When to File an Estate Return Under New Law

The American Taxpayer Relief Act that became law on Jan. 2, 2013, changed the landscape of when an estate tax return – and IRS Form 706 – needs to be filed. The $5 million estate tax exemption was preserved and additional provisions were added to adjust it for inflation. As a result, most estates are not required to file Form 706, but there may be a good reason to do so anyway.

 

Why are lifetime gifts important?

As of 2014, you can give away $14,000 – the annual exclusion – per year to as many gift recipients as you choose. Your spouse can also give away $14,000 per year. Gifts that exceed this annual exclusion amount reduce the remaining estate tax exemption that is available at the decedent’s death. The amounts that exceed the annual exclusion are reported and tracked on IRS Form 709. For example, you and your wife gift $30,000 to your nephew during 2014. You and your wife would include taxable gifts of $1,000 each on Form 709. No tax would be due, but both you and your wife will use $1,000 of your estate and lifetime gift exemption.

 

What is required to be filed?

For 2014, the estate and lifetime gift tax exemption is $5.34 million. If the decedent has a gross estate and lifetime gifts that exceed $5.34 million during 2014, a Form 706 is required to be filed. The return is due nine months after the decedent’s date of death. IRS Form 4768 can be filed on or before the original due date of Form 706 in order to request a six-month extension from the original due date of Form 706.

 

Portability – what is it and why is it important?

When a decedent has a gross estate that is less than the estate and lifetime gift exemption amount, portability allows the unused portion of the decedent’s exemption to be ported over to the surviving spouse. Thus, portability only applies to married decedents. The decedent spouse’s unused exemption or DSUE amount is added to the surviving spouse’s lifetime exclusion amount. The maximum amount of the first-to-die spouse’s unused lifetime exclusion amount that can be transferred to the surviving spouse, via a portability election on a timely Filed Form 706, is $5 million with no adjustment for inflation. In addition, there is no DSUE for generation skipping tax. Therefore, if a married couple is looking at estate planning strategies related to their grandchildren, portability will not assist them.

A surviving spouse that remarries must use care when determining which DSUE is applicable. The surviving spouse can only use one DSUE at a given time and it must be from the immediately preceding deceased spouse.

The only way to make a timely portability election is to file a timely Form 706 return for the deceased spouse, even if the value of the deceased spouse estate does not otherwise require a Form 706 to be filed. A timely filing includes the sixmonth extension if Form 4768 is filed. The portability election is automatically made when Form 706 is filed. If the executor does not want to make a portability election, the executor must check a box in Section A of Part 6 and skip Sections B and C on Form 706.

 

So what is included in the gross estate?

Assets are valued at their fair market value at the decedent’s date of death, not the amount paid to purchase the assets. The gross estate includes all property in which the decedent had an interest including property outside the U.S. It also includes:

• Certain transfers made during the decedent’s life without an adequate and full consideration in money or money’s worth.

• Annuities.

• 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, dower or curtesy (or statutory estate) of the surviving spouse. 

• Community property to the extent of the decedent’s interest as defined by the applicable law.

 

Statute of limitations:

Unlike most tax returns, the statute of limitations remains open for the decedent’s spouse’s estate tax return that elects portability until the statute lapses on the surviving spouse’s estate tax return. For example, decedent dies today and wife lives another 50 years – the decedent’s estate tax return will remain open until the statute lapses on the wife’s estate tax return. The IRS has the ability to examine the first decedent’s estate tax return and adjust the value of the assets. However, the IRS does not have the ability to assess additional tax if a closing letter has been issued on the original decedent’s estate tax return. They only have the ability to reduce the DSUE amount.