Estate and Gift Tax Filings
When a person passes away, the estate may be required to file a federal estate tax return, known as Form 706. During life, when you make a gift to any person in excess of the annual exempt amount, filing a gift tax return, known as Form 709, may be required. To comply with the law, and particularly in view of the many changes in this area over the past several years, it is essential to have knowledgeable advisors (1) to determine if a Form 706 filing or a Form 709 filing may be necessary, and (2) to be sure that you take advantage of all the potential benefits – deductions, credits, etc. – that are available.
At Colby&Thornes, our estate planning attorneys are experienced in this area of the law, and, based upon information provided by you, your accountant and financial advisors, we prepare and file Forms 706 and 709 to minimize any adverse tax consequences to the estate and to its beneficiaries. Call us to discuss your estate planning needs.
Form 706 Estate Tax Return
If you were named as executor, personal administrator, or trustee of an estate, it is important to understand Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. The form tends to be updated on a regular basis. It can be downloaded from the Internal Revenue Service website.
One of the main functions of Form 706 is to determine and report to the IRS the value of the decedent’s estate. Some common questions include:
- Is Form 706 required? The requirement for filing Form 706 is largely determined by two factors. For decedents, a Form 706 is required if the gross estate of the decedent has a value in excess of a certain amount ($5,490,000 in 2017 which is revised upward every year by CPI). (In a community property state, as Arizona, the decedent’s estate is most likely ½ of the total FMV of the gross estate; therefore, for a married couple the gross estate generally must exceed twice the single exempt amount to trigger a Form 706 filing.) A Form 706 is also required if the Trustee/executor elects to transfer the deceased spouse’s then available and unused exemption to the surviving spouse (“portability”) in lieu of splitting the estate on first death.
- How soon must Form 706 be filed? Form 706 is due within 9 months after date the decedent died.
- Can I obtain an extension to file? An automatic 6-month extension for the filing of Form 706 can be obtained by filing Form 4768 with the IRS. You must apply for the extension by the original due date. But no extension can be obtained on payment of estate taxes, which are due in full within 9 months of the death of a single person or for a married couple the death of the second spouse to die.
- What is included in the decedent’s gross estate? The gross estate includes ALL property owned by the decedent at the time of his death. Property located outside the U.S., including real property, must be included. Other includable assets are certain gifts made within 3 years prior to death, the decedent’s portion of real property owned with others, life insurance proceeds if the policy is owned by the decedent regardless of the identity of the beneficiary, and all IRAs and employer sponsored plans.
- What is “stepped-up basis”? There are some potential favorable income tax consequences when a decedent dies. One of these relates to property that has appreciated in value during the time it was owned by the decedent. Under both federal and Arizona state law, the FMV of the taxable assets on death becomes the new “stepped-up” cost basis of the assets, and all gain of the assets is forgiven to the heirs who receive the assets. The surviving spouse, or other heirs who receive the assets, and can sell the assets and suffer no income taxes, except any gain since the FMV on the date of death of the decedent, if any. The higher basis translates into lower taxes for the beneficiary when the property is sold. Stepped-up basis does not apply to IRAs or employer sponsored plans. In a community property state, such as AZ, a married couple receives a double stepped-up basis on first death, meaning the FMV of all the assets owned by the surviving spouse also gets a full step-up in basis.
At Colby&Thornes, we know how to handle these are other issues related to an estate in a manner that complies with the law and takes advantage of the rules so that the tax expense is minimized.
Form 709 Gift Tax Return
In an effort to reduce the size of an estate and the associated estate tax burden, and for a variety of other reasons, some parents want to make gifts to their children, grandchildren, relatives, and others prior to death. Perhaps you would like your children to enjoy their inheritance while you are living, rather than to have the entire inheritance pass to them after your death. The IRS has created a complex set of rules regarding gifting that you must understand before you make any significant gifts to children or others.
The IRS has established an annual exclusion that permits you to gift a specific amount of cash or property to another without the need to file a Form 709; the IRS publishes tables to give the annual exclusion amount every tax year. If you are married, the rules also permit you to make a gift as if both of you contributed to it, effectively doubling the annual exclusion limit for couples.
If a person or a couple makes gifts to any person in any year, the total value of which exceeds the annual exclusion amount (as determined by published IRS tables), the person making the gift must file a Form 709 gift tax return for the value of the gifts for that tax year that exceed the annual exclusion amount. The value of the gifted amount on the Form 709 then reduces the lifetime estate tax exemption available to the gift donor by the gift amount.
A gift to a qualified charity will not generally trigger a gift tax, although it may trigger the obligation to file a Form 709 gift tax return.
Any gift made in excess of the lifetime estate tax exempt amount available to a person will trigger a gift tax, the rates of which are published on IRS tables.
Estate and Gift Tax Filings Attorneys in Scottsdale, AZ
The estate and gift tax forms that are required by the IRS must be properly prepared, and filed on time. This requires experience and knowledge in many different areas, an attention to detail, and a commitment to take advantage of every possible regulation and court decision so that you do not pay more than your share of taxes. If you would like to discuss your goals, call Colby&Thornes today to speak to an experienced estate planning attorney.
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