A federal estate tax return, or IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is required to be filed only after specific criteria with regard to an estate are met. Even so, some estates may be required to prepare IRS Form 706 strictly for state estate tax purposes or electing "portability" of the estate tax exemption, while others should consider filing IRS Form 706 even if a return is not required to be filed.
Form 706 Filing Requirements for Decedents Dying in 2010, 2011 and 2012 - Gross Estate Exceeds $5 Million
For deaths that occur in 2010 or 2011, Form 706 must be filed for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $5,000,000. For 2012, the gross estate, plus adjusted taxable gifts and specific exemption, must exceed $5,120,000. To determine whether a return must be filed, add:
- The 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; and
- The decedent’s gross estate valued at the date of death.
What this means in 2011 is that any gross estate valued at more than $5,000,000 must file a Form 706 even if no federal estate tax will be owed after applicable deductions and tax credits have been applied.
Form 706 Filing Requirements for Married Decedents Dying in 2011 and 2012 - Portability Election
For the 2011 and 2012 tax years only, the concept of "portability" of the estate tax exemption between married couples has been introduced. What does portability of the estate tax exemption mean? It means that a surviving spouse of a decedent who dies in 2011 or 2012 can elect to pick up their deceased spouse's unused estate tax exemption (referred to as "DSUEA") and add it to their own $5,000,000 (for 2011) or $5,120,000 (for 2012) exemption.
For example, if a husband dies in 2011 and none of his $5,000,000 estate tax exemption is used, then his wife can elect to add her husband's unused $5,000,000 exemption to her own $5,000,000 exemption so that when the wife dies she can pass on up to $10,000,000 estate tax free. Or, if only $2,000,000 of the husband's $5,000,000 exemption is used, then the wife can elect to add the husband's remaining $3,000,000 exemption to her $5,000,000 exemption and pass on up to $8,000,000 estate tax free.
So how does a surviving spouse elect to use their DSUEA? According to the instructions for IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, a surviving spouse can elect to use their deceased spouse's unused estate tax exemption by timely filing a Form 706 for their deceased spouse.
Note that as it now stands, the new law governing 2011 and 2012 estate taxes is set to expire on December 31, 2012, so this means that both spouses would need to die in 2011 or 2012 in order to take advantage of the portability election. Nonetheless, since it is quite possible that portability will be extended by Congress beyond 2012, a surviving spouse of 2011 or 2012 decedent should work closely with an estate planning attorney in order to determine if a Form 706 should be filed for their deceased spouse.
When Are Form 706 and the Estate Tax Payment Due?
In general Form 706 must be filed and any tax due must be paid within nine months after the decedent's date of death. However, an automatic 6-month extension of time to file the return is granted for all estates by filing IRS Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, but this does not delay the time to pay any tax that may be due. In addition, under certain limited circumstances additional time to file the return may be granted.
Note that only for deaths occurring between January 1, 2010 and December 19, 2010, Form 706 will be due on or before September 19, 2011. In addition, Form 4768 may be filed for 2010 decedents and this will also grant an extension of time to pay any estate taxes that may be due.
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. In addition, some estates that will be nontaxable for both state and federal purposes may still be required to prepare and file a state estate tax return for state tax purposes. If either of these situations applies, then the following states require IRS Form 706 to be prepared and filed along with all necessary state estate tax forms: Illinois (for 2009 and prior years and 2011 and future years), Kansas (for 2009 and prior years), Maryland, Massachusetts, Minnesota, New Jersey, New York, and Oregon.
When Should a Nontaxable Estate Consider Filing Form 706?
Some estates that are not required to file a federal estate tax return should still consider filing one to lock in the date of death fair market values of the estate assets. This includes estates that utilize AB Trust or ABC Trust planning where only the B Trust or B and C Trusts will be funded as well as estates that create lifetime trusts for the benefit of nonspouse beneficiaries. Why? Because it will be much easier to settle the estate of the surviving spouse or nonspouse beneficiary when they later die since the starting fair market values and step up in basis of the estate assets wil be clearly stated on the initial decedent's IRS Form 706. Imagine trying to settle the estate of a beneficiary 5, 10, 15 or 20 years after the person who the beneficiary inherited their estate from died. Not fun.
For additional information on preparing and filing IRS Form 706, refer to the instructions provided by the IRS: Instructions for Form 706.