Knowing When an Estate is Required to File a Tax Return

In our previous issues, we have been following the Ashby family in order to address various issues that arise when a family member passes away.
When we last left Jillian Ashby, she was compiling a list of the estate’s assets (i.e. any assets that William owned individually, jointly, in trust, etc.), debts and expenses as of his date of death. This will determine if the estate is required to file any state or federal death tax returns.
A question that arises is, “How do I know if the estate is required to file a state or federal estate tax return?” For federal estate tax purposes, an estate is required to file an estate tax return if the decedent’s gross estate (plus adjusted taxable gifts) is worth $2,000,000 or more. In determining the value of the gross estate, Jillian should inventory every asset that William owned (either individually, jointly, in trust, etc.) as well as their values as of his date of death. This includes, but is not limited to, cash and securities, real estate, insurance, certain trust assets, annuities, retirement accounts, business interests, etc. An estate is required to file a New Jersey estate tax return, if the value of the decedent’s gross estate exceeds $675,000. In addition, New Jersey also imposes an inheritance tax on assets that pass to someone other than a spouse or a lineal ascendant or descendant. This will necessitate the filing of a New Jersey inheritance tax return.
When are these returns required to be filed and what happens if Jillian does not have all of the information ready by the due date? New Jersey and federal estate tax returns must be filed within nine months of William’s passing. If required, the New Jersey inheritance tax return is due eight months after the date of death. In addition, if William owned any real property in New York, a New York estate tax return must also be filed within nine months after the date of death. Extensions may be obtained for each of these returns; however, it should be noted that the extensions do not extend the time to pay any estate/inheritance tax due but only extends the time to file the returns.
Families always ask if there are any other tax filing requirements? William’s estate is now a separate income taxpaying entity and will be required to file annual federal fiduciary income tax returns, if income exceeding $600 each year is generated from estate assets. There may also be state fiduciary income tax return filing requirements depending upon the amount of estate income earned.
Once the death tax returns have been filed, how long can Jillian expect to wait before hearing from the Internal Revenue Service and the State of New Jersey? Generally, the taxing authorities have three years from the date the return is filed to examine it. Practically speaking, the taxing authorities will either accept the return as filed and issue a closing letter or select the estate for examination and this usually occurs approximately nine to twelve months after filing.
One predictable question asked is when can the estate assets be distributed? Generally, distributions should not be made until the estate has received clearance and tax waivers from all taxing authorities. In many circumstances; however, it may be appropriate for partial distributions to be made prior to receiving tax clearance. Special consideration must be given to the distribution of assets such as annuities, pension plans and other retirement assets as there may be adverse income tax consequences from delayed or premature distributions.
The administration of an estate raises many more issues than clients realize. There may be complex estate and income tax issues, distribution issues, valuation issues as well as complicated family dynamics that need to be addressed along with many other legal and non-legal issues that arise during estate administration. Jillian and those in her situation should enlist the aid of competent and experienced estate administration counsel in order to be guided through this process.