Estate Tax Returns
Federal and/or state estate tax returns are required whenever the total value of the decedent’s assets exceed the applicable filing thresholds. Effective for 2002 and 2003, if the total value of a decedent’s assets exceed $1,000,000, a Federal estate tax return will be required; for 2004 and 2005, the total value of the decedent's estate must exceed $1,500,000; for 2006 through 2008 the threshold is $2,000,000, and for 2009 the threshold is $3,500,000.
As of January 1, 2010 the Federal estate tax law was repealed. Beginning in 2011, however, the Federal estate tax has been reinstated with the threshold being increased to $5,000,000. The $5,000,000 threshold will remain in effect for 2012, but could revert to $1,000,000 in 2013 unless Congress changes the law again.
For decedents who did die in 2010, while there is no Federal estate tax, the "step-up" in basis rules for assets acquired from a decedent are no longer in effect, except that there will be an option to elect to treat certain assets as qualifying for this step-up in basis, subject to various dollar limits. This topic is addressed in the article on Tax and Estate Planning After the "Repeal" of the Estate Tax. However, as a result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, there is now an option to choose between two different laws. One choice is to use the 2010 rules where there is no estate tax law. As noted above, that also means that there is generally no step-up in basis for the assets in the estate. The second choice is to be subjected to the new 2011-2012 federal estate tax law, which provides for a federal estate tax for estates whose value exceeds $5,000,000. For many estates under $5,000,000, choosing this law would be advantageous because there would be an automatic step-up in basis for assets includible in the gross estate, just as there had been under the tax laws in effect before 2010. The default provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is the 2011-2012 federal estate tax law. Thus, executors of decedents who died in 2010 who want the automatic step-up in basis do not have to take any action at all. For estate under $5,000,000, the default provision in the law could be the preferred choice for all of such estates as there would be no estate tax, yet there would be the "old" step-up in basis. For estates in excess of $5,000,000 a careful analysis will need to be made whether it would be preferable to pay an estate tax and receive a step-up in basis for estate assets, or to avoid the estate tax and potentially pay higher capital gains taxes later.
State estate tax returns may also be required. Generally, a state estate tax return is required to be filed with the state where the decedent was domiciled at the time of his death. State estate tax returns may also need to be filed with each state where the decedent owned any property, if that property was physically located within that state, e.g., a vacation home in another state.
With respect to Massachusetts decedents, an estate tax return will be required if the decedent died during 2002 with an estate valued in excess of $1,000,000. For decedents dying after 2002, the Massachusetts estate tax thresholds vary from year to year as follows:
- 2003 - $700,000
- 2004 - $850,000
- 2005 - $950,000
- 2006 and later - $1,000,000
The due
date for filing the estate tax returns is nine months from the
decedent’s death. (Note that it is also possible to get a six month
extension of time to file these returns, although, if there is a tax
due, an estimated tax will generally have to be paid within the original
nine month deadline.)
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Stocks and Bonds. This category would include publicly traded
stocks, bonds and mutual funds, as well as stock in closely held
companies. Also included in this category would be any Federal
bonds, such as Savings Bonds, Treasury Bills, etc. The proper
valuation of publicly traded stocks, bonds and mutual funds is the
average of the high and the low for the day on which the decedent
died. If the decedent died on a Saturday or Sunday, an average of
the high and low prices for Friday and of the high and low prices
for Monday must be used. Further, if there are any accrued but
unpaid dividends or interest owed on any of the investments, such
accrued dividends or interest must be included as well. If the stock
is in a closely held company, some type of appraisal of the company
must be included to substantiate the value to be reported on the
return.
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Mortgages, Notes and Cash. This category would include any bank
accounts, including certificates of deposit. Also included would be
any mortgages or notes payable to the decedent.
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Life Insurance. Any and all life insurance insuring the
decedent’s life must be reported on the return. Not all such
insurance is necessarily taxable, but it must nevertheless be
disclosed on the return. Any life insurance in which the decedent
possessed any ‘incidents of ownership’ will be taxable. The term
‘incidents of ownership’ includes, but is not limited to, actual
ownership of a policy and the right to change the beneficiary (e.g.,
as in the case of company provided group term life insurance wherein
the company owns the actual insurance policy but the
employee/insured can designate and change the beneficiary of the
insurance proceeds at any time). Life insurance which is owned by
someone else, e.g., the decedent’s spouse, or by some type of
irrevocable trust may be excluded from taxation, but is still
reported. Any life insurance which the decedent had transferred away
within the three year period prior to his death is also taxable.
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Jointly Owned Property.
This would include any type of asset described herein, but that was
owned jointly by the decedent with any other person(s). For Federal
estate tax purposes, the normal presumption is that any property
owned jointly by husband and wife is includible in the decedent’s
estate to the extent of 50% of its value. The presumption for
property owned jointly by the decedent and any one other than a
surviving spouse is that the entire value of the property is
taxable to the decedent unless the surviving joint owner can
prove otherwise. Thus, for example, if the decedent had put a bank
account into his name with one or more of his children, the
entire value of the bank account is includible in the decedent’s
estate unless the children can actually prove that they contributed
to the account.
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Miscellaneous Property. This category would include items such
as jewelry, items of personal property, household furnishings,
automobiles, rare collections (e.g., coins, books, stamps, etc.) and
any other asset which the decedent might own. Other types of
miscellaneous assets would include limited partnership interests,
refunds of any type (e.g., income tax refunds, insurance premium
refunds, etc.), death benefits payable from the decedent’s employer,
etc. If any of these items were particularly valuable, a formal
appraisal may be needed.
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Lifetime Transfers. Any assets which the decedent might have
transferred to a revocable trust during his lifetime (which asset
may fit one of the categories otherwise described herein) must be
included. It is also necessary to account for any taxable gifts made
by the decedent and reported on any Federal gift tax returns filed.
Any such ‘adjusted taxable gifts’ will affect the value of the
decedent’s taxable estate as well.
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Annuities. This category includes any commercial form of annuity
as well as any type of retirement benefits to which the decedent
might be entitled. Retirement assets would include Individual
Retirement Accounts, 401(k) accounts, Keogh accounts, pension plans,
profit sharing plans, etc.
If the
gross value of all of the above assets exceeds the applicable filing
threshold, then the various debts and expenses relating to the
decedent’s estate must next be accounted for. These would include the
following:
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Administration expenses. These include legal fees, accountant’s
fees, and any executor’s fees paid. Other expenses would be fees
charged by realtors or other appraisers to render appraisals for the
estate. Certain expenses of maintaining estate assets during the
estate administration process may also be deductible.
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Debts. These include any bills incurred in connection with the
decedent’s last illness, as well as any bills owed at the time of
death. The bills would include credit card bills and household bills
which had been accrued, but not yet paid. Also, any real estate tax
bills may be deductible as well, even if not yet issued by the city
or town. Federal and state income tax liabilities may also be
deductible.
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Mortgages and Liens. Any mortgage balance outstanding or lien is
also a deductible expense. (Note, however, that if the mortgage is
on real estate in which the decedent owned less than the entire
interest, the mortgage is generally only deductible to the extent of
the decedent’s interest in the underlying real estate. Thus, for
example, if he owned a home with his spouse as joint tenants and
only 50% of the value of the home is includible in the gross estate,
only 50% of the mortgage balance may be deductible.
Finally,
after compiling the list of assets and debts and expenses, there may be
other deductions and/or credits to be taken as well. These deductions
include the following:
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Charitable Deduction. Assets payable to any qualified charitable
organization will also generally be deductible to the extent of the
value of the interest passing to charity.
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Foreign Death Taxes. If the decedent owned property in another
country and his estate is obligated to pay taxes to that country, a
credit may be available.
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Credit for Tax On Prior Transfers. In certain situations where
the decedent’s estate includes assets which were received from
someone else, if those assets had been taxed in the prior owner’s
estate, there may be a credit available. The actual amount of the
credit is a complicated computation, but is basically designed to
avoid having the same asset taxed twice within a short period of
time. Generally, this credit is available only if the tax was paid
within 10 years of the decedent’s death, with the amount of the
credit varying depending upon how closely to the decedent’s death
the tax was paid (e.g., a tax paid within 2 years of death may be
fully available as a credit, whereas the credit for a tax paid more
than 8 years and less than 10 years from date of death is available
only to the extent of 20% of the credit is otherwise determined.
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Qualified Conservation Easement Exclusion.
Once all of the above information has been gathered, the necessary computations are made to determine the amount of tax liability, if any. Fedele and Murray, P.C. can assist in gathering all the necessary information and will prepare all necessary returns and schedules for you.