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When Does An Estate Have to File An Estate Tax Return?

When Does An Estate Have to File An Estate Tax Return?

After the death of a loved one, family members often ask me if the estate has to file an estate tax return. This blog discusses how estate taxes are calculated and when estate tax returns are required to be filed.

What Are Estate Taxes?

The estate tax is a federal tax on the transfer of your property after your death.  Essentially, the estate tax is a tax on all of your assets at the date of your death. However, there is currently an estate tax exemption of $11.58 million, which means that you do not have to pay any estate taxes until your estate exceeds this exemption amount. With the current estate tax exemption of $11.58 million per person, the estate tax effects only a small percentage of estates – less than 1% of them! Under current law, this $11.58 million exemption will increase each year until 2025, with a cost-of-living adjustment. However, under the sunset provision in the existing law, this amount will be reduced to $5 million, with cost-of-living adjustments, after December 31, 2025.

For estates that exceed $11.58 million, the personal representative of the estate must file a 706 estate tax return, listing all of the assets owned by the decedent at the time of his or her death, including cash, securities, real estate, insurance, annuities, business interests, and other assets.  The estate tax rate can be as high as 40% on such returns, meaning that your estate may pay as much as 40 cents for every dollar of assets over the estate tax exemption.  Although some states also have a separate state death tax or inheritance tax, fortunately Arizona does not.

When Does the Estate Have to File an Estate Tax Return?

Most estates that are under $11.58 million do not have to file a 706 estate tax return.

For larger estates over this threshold, the estate tax return must be filed within 9 months of the decedent’s date of death. These estate tax returns must follow very detailed requirements to determine the value of the assets in the estate, including the necessity of having detailed appraisals for real estate and business interests.

Beginning in January 1, 2011, estates of decedents who were survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. This is sometimes referred to as “portability”. This portability election is made on a timely-filed estate tax return for the decedent of the surviving spouse. For these types of portability returns, simplified valuation provisions apply, so that detailed appraisals are not required for every asset in the estate.

How Do Estate Taxes Relate to Probate?

The federal estate tax laws and the Arizona probate laws are totally different from one another. However, people often confuse them. The federal estate tax laws determine when your estate has to pay federal estates taxes. The Arizona probate laws determine when your estate has to go through a probate process in the Arizona court system.  The threshold amounts for both are also very different. Whereas the federal estate tax exemption for 2020 is currently $11.58 million per person, the threshold for a probate in Arizona is only $75,000 ($100,000 for equity in real property). Thus, without proper planning, it is much more likely that your estate will have to go through a probate in Arizona.

What Can I Do to Avoid Estate Taxes?

Finally, if your estate is $11.58 million or higher, many people ask me if there is anything that can be done to reduce or eliminate their estate tax liability.  The answer is yes!  There are several strategies to reduce or eliminate estate tax liability, including annual exclusion gifting, charitable gifting, forming family limited partnerships and family LLC’s, establishing A/B or QTIP trusts, setting up irrevocable life insurance trusts (ILITs), and forming other irrevocable trusts.  These planning techniques are beyond the scope of this blog. However, please make sure to seek legal advice from an estate planning expert before implementing any of these advanced planning strategies.

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John EvenOur firm has helped hundreds of families just like yours handle a wide variety of estate planning, business planning, probate, trust, and elder law issues. When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships. Please give me a call, so that I can help you work through these difficult issues with confidence.

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