18.1 Federal Estate Tax Calculation and Filing Requirements

Estate tax calculations are a crucial part of estate planning. They involve determining the gross estate, which includes all property interests at death, and applying special valuation rules. The taxable estate is then calculated by subtracting deductions, with the final tax based on the amount exceeding the lifetime exemption.

Filing requirements for estate tax returns are equally important. Form 706 must be filed within nine months of death, with extensions available. Special elections, like alternate valuation dates and portability of unused exclusions, can significantly impact the final tax liability and must be carefully considered.

Federal Estate Tax Calculations

Gross Estate Determination

• Gross estate includes all property with decedent's interest at death (real estate, cash, securities, business interests, life insurance proceeds)
• Special valuation rules apply to certain assets (closely-held businesses, farms) potentially reducing gross estate value
• Alternate valuation date option allows executors to value estate assets six months after death (may result in lower gross estate value)
• "Stepped-up basis" concept crucial in determining inherited property value for gross estate

Taxable Estate Calculation

• Taxable estate calculated by subtracting allowable deductions from gross estate (funeral expenses, debts, marital deduction)
• Federal estate tax calculated by applying appropriate tax rate to taxable estate amount exceeding lifetime exemption threshold
• Unified credit applied against calculated estate tax to determine final amount due

Three-Year Rule and Trust Considerations

• Assets transferred within three years of death may be included in gross estate under "three-year rule"
• Revocable trust property typically included in gross estate (decedent retained control during lifetime)
• Certain irrevocable trust assets may be excluded if transfer meets specific criteria and timing requirements
• Property with decedent's life estate or retained powers may be included under Sections 2036, 2037, and 2038 of Internal Revenue Code

Assets in the Gross Estate

Included Assets

• All property owned by decedent at death, regardless of form or location
• Life insurance proceeds if decedent had incidents of ownership in policy (even if beneficiary is not the estate)
• Property held in revocable trusts
• Assets subject to three-year rule (transferred within three years of death)
• Property with decedent's life estate or retained powers (under Sections 2036, 2037, 2038 of Internal Revenue Code)

Excluded Assets

• Property passing directly to surviving spouse under unlimited marital deduction
• Assets in qualified terminable interest property (QTIP) trusts
• Certain assets held in irrevocable trusts meeting specific criteria and timing requirements
• Property not subject to decedent's control or ownership at time of death

Estate Tax Deductions and Credits

Allowable Deductions

• Marital deduction allows unlimited deduction for property passing to surviving spouse (defers estate taxes until surviving spouse's death)
• Charitable deductions for bequests to qualified charitable organizations (reduces taxable estate)
• Administrative expenses (executor fees, attorney fees, court costs)
• Outstanding debts and mortgages of decedent at time of death
• State death taxes paid (subject to limitations and requirements)

Available Credits and Special Deductions

• Unified credit (applicable credit amount) applied against calculated estate tax (potentially reduces or eliminates tax liability)
• Special deductions for family-owned businesses and farms (qualified family-owned business interest deduction, subject to conditions)
• Installment payment option for estates with closely held business interests exceeding 35% of adjusted gross estate (up to 14 years)

Filing Requirements for Estate Tax Returns

Form 706 and Deadlines

• Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) used to report gross estate and calculate tax liability
• Filing deadline generally nine months after date of death
• Automatic 6-month extension available by submitting Form 4768
• Estate tax payment due nine months after date of death (regardless of filing extension)

Special Elections and Considerations

• Alternate valuation date election (six months after death) must be made on timely filed estate tax return
• Portability of deceased spousal unused exclusion (DSUE) amount elected on timely filed return (even if estate not otherwise required to file due to value)
• Installment payment election for qualifying estates with closely held business interests
• Consideration of state-level estate tax requirements and potential interaction with federal filing