When Is a Federal Estate Tax Return Required to Be Filed?
When Must an Estate File IRS Form 706?
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:
The Value of the Estate Exceeds the Estate Tax Exemption
Form 706 must be filed when a U.S. citizen's or resident's gross estate plus adjusted taxable gifts he's given during his lifetime are valued at more than $5.45 million as of 2016. This threshold has been indexed for inflation so it can be expected to increase incrementally year by year.
To determine whether a return must be filed, add:
- Adjusted taxable gifts under Section 2001(b) made by the decedent after December 31, 1976
- 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
- The value of the decedent’s gross estate -- his assets before deducting for liabilities such as debts and taxes
Any gross estate valued at $5.45 million or more as of 2016 must file a Form 706 even if no federal estate tax will be owed after applicable deductions and tax credits have been applied.
The Decedent Was Married and the Surviving Spouse Wants to Make a Portability Election
"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, referred to as "DSUE," and add it to her own federal estate tax exemption.
For example, if a husband dies in 2016 and his $5.45 million estate tax exemption is not entirely used, his wife can elect to add the unused portion to her own $5.45 million exemption. If he used none of his estate tax exemption, she can pass up to $10.9 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 $3.45 million exemption to her own $5.45 million exemption and can pass up to $8.9 million to her beneficiaries tax-free.
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 may be granted.
Which States Require the Preparation of Form 706?
Even if an estate is not taxable at the federal level, it may be taxable at the state level. Some estates that are nontaxable for both state and federal purposes may still be required to prepare and file state estate tax returns. As of 2014, the following states require that estates prepare and file IRS Form 706 at the state level, along with all necessary state estate tax forms:
- District of Columbia
- Illinois (for 2009 and prior years and 2011 and future years)
- Kansas (for 2009 and prior years)
- New Jersey
- New York
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 later settle the estate of a surviving spouse or a non-spouse beneficiary 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.