, 1976 if they exceed annual gift tax exclusion in the year they were made
- The total specific exemption allowed under Section 2521 (which was in effect before its repeal by the Tax Reform Act of 1976 for gifts made by the decedent after September 8, 1976)
- The value of the decedent’s gross estate—his assets before deducting for liabilities such as debts and taxes and subtracting the value of assets that pass to his spouse or charities
A gross estate valued at more than $11.4 million as of 2019 must file Form 706 even if no federal estate tax will be owed after applicable deductions and tax credits have been applied.
The Portability Election
The concept of "portability" of the estate tax exemption between married couples was first introduced in 2011. A surviving spouse can elect to pick up her deceased spouse's unused estate tax exemption under this rule and add it to her own federal estate tax exemption.
For example, if a husband died in 2018 and his $11.18 million estate tax exemption was not entirely used up by the value of his estate, his wife could have elected to add the unused portion to her own $11.18 million exemption for that year.
If he used none of his estate tax exemption, she could pass up to $22.36 million tax-free to her own beneficiaries at her death. If only $2 million of the husband's exemption was used, the wife could have elected to add the remaining $9.18 million exemption to her own $11.18 million exemption and pass up to $20.36 million to her beneficiaries tax-free.
A surviving spouse can elect to use her deceased spouse’s unused estate tax exemption by filing Form 706 for his estate regardless of whether the estate is subject to any estate tax. She would make the election on this tax form.
When Is Form 706 Due?
Form 706 must generally be filed and any tax due must be paid within nine months of the decedent's date of death. An automatic six-month extension of time to file is granted to estates that file IRS Form 4768, the Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.
Under certain limited circumstances, more additional time to file might also be granted.
Which States Require Preparation of Form 706?
Sometimes an estate can be taxable at the state level even if it's not taxable at the federal level, and this can require filing Form 706 even if no tax is due to the federal government.
Twelve states and the District of Columbia impose state-level estate taxes of their own as of 2019, and some of their exemptions are far less than what's currently offered by the federal government. As of 2019, the following jurisdictions require that estates prepare and file IRS Form 706 at the state level, along with all necessary state estate tax forms, even if Form 706 isn't filed with the federal government.
They're listed with their exemption amounts as of 2019.
- Connecticut: $3.6 million
- District of Columbia: $11.4 million, matching the federal exemption
- Hawaii: $11.4 million, matching the federal exemption
- Illinois: $4 million
- Maine: $11.4 million, matching the federal exemption
- Maryland: $11.4 million, matching the federal exemption
- Massachusetts: $1 million
- Minnesota: $2.7 million
- New York: $11.4 million, matching the federal exemption
- Rhode Island: $1,561,719
- Vermont: $2.75 million
- Washington: $2,193,000
When Should a Nontaxable Estate File Form 706?
Some estates that are not required to file federal estate tax returns should consider doing so anyway to lock in date-of-death fair market values of estate assets.
It’s typically much easier to settle the estate of a surviving spouse or a non-spouse beneficiary later on if an estate tax return has previously been filed. The starting fair market values and step-up in basis of estate assets will be clearly stated and memorialized on the initial decedent’s IRS Form 706.
You can visit the IRS forms website for the latest version of Form 706 and its instructions.