According to the most recent data from the IRS, 13,526 tax returns were filed for estates during the 2018 tax season (which applied to decedents that died in 2017). This number was up from 12,711 estate tax returns in the 2017 tax season. If this seems small, you're not wrong. It's because not all estates are required to file a federal estate tax return.
IRS Form 706, officially called the United States Estate (and Generation-Skipping Transfer) Tax Return, is required by the federal government only for estates that meet certain criteria. Learn when Form 706 needs to be filed, who needs to file it, and how to ask for an extension.
When Does Form 706 Need to be Filed?
Form 706 must generally be filed along with any tax due within nine months of the decedent's date of death. However, not every estate needs to file Form 706. It depends on the value of the estate.
The Value of the Estate
For decedents who died in 2019, Form 706 must be filed when their gross estate, plus any taxable gifts given during their lifetime, is valued at more than $11.4 million. This threshold has been indexed for inflation, so it may increase incrementally year over year.
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. For 2020, the exemption is $11.58 million.
The TCJA expires at the end of 2025 unless Congress acts to renew it. If it expires, the federal estate tax exemption will revert back to the 2017 level, 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 the Value of the Estate
To determine whether an estate tax return must be filed, add the following values together:
- Adjusted taxable gifts made by the decedent after Dec. 31, 1976, if they exceeded the 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 Sept. 8, 1976
- The value of the decedent’s gross estate valued at the time of death
A gross estate valued at more than the exemption limit 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 their deceased spouse's unused estate tax exemption under this rule and add it to their own federal estate tax exemption. This is known as the deceased spousal unused exclusion (DSUE).
For example, if a husband died in 2019 and he owned a taxable estate worth $5 million, the surviving spouse could claim the remaining $6.4 million balance of the 2019 $11.4 million exemption to shield the subsequent estate from taxation at the survivor's time of death. If the husband used none of the $11.4 million estate tax exemption, the spouse could pass up to $22.8 million tax-free to her own beneficiaries at her death.
A surviving spouse can elect to use their DSUE by filing Form 706 for the estate regardless of whether it is subject to any estate tax. They would make the election on this tax form.
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 may require filing Form 706 even if no tax is due to the federal government.
Twelve states and Washington D.C. 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. The 2019 state-by-state tax exemption limits are as follows:
- Connecticut: $3.6 million
- Hawaii: $5.49 million
- Illinois: $4 million
- Maine: $5.7 million
- Maryland: $5 million
- Massachusetts: $1 million
- Minnesota: $2.7 million
- New York: $5.74 million
- Oregon: $1 million
- Rhode Island: $1.5 million
- Vermont: $2.75 million
- Washington: $2.193 million
- Washington D.C.: $5.681 million
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 documented and memorialized on the initial decedent’s IRS Form 706.
How to File an Extension
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. Filing Form 4768 automatically gives the executor of an estate or the trustee of a living trust an additional six months to file a tax return.
Form 4768 must be filed on or before the due date for Form 706, or for the equivalent form for a given estate. The estimated tax should be paid by that date as well.
Where to File Form 706 and Form 4768
If filing by mail, you can send Form 706 to the following address: Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999
If filing by mail, you can send Form 4768 for the extension to the following address: Internal Revenue Service Center, Attn: Estate & Gift, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915