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Virginia Estate Tax Return

The passing of a loved one is often a very difficult time. There are suddenly many factors to worry about, matters to take care of, and responsibilities to uphold. This can be an incredibly difficult task, especially in a time of grief and mourning. It is essential to enlist the aid of an experienced estates attorney to provide you with the guidance and comfort you need in dealing with your loved one’s assets moving forward.

Defining an Estate Tax Return

The estate tax, in general, is a tax on the right to leave the property at the death of an individual. It is just one of the many tax systems that are applicable at an individual’s death. Virginia repealed its state estate tax for the estates of decedents who died after July 1st, 2007. For individuals that died before July 1st, 2007, there may still be an estate tax return due.

There is a federal estate tax that may be applicable regardless of the state that an individual resided or owned property in. The federal estate tax currently has a $5,450,000 filing threshold or exemption, and that amount is indexed for inflation every year from $5,000,000. In the coming years, it will continue to increase.

For individuals that are residents of Virginia who don’t own real estate in any other jurisdiction, they may not be required to file a Virginia estate tax return. These individuals, however, may still be subject to the federal estate tax. In addition, sometimes, individuals in Virginia own real estate in bordering jurisdictions such as the District of Columbia, or Maryland. Both local jurisdictions currently have their own estate tax system which only protects estates at a much lower limit from the federal estate tax.

Due Date

Virginia repealed its estate tax with legislation that was enacted in 2006 for any death that occurred on or after July 1st, 2007. For many individuals, there is not a requirement to file a Virginia estate tax return. However, a federal estate tax return, which is a separate taxing system, may still be due. Federal estate tax returns are due nine months from the date of death, and the filing exemption or the filing threshold for a federal estate tax return is $5,450,000. Although you can request a six-month time extension from the IRS, that extension and the time to pay the estate taxes is not available.

Included Assets

For federal estate tax returns, the assets that are included are all the assets in the control of a decedent on the date of death, regardless of the titling or the beneficiary designation. All assets such as real estate, life insurance, annuities, IRAs, retirement proceeds, vehicles, tangible personal property, and any items that belong to the decedent on the date of death are valued. If the value of the assets exceeds the filing threshold for the year in which the decedent died, then an estate tax return may be due. This, however, does not necessarily mean that estate taxes are due.  The current maximum federal estate tax rate is 40%.  Where estates are taxable, the tax liability could be substantial.

It is a common misconception that life insurance is not includable or taxable for estate tax purposes. That is not the case, as life insurance policies are also included in the valued assets that determine the market value for a decedent’s taxable estate.

It should be noted that a taxable estate often differs from a probate estate.  While a taxable estate includes all assets in a decedent’s control on the date of death, a probate estate only includes those assets in a decedent’s sole name with no joint owner or beneficiary designation.

Valuing Assets

Depending on the nature of the assets, they are valued as of the market value as of the date of death. However, the calculation may differ depending on the type of asset, which is dependent on any IRS requirements or procedures. Generally, for real estate and tangible items, they are appraised by a licensed appraiser who provides an appraisal of the date of death value of the assets. For bank accounts or other cash accounts, the date of death value would be the amount of cash valued. For other assets, such as stocks or mutual funds, the calculation is slightly different depending on the nature of the investment. The nature of the investment would determine the calculation for providing the market value of the asset as of the date of death.

Necessary Documents

Virginia repealed its estate tax in 2006 for any decedents, or any individuals dying after July 1st, 2007. An estate tax return for any individuals that passed away after 2007 would not be due to the state of Virginia. However, it is possible that a federal estate tax return would be due. If a return was due, then some of the items that would be included would be any supporting documentation to support the market value of assets, a copy of the death certificate, a copy of the last will and testament and trusts, if any, and any documentation regarding funeral expenses. The preparation of a federal estate tax return (Form 706) can be complex. Unlike some individual income tax returns, often the federal estate tax return involves complex elections, calculations, and valuations.

Further Tax Returns

There may be other Virginia state estate tax returns that an executor or administrator may need to consider. At an individual’s death, there are a few taxing systems at play depending on where an individual passed away or owned property. The first is an estate tax, but it is a tax on the right to leave assets. The next is an inheritance tax, which is a tax on the right to receive assets. The third is income tax, which, of course, would be applicable for individuals, both personally for their final income tax return, and for the estate or trust on a fiduciary income tax return. Virginia has a probate tax that has to do with the time of filing, which is based on the value of the probate assets and operates as probate fee. Virginia does not collect an inheritance tax, but other local jurisdictions, such as Maryland, do collect inheritance tax.