Whether you are an executor of an estate or CPA, preparing a federal estate tax return can seem to be a daunting task. Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return is due nine months after a client’s death. This return serves as a summary of the assets included in the decedent’s taxable estate and valued as of that date. This is an important part of estate administration. Here are five common mistakes to avoid.
Mistake No. 1 – Missing the Filing Deadline
If the estate tax return is not filed within nine months of the decedent’s death, you could jeopardize some applicable elections or cause interest and penalties to be due. If you see that it may not be possible or practical to file the return on time, be sure to timely file Form 4768, Application for Extension of Time to File a Return. It is important to remember that, although you can get an automatic six-month extension that does not automatically extend the time for paying the tax. If you need additional time to pay the tax, you must request a separate extension for that purpose. An extension to pay is not automatic, but instead, the IRS will determine whether or not the extension will be granted.
Mistake No. 2 – Not electing portability for the first spouse
There is an important election that can be made on the federal estate tax return of the first spouse to die. This election, known as “portability,” allows any unused federal estate tax exemption to be “portable,” which means that unused portion will be available to be used at the surviving spouse’s death. However, this particular election must be made on the federal estate tax return of the first spouse to die. You should take this election whether you believe the surviving spouse will need the exemption. It is best to elect portability regardless because the financial circumstances of the surviving spouse might change.
Mistake No. 3 – Not including prior gift tax returns
Be sure to determine whether or not the deceased filed any gift tax returns prior to death. Those returns must be included with the federal estate tax return. If you cannot determine whether there were any, and the family cannot remember, then you can contact the IRS Service Center to request copies of all gift tax returns that were filed. Why is this so important? Because those prior gift tax returns will affect the amount of available estate and generation-skipping tax exemptions. That will then affect the amount of taxes due on the federal estate tax return.
Mistake No. 4 – Not taking advantage of tax allocation clauses
Most wills and trusts incorporate what is known as a tax allocation clause. This particular clause allocates the tax liability among the beneficiaries or against the residue of the estate. If this clause does not exist, then the law of the state where the deceased resided controls the allocation of estate taxes.
Mistake No. 5 – Not providing adequate documentation of asset value
Estate assets such as real estate, tangible personal property, and interests in a closely-held business can often be hard to value. If you do not provide adequate documentation with the federal estate tax return, to substantiate the value of certain assets, you will substantially increase the risk of being audited. You should obtain actual appraisals of those types of property that will establish the fair market value at the date of death for these assets. These appraisals should then be submitted along with the tax return. A thorough appraisal will show comparable sales for the property.
Dealing with estate taxes does not have to be stressful
No doubt, one of the biggest concerns in estate planning is estate taxes. In fact, much of estate planning is geared toward minimizing or even eliminating estate taxes any way possible. That is understandable, with the current federal estate tax rate at 40%. However, considering the current estate tax exemption amount of $5.45 million, most estate are not required to pay estate taxes. If your estate is not exempt, however, filing a federal estate tax return will be required. Don’t hesitate to seek the advice of an estate planning attorney in order to find ways to make this issue as stress-free as possible.
If you have questions regarding the estate tax, or any other estate planning needs, please contact the Schomer Law Group for a consultation, either online or by calling us at (310) 337-7696.