DAVID A. SILVERSTONE
FLORIDA PROBATE AND ESTATES LAWYER.
Federal Estate Tax Return, Form 706
What is it?
Otherwise known as IRS Form 706, this tax sets in after death and is charged upon the transfer of an inheritance or estate.
The amount of federal estate tax to be paid out hinges on the assets’ fair market value.
Fair market value refers to an estimate of what a buyer would pay to the seller for that property when both parties are under no pressure and are knowledgeable of the asset.
However, there’s an option to delay this valuation by six months, and that power lies with the estate administrator or executor. The latter proves a wise decision in case of a depreciating estate which is bound to realize lesser federal taxes by the end of the six months.
What You Need to Know about the Federal Estate Tax Return
How is the federal estate tax calculated?
The taxable sum factors in allowable estate tax deductions while credits are also taken out from the valuation.
That encompasses money spent on settling debts for the decedent, charity bequests, and costs of estate settlement. Other deductions also include any losses amassed during estate administration and marital deductions, which only qualify if the property passes outright (i.e. without being held in a trust).
What remains after all these are taken out is weighed against the exemption. The sum above the current federal estate tax exemption incurs a charge of 18% for cases where the threshold is surpassed by not more than $10,000.
That percentage rockets to 40% if the exceeding amount comes to $1 million or more and the rates vary progressively in between.
Do you have to pay the federal estate tax?
While every US citizen is required by law to pay this tax, it’s usually the case that most estates do not. That all boils down to the exemption which has varied as follows over the years:
In 2009, the exclusion stood at $3.5 million, which shot up to $5 million, the $5.12, 5.25, 5.34, 5.43, 5.45, and 5.49 million between 2010 and 2017. Last year, that sum almost doubled, availing a generous exemption of $11.18 million with 2019 seeing it further increase to $11.4 million.
In other words, if the net value of an estate after deductions and credit reductions is under the current exemption limit of $11.4 million, the estate passes without this federal tax.
What if you qualify to pay the tax?
If an estate’s value surpasses exemption, it has to file Form 706, and that should happen no longer than nine months from the decedent’s passing.
After this period, Form 706 and the estate tax payment will be due but Form 4768 can be used to secure an automatic extension. Nonetheless, once the nine-month window elapses, the fee is subject to interest.
That said, the prerequisites for filing include copies of:
- The decedent’s relevant trusts or will
- Litigation documents for the estate
- The death certificate
- Return documentation depicting losses, partially included assets, among other unusual items.
It’s best to seek the services of an experienced attorney to help you out with this or determine if you have to pay the tax in the first place.
Do you need to think about inheritance tax as well?
Most people think estate and inheritance taxes are the same thing, but they are not.
The beneficiary pays out the latter as per the assets he or she has received, while the estate pays an estate tax which takes into account the entire estate value.
Florida residents don’t have to worry about inheritance tax as the state doesn’t impose one.
Only six states do at the moment, and those include: Nebraska, New Jersey, Maryland, Kentucky, Pennsylvania, and Iowa.