Estate PlanningTax Planning

Estate Tax Returns: The Basics

Senior man calculating estate taxes

The federal government imposes a tax on the transfer of an individual’s wealth during lifetime and death, which is the unified gift and estate tax. When a family member dies, the executor of their estate may be required to file an estate tax return. Like an income tax return, an estate tax return is filed with the IRS, and the return will report the value of all the assets the decedent owned at death. The assets reported on the return include the decedent’s real estate, bank accounts, brokerage accounts, business interests, life insurance, retirement accounts, tangible personal property, and any other property interest of the decedent valued as of the date of death.

The estate tax return is generally due 9 months after the decedent’s death, but the due date for filing the return may be extended automatically for an additional 6 months. An extension for filing, however, is not an extension for paying any potential estate tax owed. If tax is due from the decedent’s estate, then the tax must be paid by the 9-month filing deadline, and failure to pay the tax within 9 months could result in the IRS accessing penalties and interest.

The good news is, most estates are not required to file an estate tax return, because a return is only required if the value of the decedent’s estate (plus the value of lifetime gifts made by the decedent) is over the applicable estate exemption in the year of death. In 2023 the exemption is $12.92 million dollars. Sometimes, even when the estate is less than the exemption amount, the surviving spouse will want to file an estate tax return in order to make a portability election. This portability election allows the surviving spouse take advantage of the decedent spouse’s unused exemption. For example, if husband dies in 2023 with a $5 million taxable estate, his spouse may file an estate tax return and elect to “port over” the husband’s $7.92 of unused exemption which will then be added on to her own exemption amount. This portability feature can save significant taxes upon the death of the second spouse.

The preparation of the return mostly involves valuing the decedent’s assets as of his or date of death, determining potential deductions such as mortgage payments, appraisal fees, fiduciary fees, and legal and accounting fees, and gathering information for the decedent’s beneficiaries. Certain assets such as real estate, family businesses, family farms require an appraisal. The decedent’s executor will usually need to coordinate with an accountant, financial institutions and appraisers to gather the information needed for the return.

Once the return is filed, the family must wait for the IRS to review and accept the return. Over the last few years, this process has taken longer and longer, usually over a year. The executor for the estate will need to request a tax transcript, pay a $67 processing fee to the IRS, and then request a closing letter in order to confirm that the IRS has accepted the return and confirm there will not be an audit of the information presented.

If you have any questions about estate planning or estate tax returns please contact us.