Federal estate tax returns (Form 706) are due nine months after the date of death, though a six-month extension is available if requested before the due date. Filing late without an extension can result in penalties and interest. The penalty for late filing is 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%. Additionally, interest accrues on unpaid tax from the due date until payment. Critically, to elect portability of a deceased spouse’s unused exemption, the estate tax return must be filed timely (with extensions), even if no tax is due. Failing to file timely can result in the permanent loss of the deceased spouse’s unused exemption, potentially costing millions in future estate tax savings.

The SECURE Act of 2019 substantially changed estate planning for retirement accounts by eliminating the “stretch IRA” option for most non-spouse beneficiaries. Previously, beneficiaries could stretch distributions (and associated income tax) over their lifetimes. Now, most non-spouse beneficiaries must withdraw the entire inherited retirement account within 10 years of the owner’s death, potentially increasing both income taxes and estate taxes. This acceleration of distributions can push beneficiaries into higher tax brackets and requires rethinking legacy planning for retirement assets. For larger estates with substantial retirement assets, strategies might include Roth conversions during life, using charitable remainder trusts as beneficiaries, or spreading assets among multiple beneficiaries to minimize tax impact. Life insurance held in an Irrevocable Life Insurance Trust (ILIT) can also provide tax-efficient replacement for retirement assets that will face both income and estate taxation.

Estate tax treatment varies significantly depending on citizenship and residency status. Non-resident aliens (non-citizens who don’t live in the US) are only subject to US estate tax on their US-situated assets, but with a much lower exemption amount of just $60,000. Assets potentially subject to tax include US real estate, tangible personal property located in the US, and US securities. For non-citizen spouses, the unlimited marital deduction is not automatically available. However, specialized planning using a Qualified Domestic Trust (QDOT) can defer estate taxes until the surviving spouse’s death or earlier distributions of principal. US citizens living abroad remain subject to US estate tax on their worldwide assets, though foreign tax credits may help prevent double taxation. For “resident aliens” (green card holders or those meeting the substantial presence test), the rules generally mirror those for US citizens, including the full exemption amount. International estate planning is particularly complex and should be addressed with advisors experienced in cross-border planning.

Life insurance serves multiple critical functions in estate tax planning. First, it can provide liquidity to pay estate taxes without forcing the sale of illiquid assets like businesses or real estate. Second, when properly structured through an Irrevocable Life Insurance Trust (ILIT), the death benefit can remain outside the taxable estate while still being available to beneficiaries. This allows for tax-free “replacement” of wealth lost to estate taxes. For business owners, life insurance can fund buy-sell agreements, ensuring business continuity while providing liquidity for estate taxes. Premium financing arrangements may help fund large policies for substantial estates. Second-to-die (survivorship) policies, which pay out after both spouses have died, can be particularly cost-effective for estate tax funding since the largest tax bill typically comes after the second death. The tax arbitrage potential of life insurance—leveraging premiums into a tax-free death benefit outside the taxable estate—makes it a cornerstone strategy for many taxable estates.

The distinction between revocable and irrevocable trusts is crucial for estate tax planning. A revocable trust (also called a living trust) provides no estate tax benefits because the grantor retains complete control—assets in the trust remain part of your taxable estate. The primary benefits of revocable trusts are probate avoidance and incapacity planning, not tax savings. In contrast, irrevocable trusts can provide significant estate tax benefits because they involve permanently transferring assets out of your ownership and control. When properly structured and administered, assets transferred to an irrevocable trust (and any future appreciation) can be removed from your taxable estate. However, this comes with a tradeoff—you generally cannot change the trust terms or reclaim the assets. Various types of irrevocable trusts serve different planning purposes: Irrevocable Life Insurance Trusts (ILITs) keep insurance proceeds out of the taxable estate; Grantor Retained Annuity Trusts (GRATs) transfer appreciation with minimal gift tax cost; and Charitable Remainder Trusts combine income streams with eventual charitable benefits. Each type has specific rules and requirements that must be carefully followed to achieve the intended tax benefits.