Critter Corner: Farr Law Firm Now Filing Estate Tax Returns and Gift Tax Returns — What You Need to Know

Dear Oakley,

My father died last year at the age of 95, and my mother is still alive, but she’s in an assisted living facility suffering from pretty significant memory loss. I’m wondering if you can tell me whether I need to file an IRS Form 706 Estate Tax Return, and if your firm helps with preparing and filing this return if it is necessary.

Also, my spouse and I set up an irrevocable Living Trust Plus Asset Protection Trust with your firm last year, and we of course have transferred our house and our brokerage account into the trust, but we haven’t filed a 709 Gift Tax Return. Do we need to? And if we do need to, can your firm do this for us? Thanks for your help!

Taks Tyme

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Dear Taks,

I’m very sorry to hear about your loss.

If you’re the executor of your father’s estate or trustee of his trust, you may be required to file a federal estate tax return (and some states have their own estate tax return) and federal and state income tax returns for his estate. The Farr Law Firm can now prepare and file all of these tax returns for you.

When Is Form 706 Filed?

There are two reasons for an estate tax return, IRS Form 706, to be filed:

1. An estate tax return is required if the gross estate of the decedent is valued at more than $11.7 million for 2021, looking at the full financial picture including real estate, brokerage accounts, IRAs, etc. This $11.7 million is a very high exemption equivalent amount, so for the most part, it doesn’t apply to the average person at all. But that is very likely to change as of tax year 2026, when the exemption equivalent amount is scheduled to revert back down to 2016 levels, which will mean about $6 million per person (adjusted for inflation) if Congress does not take additional action to prevent this change or accelerate this change.
2. For married couples, it is also very important to file an estate tax return upon the death of the first spouse to die when the surviving spouse believes that he or she may have a potentially taxable estate when they pass in the future. Even if the executor is not obligated to file an Estate Tax Return, an IRS Form 706 should be filed to elect a portability exclusion, which allows the decedent’s surviving spouse to take advantage of the deceased spouse’s unused exclusion amount under Code Section 2010(c)(5)(A). To make this election, the executor must file a Form 706 Estate Tax Return for the decedent’s estate. For example, let’s look at an example of a married couple who have a combined estate of $7 million, roughly $3.5 million each. If one spouse were to die in 2022, there’s no requirement to file an estate tax return because the decedent’s estate is well under $11.7 million. However, if the surviving spouse lives past 2026, when the exemption equivalent amount is scheduled to be reduced to approximately $6 million per person, then the surviving spouse will most likely wind up having a taxable estate in excess of the $6 million exclusion. For this reason, the executor would want to file an estate tax return upon the death of the first spouse simply to claim the portability exclusion, allowing the surviving spouse to take advantage of the deceased spouse’s unused exclusion amount, meaning that when the second spouse dies, the second spouse will be able to use both $6 million exclusions, therefore excluding a total of $12 million and hopefully avoiding paying any estate tax on the death of a second spouse.

When Do You Need to File a Gift Tax Return for Lifetime Gifts?

For gifts to individuals: Annual gifts in excess of $15,000 per recipient for gifts in 2018-2021 are potentially taxable and therefore require a Gift Tax Return to be filed. This amount has gone up to $16,000 starting in 2022. If such potentially taxable gifts were made, the excess over the applicable threshold for the year of the gift is added to the estate upon death to see if the estate tax exemption ($11.7 million for 2021) is surpassed. If it is, there’s a 40 percent federal estate tax on the excess.

For Gifts to Your Living Trust Plus Asset Protection Trust: When you transferred your house and your brokerage accounts into your irrevocable Living Trust Plus Asset Protection Trust, that was the equivalent of an incomplete gift to the ultimate beneficiaries named in the trust. The IRS considers it an incomplete gift until such time as those assets are actually transferred from the trust to the beneficiaries of the trust. However, even though it is an incomplete gift, the IRS still requires a gift tax return showing the gift, along with an explanation that these are incomplete gifts and therefore should not be looked at as completed gifts upon your death and possibly counted twice as part of your total estate.

Can the Farr Law Firm Help with All These Confusing Tax Returns?

Yes, all of the above is very confusing, and this is why the Farr Law Firm is now offering to file these informational gift tax returns for our Living Trust Plus clients. At the Farr Law Firm, we are now offering to prepare and file tax returns for our clients, including 706 estate tax returns and 709 gift tax returns, as well as 1041 income tax returns for estates and for irrevocable trusts after death, as well as 1041 income tax returns and grantor trust statements and 1040s as discussed in today’s Everything Elder Law newsletter. No-cost initial tax consultations are being offered, so please call the office to schedule your appointment as soon as possible, before time slots are filled.

Hope this helps,

Oakley