Delaware Estate Tax

Even if the estate you’re handling isn’t large enough to owe federal estate tax, it might need to file a separate Delaware estate tax return. For deaths in 2011 and 2012, estates with a total value of more than $3.5 million are subject to the state estate tax.

Which Estates Must File

If the gross estate of a Delaware resident has a value of more than $3.5 million, the executor must file a state estate tax return. (Federal estate tax returns are required only for estates worth more than $5.12 million, for deaths in 2012.)  The estate may not end up owing state taxes; certain items can be deducted from the gross estate (for example, certain farmland), and the taxable estate may be too small to owe tax.

It’s not just state residents who may owe Delaware estate tax. The estate of a nonresident may also need to file a Delaware estate tax return, if the person owned valuable real estate in Delaware or kept other tangible assets in the state.

Adding Up the Gross Estate

To determine whether or not a Delaware estate tax return is required, add up the value of the deceased person’s gross estate. Be sure to include:

• Real estate
• Bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Vehicles and other personal property kept in the state
• Proceeds from life insurance policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (sole proprietorship, limited liability company, or small corporation)

If any assets were owned with someone else, count only the value of the deceased person’s interest. For example, if the deceased person owned a house with her husband, include half of its value. If, however, property was owned in joint tenancy with someone else, then include the total value except for funds that the other person contributed.

Also include these assets:

• Taxable gifts made during life. If the deceased person made taxable gifts (more than the annual exclusion amount, which is currently $13,000 per year per recipient), then add the taxable amount of those gifts to the value of the estate.
• Some transfers made fewer than three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, you must include the value of the policy in the estate. 
• Assets held in a trust. The value of assets the deceased person held in a revocable living trust or other trusts the deceased person controlled is included in the taxable estate.

No ‘Portability’ Provision for Delaware Couples

Federal law currently allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up all of his or her entire $5 million federal estate tax exemption, then the second spouse’s estate can use the unused portion of the first spouse’s exemption amount. This is called the “portability” provision. It will expire at the end of 2012 unless Congress extends it.

Spouses cannot share their individual estate tax exemptions for Delaware estate tax purposes. All property left to a surviving spouse is, however, exempt from state estate tax.

Filing the Estate Tax Return

The executor must file the Delaware estate tax return (Form 900-R for residents) and pay any tax due nine months after the date of death. After that date, interest begins accruing on any unpaid amounts. You can apply for an extension for filing and for paying the tax. If you’re filing a federal estate tax return and get an extension for filing that one, it applies to the state return as well, as long as you give a copy of your federal extension to the Delaware Division of Revenue.

If you’re also filing a federal estate tax return (IRS Form 706), attach a copy of that return when you file the Delaware return.

Delaware estate tax return forms and instructions are available on the website of the state’s Division of Revenue. You can download the return or fill it in online.

Help With Preparing Estate Tax Returns

Preparing a federal or Delaware estate tax return, both of which are long and complicated, requires the help of an expert. Hire a lawyer or CPA who has lots of recent experience with Delaware estate tax returns and procedures; the fee, which can be paid from estate assets, will be worth it.