When you start to plan your estate in earnest, you may wonder if you have to file an estate tax return. You do not have to file an estate tax return unless the taxable value of your estate exceeds the amount of the federal estate tax exclusion.
Let’s look at the details so that you can proceed in an informed manner.
Parameters of Federal Estate Tax
Everyone does not have to file an estate tax return because there is a federal estate tax credit or exclusion. This is the line that is drawn between those who are exposed to the tax and those who are exempt. If your taxable assets exceed the amount of this exclusion, you do have to file a federal estate tax return.
For the rest of the 2014 calendar year, the exact amount of the federal estate tax exclusion is $5.34 million. This precise figure is a result of inflation adjustments. Back in 2011 a $5 million exclusion was put into place, and there have been ongoing adjustments to account for inflation ever since.
You could see a somewhat larger exclusion next year if another inflation adjustment is applied.
Internal Revenue Service Form 706
If your estate exceeds the amount of the exclusion and you have estate tax liability, a return called Internal Revenue Service Form 706 must be filed. A representative of your estate must file this form within nine months of your passing. Any taxes that are due must be paid within this time frame.
However, the Internal Revenue Service will grant an automatic six-month extension if the appropriate application is submitted.
There is a scenario that could exist that could call for the filing of IRS Form 706 even if there is no immediate estate tax liability.
In an estate planning context, the term portability is used to describe the ability of a surviving spouse to use the exclusion that was due to his or her deceased spouse. The $5.34 million exclusion that we discussed in a previous section is allotted to each individual taxpayer. The estate tax exclusion is portable, so a surviving spouse could use the exclusion that was allotted to his or her deceased spouse. This would equal a total exclusion of $10.68 million using the 2014 parameters.
Estate tax exclusion portability is not automatically given to the surviving spouse by the IRS. To elect portability, Form 706 must be filed, and the deadline is the same. The form must be filed within nine months, but a six-month extension can be granted.
Schedule a Free Tax Efficiency Consultation
The federal estate tax can significantly erode the wealth that you are passing on to your loved ones. Fortunately, there are legal steps that you can take to mitigate your exposure.
If you would like to discuss tax efficiency strategies with a licensed estate planning attorney, contact our firm to request a free consultation.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.