The estate tax is a factor if the value of your estate exceeds the amount of the federal estate tax credit or exclusion. For the rest of 2014, the federal estate tax exclusion is $5.34 million. If your assets do not exceed this amount, you have no exposure.
On the other hand, if you intend to transfer more than $5.34 million, you should explore estate tax efficiency strategies. There are things that you can do to mitigate your estate tax exposure. The optimal course of action will vary depending on the circumstances.
Federal Estate Tax Return
If you pass away and your estate is subject to the estate tax, a representative of the estate must file a federal estate tax return. This would be Internal Revenue Service Form 706. Form 706 must be filed within nine months of the date of death. Any taxes that are due should also be paid within this time frame.
This form would also be required if your estate was exposed to the generation-skipping transfer tax.
However, there is recourse if more time is needed. The Internal Revenue Service will grant a six-month extension if the appropriate paperwork is filed.
Electing Estate Tax Exclusion Portability
There is an unlimited marital estate tax deduction. This allows you to leave unlimited resources to your spouse free of the estate tax. As a result, your spouse could inherit assets from you that exceed $5.34 million in value, and he or she would not be required to pay the estate tax.
However, even if there is no estate tax payment due right away, there is another reason why Internal Revenue Service Form 706 should be filed. The estate tax exclusion is portable between spouses. In an estate planning context, the term portability describes the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse.
Portability is available, but it is not automatically allotted to the surviving spouse by the Internal Revenue Service. To elect portability, someone who is representing the estate must file IRS Form 706 within nine months of the decedent’s passing.
Once again, a representative of the estate could request an automatic six-month extension.
State Estate Tax
There are some states in the union that levy state-level estate taxes. We practice law in the state of California. There is no state estate tax in California, but an estate tax return could be required if you own valuable property in a state that has a state-level estate tax.
Schedule a Free Tax Planning Consultation
If you are concerned about potential estate tax exposure, our firm can help. We offer free wealth preservation consultations to people in the greater San Jose area, and you can request an appointment through the contact page on this website.