With the most recent tax law changes, most estates are no longer subject to reporting requirements and/or paying a federal estate tax at death. However, filing a United States Estate and Generation-Skipping Transfer Tax Return, also known as IRS Form 706, is one of the most important things you can do after the death of a loved one and many people are unaware of this requirement. In this post, we'll discuss some of the reasons why you would file an estate tax return.
First and foremost, a federal estate tax is a tax on the transfer of property after death. If the deceased owned assets worth more than a certain amount, their estate will be subject to federal estate tax. For 2024, the federal estate tax exemption is $13,610,000 per individual, meaning that estates worth less than this amount are not subject to federal estate tax. However, if the estate is valued above this exemption amount, then a federal estate tax return must be filed. The estate tax return provides the IRS with information about the estate's assets, deductions, and taxes owed, and it is used to calculate the estate tax liability. It is important to file the estate tax return accurately and on time (9 months after the date of death) to avoid penalties and interest charges.
While we are focusing on federal estate tax requirements, it is important to note that each state has its own estate tax laws. Virginia is not one of the states that imposes an estate tax. If you're a resident of Virginia, you are not required to file a Virginia Estate Tax Return.
If the estate is not subject to federal estate tax you may still elect to file an estate tax return to take advance of portability. A portability return is a type of federal estate tax return that allows a surviving spouse to take advantage of their deceased spouse's unused estate tax exemption. In practical terms, this means that if a spouse dies and leaves behind an estate that is valued below the federal estate tax exemption amount, any unused portion of their exemption can be transferred to their surviving spouse. The surviving spouse can then use this unused exemption to reduce or eliminate their own estate tax liability when they pass away. To take advantage of portability, the executor of the deceased spouse's estate must file a federal estate tax return, even if the estate is not otherwise required to file.
Form 706 also provides an opportunity to claim valuation discounts for certain assets. If the estate includes assets that are difficult to value, such as closely-held businesses or real estate, it may be necessary to file an estate tax return to claim valuation discounts. Discounts typically reflect the reduced marketability or lack of control associated with these types of assets.
Filing an estate tax return is an important step in the process of settling a loved one's estate. It can help ensure that the estate complies with all applicable laws and establish the value of the estate for future tax purposes. It is important to understand the federal estate tax laws and the estate tax laws in your state. Consult with Schooley Law Firm to ensure that you're taking advantage of all available exemptions and planning strategies.
If you're not sure whether or not you need to file an estate tax return, or if you need assistance filing an estate tax return, contact us today at (804) 270-1300 to schedule a consultation.