DC Estate Tax Return: Should You File When Assets Are Less Than $1 million?

Generally, Washington DC residents who die owning assets worth more than $1 million must file a DC estate tax return, Form D-76.

The instructions to Form D-76 state that “(a) DC Estate Tax Return (Form D-76 or Form D-76 EZ) must be filed when the gross estate is $1,000,000 or more, even if the Federal Estate Tax Return (IRS Form 706, for individuals dying in 2002 and thereafter) is not required to be filed.”

But what should you do if you are serving as personal representative (“PR”) and the estate’s assets are close to but less than $1 million.  For example, what should you do if your estate has assets that equal $995,000?

Many estate lawyers, including our firm, recommend that in such cases, PRs should consider filing a Form D-76 even though the estate’s assets are below $1 million.  The reasons are as follows.

First, sometimes estates discover assets after the estate tax return has been filed, which cause the estate’s assets to exceed $1 million and triggers a DC estate tax return filing requirement.  If a D-76 has been filed, it can be amended and the estate will have avoided a failure to file penalty.  If a D-76 has not been filed, a failure to file penalty may be incured by the estate.

The failure to file penalty equals “(a) penalty of 5% per month or any fraction of a month up to a maximum of 25% of the unpaid portion of the tax due.”

Second and similarly, if the valuation of estate assets were to be challenged successfully, by filing the PR would avoid failure to file penalties if the value is increased on audit.

Practice Pointer.  Sometimes PRs, for purposes of determining whether their estates have exceeded the $1 million D-76 filing threshold, subtract selling expenses from the fair market value of all estate assets to arrive at a “gross estate” amount.  That is an incorrect analysis.  The D-76 instructions state that a D-76 must be filed when the gross estate (i.e., the fair market value of the estate’s assets before taking into account any deductions) exceeds $1 million.  Therefore, if the gross estate exceeds $1 million, the PR must file a DC estate tax return.

Practice Pointer.  When the decedent was married, the PR should always consider filing federal estate tax return in order to make a portability election.