In general, a Form 706 estate tax return need only be filed if the value of the gross estate exceeds the $600,000 exemption equivalent. If required, the form must be filed within 9 months after the date of the decedent’s death, unless an extension is granted for reasonable cause. As in the income tax context, the estate tax must be paid by the due date of the return, irrespective of any extensions granted.
Along with the Form 706, the taxpayer must also file copies of other documents, including (but not limited to) the Will, any trust instruments relating to lifetime transfers, and a certificate documenting state death taxes paid. The mechanics of calculating the estate tax itself can best be described by means of an example:
Assume the taxpayer dies on June 30, 1996, and is survived by his wife and two children. During his lifetime, the deceased made two taxable gifts (excluding numerous gifts qualifying for the $10,000 annual exclusion). In 1992, he gave his son $130,000 in cash, and his daughter $130,000 in IBM stock, having a basis of $40,000.
At the time of his death, the deceased held title in joint tenancy to a home in Cold Spring Harbor worth $450,000, subject to a mortgage of $150,000, and a summer home in Lake George worth $250,000, free and clear of any mortgage. The consideration for the Cold Spring Harbor residence had been his; for the Lake George summer home, his wife.
Other property owned by the deceased at his death included an IRA worth $120,000, stock of Intel Corp. worth $640,000 and having a basis of $75,000, a life insurance policy (over which the taxpayer had retained the power to surrender or cancel the policy) with a face value of $100,000, payable upon his death to his wife, and a savings account with a balance of $42,000.
Liabilities of the deceased at his death included credit card balances totalling $12,500 and the $150,000 mortgage on his home. Funeral expenses were $10,000, and administration expenses were estimated to be approximately $50,000. The deceased died testate, his Will providing that proceeds of the IRA and the $42,000 bank account were to be distributed to his wife, and the Intel stock was to be divided equally between his children. The Will also named the children as the residuary legatees of the estate.
The first step in calculating estate tax liability is to determine the gross estate. The gross estate includes, but is not limited to all property over which the taxpayer held legal title at the time of his death. Therefore, even though the deceased may not have held title to the insurance policy at his death, since he had retained “incidents of ownership” over the policy, the Code stipulates that it must be included in his gross estate. In addition, for purposes of calculating the gross estate, one-half of all property held in joint tenancy with one’s spouse is included in the gross estate, irrespective of who may have supplied the consideration.
The sum of the date-of-death fair market values of the IRA, the Intel stock, the life insurance policy (face value is deemed to be date-of-death value), the savings account, and one-half of the date-of-death value of the two homes (net of mortgage for the Cold Spring Harbor home), is $1,177,000. This represents the value of the gross estate. Since the value of the gross estate exceeds $600,000, an estate tax return must be filed, irrespective the amount of estate taxes, if any, that may ultimately be determined to be owing.
Certain reductions may be taken from the gross estate in calculating the taxable estate. Thus, the outstanding credit card balance, as well as funeral and administration expenses will work to reduce the gross estate by $72,500. The estate may also take a marital deduction for all property that “passes” to the taxpayer’s wife at the time of death. This includes the proceeds of the insurance policy, the IRA account, the bank account, and one-half of the date-of-death value of the homes. These deductions total $537,000, and when added to the $72,500 reductions described above, result in a $609,500 reduction in the gross estate, resulting in a taxable estate of $567,500.
The next step involves calculating the estate tax base, which is the sum of the taxable estate and adjusted taxable gifts, which consist of taxable gifts made after 1976. The 1992 gifts of cash and stock to the children constituted taxable gifts of $220,000, rather than $260,000, since $20,000 of each gift qualifies for the split-gift annual exclusion of $20,000. After making this upward adjustment, the estate tax base is determined to be $787,500. After calculating the estate tax base, the tentative estate tax liability of $262,175 may be determined by reference to tax tables in the Code. After application of the above unified credit of $192,800, and the $12,700 credit for state death taxes (also determined by reference to tax tables in the Code) one arrives at an estate tax payable of $56,675.
(To prevent lifetime taxable gifts from being taxed twice, a reduction in tentative tax liability is permitted for taxes previously paid on those gifts. No reduction occurred in this instance because no taxes were paid on the 1992 gifts. No taxes were paid since the taxable portion of the sum of these gifts did not exceed the $600,000 exemption equivalent for lifetime and testamentary transfers.)
Note that all property acquired from the deceased takes a basis equal to its date-of-death value. Thus, the children could decide to sell the Intel stock immediately without incurring any capital gains tax. With respect to the basis of the homes, one-half of the surviving spouse’s basis in each home is stepped-up to its fair market value. However, the basis of the other half is determined without reference to the deceased, and therefore does not receive a basis step-up.
Note also that all property passing to the surviving spouse and qualifying for the marital deduction must be included in the spouse’s estate, unless consumed by her during her lifetime. If the spouse’s estate appeared to be exceeding $600,000, she might “consume” the summer home by selling it, and then by making annual gifts to her relatives qualifying for the $10,000 annual exclusion.
Section 971(a) of N.Y. Estate Tax Law establishes a filing threshold of $115,000; taxable estates worth more than this amount must a N.Y. Estate Tax Return (ET-90). In order to avoid interest and penalties, 90% of the N.Y. estate tax owed must be paid within 6 months and the balance within 9 months.
Section 952(b) of the N.Y. Estate Tax Law now allows a N.Y. unified credit of $2,950, which is equal to the tax owed for a taxable estate of $115,000. The $2,950 credit is not as generous as it seems: if the N.Y. tentative tax is between $2,750 and $5,000, the N.Y. unified credit is equal to $5,500 less the N.Y. tentative tax. If the N.Y. tentative tax is $5,000 or more, the N.Y. unified credit is only $500.
IRC Sec. 2011(a) does provide that a federal estate tax credit is allowed for estate taxes actually paid to any state with respect to property that is included in the decedent’s gross estate. The amount of the federal credit is based on the “adjusted taxable estate,” which is the taxable estate for federal purposes less $60,000.
For taxable estates worth more than $600,000, the credit for state taxes allowed on the federal estate tax return will generally assure that no additional taxes are incurred by reason of the imposition N.Y. State estate tax. However, no federal taxes are due for taxable estates under $600,000. Therefore, a taxable estate of $400,000 would owe N.Y. State estate tax, but would be unable to utilize the federal credit since no federal estate taxes would be owing.
This disparity, the result of the less generous N.Y. unified credit, is somewhat mitigated by a new provision in N.Y. Estate Tax Law which provides that estates may now deduct the value of the individual’s principal residence, up to $250,000, in determining the N.Y. State estate tax. Thus, a taxable estate of $500,000, consisting in part of a $250,000 principal residence of the deceased would now owe only $7,500 in combined federal and N.Y. State estate taxes, rather than the $19,500 which would have been previously owed.