Question 25: When is an Estate Tax Return Due?

Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. In actuality, only about one-half of one percent of all estates are subject to the estate tax. This is due to the unlimited marital deduction and the annual gift deduction. Even if tax applies to your estate, it may be eliminated by the Federal Applicable Exclusion amount.

Most relatively simple estates with a total value under $5.49 million and a date of death in 2017 do not require the filing of an estate tax return. Additionally, the person who receives your estate will not have to pay any estate tax, and typically, depending on the type of assets, they will not have to pay income tax on the value of the inheritance received.

However, for those estates that are valued at more than $5.49 million, you will need to figure the estate tax.

Finding Your Taxable Estate Amount

Your taxable estate is your gross estate less allowable deductions. Your gross estate includes the value of all property in which you had an interest at the time of death.

Your gross estate also will include:

  • The value of certain annuities
  • The value of certain property you transferred within 3 years before your death
  • Trusts or other interests established by you or others over which you have certain powers
  • The includible portion of joint estates with right of survivorship
  • The includible portion of tenancies by the entirety
  • Certain life insurance proceeds (even though payable to beneficiaries other than the estate)
  • Property over which the decedent possessed a general power of appointment
  • Community property to the extent of the decedent’s interest as defined by applicable law
  • Real property and other assets outside the S.
  • Cash
  • Certificates of deposit
  • Stocks and bonds
  • Mutual funds
  • Equity in your house
  • Retirement plans

The allowable deductions used in determining your taxable estate include:

  • Funeral expenses paid out of your estate
  • Debts you owed at the time of death
  • The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse)

To determine whether you must file a return for the estate, add:

  • The adjusted taxable gifts made by the decedent after December 31, 1976
  • The decedent’s gross estate valued at the date of death and subtract the applicable exclusion amount for the year of death

What Estate Tax Forms Do You Use and When?

  • IRS Form 706 is used to figure the estate tax of S. citizens and residents. It must be filed for every gross estate, adjusted for taxable gifts and other exemptions, that are more than $5.49 million in 2017. This form must be filed within 9 months of the decedent’s death.
  • Form 706-NA is for the estates of those who were neither S. citizens nor residents at the time of death.
  • Form 4768 is used to apply for an extension of time to file. This form will give you an extension of up to six months.

Under certain circumstances, filing a Form 706 is recommended even if the estate is less than $5.49 million, in order to start the statute of limitations running. For example, if there are difficult to value assets in order to establish basis for income tax purposes.

Who Is Responsible for Filing Estate Tax Returns?

It is the job of the Executor or Trustee to file the estate tax return. If there is more than one Executor or Trustee, all must be listed and all are responsible and held liable for late or false returns. Although each Executor or Trustee is liable, only one need sign the return.

The Executor or Trustee who files the return must sign the declaration on page 1 under penalties of perjury. If the return is prepared by someone other than the person who is filing the return, the preparer must also sign at the bottom of page 1.

Making Changes to Form 706

Sometimes new information or forgotten information will necessitate making changes on Form 706. If you have already filed Form 706, you need to do the following to make amendments:

  • File a new Form 706
  • Write “Supplemental Information” across the top of page 1 of Form 706
  • Attach pages one through three of the original Form 706

Documents You May Need to File with Form 706

When you file Form 706, you must attach the death certificate to the return. Additionally, these other documents may also need to be attached:

  • Certified copy of the Will if the decedent was a citizen and died testate
  • Trust instruments
  • Powers of Attorney instruments
  • State certification of payment of death taxes

Additionally, if the decedent was a U.S. citizen but lived outside the U.S., you will need the following supplemental documents:

  • A copy of the inventory of property and the schedule of liabilities, claims against the estate, and expenses of administration filed with the foreign court of Probate jurisdiction, certified by a proper official of the court
  • A copy of the return filed under the foreign inheritance, estate, legacy, succession tax, or other death tax act, certified by a proper official of the foreign tax department, if the estate is subject to such a foreign tax
  • A certified copy of the Will if the decedent died testate

Penalties

The IRS provides for penalties for both late filing and for late payment unless there is reasonable cause for the delay. The law also provides for penalties for willful attempts to evade payment of tax. The IRS also provides a 20 percent penalty if you underpay the estate tax by more than $5,000 if the underpayment is due to understated valuations. A valuation understatement occurs when the value of property reported on Form 706 is 50% or less of the actual value of the property. This penalty increases to 40% if there is a gross valuation understatement. A gross valuation understatement occurs if any property on the return is valued at 25% or less of the value determined to be correct.

Keep in mind that while you can plan to minimize taxes, your estate may still have to pay some federal estate taxes. What’s more, your estate may be subject to income taxes, state estate or inheritance taxes. An estate planning attorney can provide more information regarding both federal and state income and estate taxes.

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