Many Unhappy Returns: Estate Tax Returns of Married Decedents

27 Pages Posted: 24 Jun 2002 Last revised: 28 Dec 2014

See all articles by Richard Schmalbeck

Richard Schmalbeck

Duke University School of Law

Jay A. Soled

Rutgers University

Abstract

Estates of U.S. decedents face an estate-tax filing requirement that is based exclusively on the size of the adjusted gross estate ("AGE"). If the AGE exceeds the threshold that applies in the year of the decedent's death $1,000,000 in 2002 a return must be filed, whether or not any estate tax is owed.

This is not a trivial obligation. The federal estate tax return - IRS Form 706 - includes 21 schedules, and covers 44 pages. It comes with 25 pages of instructions. Unsurprisingly, it is almost invariably prepared by accountants or lawyers, at considerable expense to the estate. The time taken to prepare and defend the return also significantly adds to the time required to effect distribution of the net estate.

Such burdens should not be lightly imposed; but in fact the authors believe that Congress has done exactly that. When Congress amended the estate tax in 1981 to permit an unlimited marital deduction, it dramatically lowered the likelihood that the estate of a married decedent would owe any estate tax. Congress might have guessed that this would lead to a very low incidence of estate tax on estates of married decedents, but it did nothing to alter the filing requirements.

Most married couples can and do take advantage of the unlimited marital deduction to eliminate all or most of the estate tax liability they might otherwise face. Proof of this assertion can be found in the IRS statistics on estate tax liabilities. In recent years, among estates of married decedents whose AGE exceeded the filing threshold, only about one out of seven actually had any net estate tax liability. The other six of seven estates were subject to a burdensome filing obligation merely to demonstrate that no tax was owed.

The authors' proposal is simple: that estates of married decedents should only be required to file returns if the executor determines that the estate has an estate tax liability. The only exception to this rule would be that estates of decedents whose surviving spouses were not U.S. citizens would continue to be subject to a filing requirement based on the size of the AGE, due to the complexities of the marital deduction in those cases.

The authors consider several objections to their proposal. They note that even returns that show no tax liability serve the useful purpose of providing the IRS an opportunity to review determinations made by the executor that particular bequests qualified for the marital deduction. However, this argument lacks force in a system that imposes no general obligation to file estate tax returns; the vast majority of estates - some 95% - do not file returns because the executor has determined that the size of the AGE falls below the filing threshold. As in other areas of the tax system, the estate tax has always depended on a high level of voluntary compliance, backed up by the availability of serious sanctions for willful or negligent failures to file.

Other objections are also considered, but each is found insufficient to justify imposition of filing burdens on a category of returns that will turn out to be mostly non-taxable. In the end, eliminating the automatic filing requirement for married decedents with AGE's over the filing threshold would lessen both private compliance costs and government enforcement costs, without significant risk to the fisc.

Suggested Citation

Schmalbeck, Richard L. and Soled, Jay, Many Unhappy Returns: Estate Tax Returns of Married Decedents. Virginia Tax Review, Vol. 21, P. 361, 2002, Available at SSRN: https://ssrn.com/abstract=317139

Richard L. Schmalbeck (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7078 (Phone)
919-613-7231 (Fax)

Jay Soled

Rutgers University ( email )

1 Washington Park
Newark, NJ 07901-1825
United States
(973) 353-1727 (Phone)

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