Written by: Christopher N. McGann, Esq.

Filing the United States Estate and Generation-Skipping Transfer Tax Return form, Federal Form 706, is not just reserved for those decedents whose gross estate (calculated as gross assets plus lifetime taxable gifts) is greater than the lifetime exclusion amount (currently $11,700,000.00). There are a number of practical considerations, however, that may make filing a Form 706 beneficial, if not almost obligatory. Here are some examples to consider.

Let’s start with the most common and well-known reason: electing “Portability.” Since 2011 federal law permits the surviving spouse to use the deceased spouse’s unused lifetime exclusion amount. On Form 706, this unused exclusion is referred to as the “Deceased Spousal Unused Exclusion or DSUE.”  For example, if husband dies with a gross estate of $5 million, by electing Portability, his wife’s estate will, if Form 706 is filed after his passing, automatically be entitled to add the unused $6.7 million ($11.7 million – $5 million) of husband’s exclusion to whatever the exclusion amount wife has when she passes.  It is tempting for the surviving spouse to think, “I will never have that much money so why bother.” Such thinking is misguided because a.) the current exclusion amount will revert to the pre-Tax Cuts and Jobs Act level of $5.5 million, adjusted for inflation, at the end of 2025, absent Congressional action; and b.) President Biden has already made it well known that he wants to substantially reduce the exclusion amount sooner, and perhaps as low as $3 million. The foregoing is illustrative of the fluidity of tax laws and the importance of taking advantage of generous provisions when they exist. Considering the current federal estate tax rate is a flat 40% of the value of all assets above the exclusion threshold, deciding to forego electing Portability could prove extremely costly.

Another benefit to filing Form 706 is the identification of the value of the assets in the estate of the first spouse to die for cost basis purposes. Under current federal law, at the time of a person’s death, the value of most assets (pre-tax, retirement accounts being the most notorious exception) are “stepped up” from the original cost basis or acquisition cost to their fair market value at the time of the person’s passing. This is an opportunity to determine the original basis, which sometimes can be problematic. Consider stocks purchased decades ago before a company underwent multiple permutations in structure and/or name changes. Determining original cost basis could prove challenging, making time of death an opportune time to fix the value of these long-held assets. The Executor of the estate of the surviving spouse will be more than grateful since the values listed in the Form 706 also act as a placeholder, basis wise, where documentation is ambiguous or has been lost or destroyed after the surviving spouse dies.

As a corollary to the above, filing the 706 may also be advantageous to establish the value of an asset which is difficult to value or lacks an easily identifiable market at the time of the death of the first spouse. For example, if an owner of a business structured as an S-Corporation dies, it may be beneficial to not only the heirs, but any other remaining business owners (oftentimes family members themselves) but the surviving shareholders to have a value determined and accepted by the IRS. Not only can the heirs make an informed decision, but for the Estate attorney, this could lead to further estate and business succession planning.

Finally, a handful of states which still have a separate state estate tax, require a Form 706 to be prepared and filed with the state estate tax return even if no federal estate tax is owed. Notably, except for Pennsylvania virtually the entire northeast made the list.

If you or a loved one think it may be necessary to have a Form 706 prepared, contact us and we would be happy to assist you.