When Is a Federal Estate Tax Return Required to Be Filed?

Criteria that determine when an estate must file IRS Form 706

Doing taxes
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Not all estates must file federal estate tax returns. 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. In fact, only two out of every 1,000 estates had to pay an estate tax in 2017, according to the Center on Budget and Policy Priorities.

When the Value of the Estate Exceeds the Tax Exemption

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 $11.18 million as of 2018. This threshold has been indexed for inflation, so it can be expected to increase incrementally year by year...for the time being.

The Tax Cuts and Jobs Act (TCJA) increased the exemption significantly effective 2018. It was just $5.49 million for deaths occurring in 2017. But the terms of the TCJA might be temporary. The tax law expires at the end of 2025 unless Congress acts to renew it.

The federal estate tax exemption will revert back to 2017 levels if that doesn't happen, although it's indexed for inflation so it can be expected to be marginally greater than the 2017 $5.49 million figure.

How to Calculate the Value of an Estate

Add up the following to determine whether an estate tax return must be filed:

  1. 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
  2. The total specific exemption allowed under Section 2521 (as in effect before its repeal by the Tax Reform Act of 1976) for gifts made by the decedent after September 8, 1976
  3. 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 $11.18 million as of 2018 must file Form 706 even if no federal estate tax will be owed after applicable deductions and tax credits have been applied.

    When the Surviving Spouse Wants to Make a Portability Election

    The concept of "portability" of the estate tax exemption between married couples was introduced in 2011. Under this rule, a surviving spouse can elect to pick up her deceased spouse's unused estate tax exemption and add it to her own federal estate tax exemption.

    For example, if a husband dies in 2018 and his $11.18 million estate tax exemption is not entirely used up by the value of his estate, his wife can elect to add the unused portion to her own $11.18 million exemption.

    If he used none of his estate tax exemption, she could pass up to $22.36 million tax-free at her death. If only $2 million of the husband's exemption is used, the wife can elect to add the remaining $9.18 million exemption to her own $11.18 million exemption and pass up to $10.36 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 Are Form 706 and the Estate Tax Payment 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 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. Twelve states and the District of Columbia impose state-level estate taxes of their own as of 2018, many with exemptions far less than what's currently offered by the federal government.

    As of 2018, the following states 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:

    • District of Columbia
    • Hawaii
    • Illinois (for 2009 and prior years and 2011 and future years)
    • Kansas (for 2009 and prior years)
    • Maine
    • Maryland
    • Massachusetts
    • Minnesota
    • New York
    • Oregon
    • Vermont

    When Should a Nontaxable Estate Consider Filing Form 706?

    Some estates that are not required to file federal estate tax returns should consider filing one anyway to lock in date-of-death fair market values of estate assets. This includes estates that utilize AB Trusts or ABC Trusts, as well as estates that create lifetime trusts for the benefit of non-spouse beneficiaries.

    It’s typically much easier to settle the estate of a surviving spouse or a non-spouse beneficiary later when an estate tax return has previously been filed because the starting fair market values and step-up in basis of estate assets will be clearly stated 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.