A threshold issue an executor or trustee must resolve is whether an estate tax return is required. If so, the return must be filed (and the tax must be paid) within nine months of the decedent’s death, although the filing date can be extended for six months.
In general, an Oregon estate tax return (Form OR 706) must be filed if the decedent’s wealth exceeds $1M. The threshold for a Washington estate tax return is $2M. The return must be filed even if no tax is due. Only one-half of property held jointly with a spouse is counted toward these thresholds. The Oregon and Washington estate tax rates start at 10% on the excess over the respective thresholds.
The federal estate tax return (Form 706) must be filed if the estate is over $5.34M. (Keep in mind that for federal purposes “taxable gifts” over the $14,000/person/year limit are counted toward the $5.34M.) However, if there is a surviving spouse, there may be a tax benefit to filing Form 706 even if the decedent’s estate is less than $5.34M. The reason is “portability” of the $5.34M exemption. Provided the Form 706 is timely filed when the first spouse dies, his or her unused exemption passes to the surviving spouse. See IRC § 2010(c)(4). This will vest the surviving spouse with an exemption of $10.68M, instead of the usual $5.34M exemption. If Form 706 is not filed upon the death of the first spouse to die, none of the decedent’s exemption carries over to the surviving spouse. See IRC § 2010(c)(5)(A).
Example: Decedent and surviving spouse each hold $5M of wealth, for a total of $10M. Under decedent’s will, everything passes outright to the surviving spouse. If a 706 is filed for the decedent, the surviving spouse will have an exemption of $10.68M at her death, and the federal estate tax at her death will be zero. But if a 706 is not filed for the decedent, the surviving spouse will have only a $5.34M exemption, and the federal estate tax on her death (on $10M) will be roughly $1.9M. That’s a big difference that hinges on a single tax return!
In summary, a Form 706 should be filed when the first spouse dies unless the spouses’ aggregate wealth (grossed up by taxable lifetime gifts) is so far below $5.34M that the possibility of a federal estate tax at the surviving spouse’s death is remote.