A major part of the estate planning process is making sure you shield your estate from taxes as much as possible. In many cases, this isn’t too much of a problem, but you do need to plan everything carefully. Oversights can lead to excess tax exposure, the result of which would be a significant reduction in what you pass on to your heirs.
One of the questions you’ll have to deal with is whether a tax return needs to be filed for your estate. In many cases, it may not be strictly necessary, but it’s often a good idea to do so anyway.
Technical Requirements for Filing an Estate Tax Return
Under the IRS tax code, an executor needs to file an estate tax return if any of the following apply:
- Gross amounts and previous lifetime gifts exceed $11,180,000 for a couple (as of 2018)
- The estate earns a gross income of at least $600 each tax year
- Your estate has a beneficiary who is a nonresident alien
In most cases, an estate won’t meet any of these requirements. The majority of estates are fairly simple and won’t reach the high lifetime gift amount of $11,180,000. In addition, estates are typically distributed to beneficiaries before they earn any income (though beneficiaries will still have to pay income tax on any income their inheritance generates for them). Finally, most U.S. estates will have beneficiaries who are resident citizens.
That said, there are some scenarios that require filing an estate tax return.
Situations that May Require Filing
Estate tax returns are filed on IRS Form 1041. The following scenarios may necessitate filing:
- A couple has given large monetary gifts over the course of their lifetime. Many of these exceeded the $15,000 exclusion, and the full amounts counting against their lifetime exemption totaled about $6 million. Their estate, worth $9 million, is distributed to their children and grandchildren, making their lifetime gift amount to $15 million. This exceeds the $11,180,000 exemption limit, so their executor needs to file Form 1041.
- A successful businesswoman’s estate isn’t disbursed right away after her passing, and her assets continue generating income. Her estate’s total income each year is $700,000, which is well over the $600 exemption. Her executor will need to file Form 1041 for her estate’s tax year, which begins when she passed away.
- One family has relatives in Canada, and a number of them are named in their will. After a tragic vehicle accident, both spouses pass away, distributing their small estate to their children, nieces, and nephews. Since many of their nieces and nephews aren’t residents of the United States, Form 1041 needs to be filed.
Other Needs for Filing Estate Tax Returns
The above situations require a tax return, but even if there is no legal need to file, it may still be advisable to do so. For instance, if you pass but your spouse remains alive, you can have your lifetime gift tax exemption transferred to your surviving spouse. This transfer must be indicated on Form 1041—otherwise, it doesn’t take effect.
In the process of estate planning, you need an attorney to make sure everything works properly. Hart David Carson LLP can provide you with the legal guidance you need when making estate plans.