Federal and Maryland Estate Tax Returns

For large estates, a key aspect of the administration process is the preparation of the Federal Estate and Generation Tax Return - Form 706. This is a return that is complex, but various tweaks and reporting techniques and careful planning can engender significant reduction of federal estate taxes. There are many elections that could dramatically cut your estate tax bill. Indeed, key elements of the return are the valuation of assets, particularly the valuation of closely-held business interests, and the allocation of those assets to the appropriate trusts. Our office is keenly aware of this and as part of proactive planning, we work with qualified appraisers who could provide the appropriate valuation of assets with appropriate “discounts” for minority or non-controlling interests or where there is a lack of marketability. However, one must recognize that there are times when a higher valuation is desired (for instance, to obtain a new high basis in a non-taxable estate). These are all issues that need to be evaluated before preparing and filing the 706. This is a return that has a high frequency of audit and one should prepare the return in a sophisticated and complete manner to ensure that it is as “audit proof” as possible.

The Maryland Estate Tax Return (Form MET-1) is largely based upon the federal return. This return, however, must be coordinated with the payment of Maryland inheritance tax (since there is an overlapping credit between the Maryland death tax and the Maryland inheritance tax). The Maryland return has become very significant after 2004 due to the new “decoupled” Maryland estate tax, which could result in Maryland estate tax for estates over $1,000,000, even where there would be no federal estate tax due. The new "Maryland State-only QTIP" election has further made this return critical in order to effectively avoid the payment of a Maryland estate tax upon the death of the first spouse.

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