As tax season is wrapping up I’ve found myself busy with a few estate tax returns, and wanted to share 7 Tips to keep in mind when completing a United States Estate (and Generation-Skipping Transfer)
Tax Return – aka the 706. The federal form (coming in at 31 pages before any schedules and supporting documentation is attached) is a bit overwhelming. But with the tips below the Estate Tax Return can be quite easy.
Tip 1: Know the Exemption Amount
This may seem a bit obvious but with changes in legislation, and estates with property in multiple states, it is important to keep an eye on the applicable exemption amount for the date of death.
The federal exemption for 2014 was $5.34 million, and is $5.43 million in 2015.
The Minnesota state exemption in 2014 was $1.2 million and is $1.4 million for 2015. Minnesota’s exemption will increase annually until it is phased up to $2 million in 2018.
An estate greater than either exemption amount will require a 706, and if the decedent resided in Minnesota, a M706. Other states will have different exemption amounts, and may require a return if the Decedent either resided there or had assets in that state. Taking time in the beginning to determine the applicable exemptions will prevent any surprises later on.
Tip 2: Determine whether or not you’re handling a “taxable estate”
You’ll need to look at ALL the assets of the decedent- even those non-probate assets we seem to lose track of. You should also review any gifts made by the decedent throughout their lifetime. Any gifts the decedent made during their lifetime, that exceeded the annual exclusion, will also need to be included in the total estate value.
If the total of all the assets in their name (and any gifts made that exceeded the annual exclusion), is larger than the federal or state exemptions the year the decedent died, you’ll have to file a 706.
Tip 3: Read the Instructions!
Read the instructions carefully. Even if you don’t think you need to complete a specific section or schedule, read the instructions to be sure.
Tip 4: Know your Due Date & be Aware of the Automatic Extension
The 706 must be filed, and any estate tax due must be paid, within 9 months of the date of death. Know the due date!
The IRS will allow you a 6 month extension to file the 706 if you complete Form 4768 “Application for Extension of Time to File Return and/or Pay U.S. Estate (and Generation Skipping Transfer) Taxes”. Keep in mind that the extension must be filed before the initial due date. Minnesota will allow that same extension.
Keep in mind that even if you file for the automatic extension, the tax due (or a really close estimate) is still due on the original due date, 9 months after the date of death.
Tip 5: Know why you’re filing
There are three main reasons a 706 Return may be filed:
1) Because the estate exceeds the exemption amount and will need to pay estate tax
2) To allow for portability of the Unused Exemption amount of a predeceased spouse
3) To determine the generation-skipping transfer (GST) tax imposed on direct skips
Reminding yourself of why you’re filing the 706 will help narrow the focus and schedules you’ll need to complete.
Tip 6: Watch out for non-residents with property in Minnesota
If a nonresident owns property that is located in Minnesota and their federal gross estate exceeds the Minnesota exemption amount, they will be required to complete a Minnesota estate tax return. Keep in mind that business-interests, or a trust, which is sitused in Minnesota and the nonresident is a partner/member/shareholder or beneficiary of, may be subject to the estate tax.
Tip 7: Keep a separate folder for each Schedule.
Some of you may be a bit more organized than I am, but I found it extremely helpful to keep a running checklist of each Schedule I was completing for a given return and a separate folder to hold the supporting documentation for that specific Schedule. For example, knowing that I had the necessary appraisals for all property in Schedule A, or the 712s for Schedule F, or that I was still waiting on letters of receipt from charities for Schedule O helped me keep moving things along. When it was time to compile all the documents for submission, I knew I had everything I needed.
Keep the tips above in mind as you’re completing your next estate tax return and everything should go smoothly. If you run into any problems, take a peek at the instructions again, and consult an attorney or your favorite accountant for further advice.