5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due)

Your spouse recently died leaving all her assets to you. Your attorney has assured you that no estate tax is due, but you still need to file an estate tax return. Do not overlook the importance of filing the return. It may save your family millions in estate taxes after your death.

The estate tax is a one-time tax due nine months after someone dies if their assets reach certain thresholds. The federal threshold in 2023 is $12,920,000. Many states have their own estate tax with thresholds ranging from $1 million in Oregon and Massachusetts to $12,920,00 in Connecticut. Your lawyer can advise you as to which of your assets are included in calculating this amount. For instance, many people are surprised to learn that their life insurance proceeds will be taxed on their death (unless the policy is owned in an irrevocable trust).

If you leave all your assets to your surviving spouse, no estate tax is due because of something called the unlimited marital deduction. You get a deduction for the monies you leave to your spouse and that deduction is unlimited. You can leave any amount to your surviving spouse free of estate taxes whether it is $1 or $100 million. So, if you have $50 million and you leave it all to your spouse, there is no estate tax due. Nevertheless, you may still be required or advised to file a return. Here’s why.

• It’s the law. If the value of your estate assets when you die reach the threshold (before the deductions apply), you must file an estate tax return even if the deductions bring you below the filing threshold.

• Trust administration. If you have done estate planning with your spouse, she most likely has a trust that will break down into various sub-trusts upon her death. As the surviving spouse, you will need to fund those trusts and apportion assets to them through the estate tax return. The estate tax return establishes the value of what those trusts are funded with.

• Critical tax elections. When you file an estate tax return for your spouse, you will make certain elections that will determine what assets are included in your estate when you die.

• Tax savings for your heirs. If your spouse has not used all of his $12,920,000 exemption, you can lock in his unused portion and port it to your estate tax return when you die. This portability of the deceased spouse’s unused exemption could save your children millions in estate taxes down the road. The combined exemption for two spouses is currently $25,840,000, and the federal estate tax rate can be as high as 40%. By locking in your spouse’s unused exemption, you can save over $5 million in estate taxes that will be due on your death. Also, even if your assets are not in the $12 million to $25 million range, it is still beneficial to lock in your spouse’s unused exemption because your assets could increase in value, or the estate tax thresholds could lower (which they are scheduled to do in 2026 when the federal estate tax exemption drops to $5 million adjusted for inflation unless Congress acts to change that).

• More tax savings for grandchildren. If your spouse has not used up all her generation- skipping transfer tax (GST Tax) exemption, you can also lock in her remaining GST Tax exemption. The GST Tax is a 40% tax on assets if you “skip” your children and leave assets directly to your grandchildren or in a trust that will eventually distribute to them. The amount of GST Tax exemption that every person has is the same as the estate tax exemption amount, $12,920,000 per person in 2023. This often leads people to think that they are the same tax, when they are actually two separate taxes. When you die, your estate could be subject to a 40% estate tax (for assets over $12,920,000), and then the assets could be subject to a 40% GST Tax if the assets are distributed to grandchildren. For that reason, it is important to pay attention to the GST Tax. By locking in your deceased spouse’s unused GST Tax exemption, you will be able to leave more monies to your grandchildren whether outright or in trust.