Form 706

Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, is a tax form used by the Internal Revenue Service (IRS) to assess the estate tax on the transfer of assets upon the death of a person. The form is also applicable to the generation-skipping transfer (GST) tax, which is a tax on the transfer of assets to a beneficiary at least two generations younger than the decedent, such as a grandchild.

Purpose of Form 706

The primary purpose of Form 706 is to report the value of the decedent’s estate, along with any deductions, credits, and the resulting estate tax owed. The form ensures that the federal government collects the appropriate amount of tax from large estates before the remaining assets can be distributed to the beneficiaries.

Who Needs to File Form 706?

Form 706 is required to be filed by the executor of the deceased’s estate if the gross estate, plus any adjusted taxable gifts and specific exemptions, exceeds the basic exclusion amount, which varies by year. The filing threshold for Form 706 is set to adjust for inflation annually.

As of the latest data available in 2023, the basic exclusion amount is $12,920,000 per individual. If the value of the decedent’s estate exceeds this threshold, Form 706 must be filed, even if no tax is ultimately due after the application of deductions and credits.

Filing Deadlines

Form 706 must be filed within nine months of the decedent’s date of death. An automatic six-month extension can be requested by filing Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes,” before the original due date.

Components of Form 706

Form 706 is a comprehensive document, consisting of various schedules to detail different aspects of the estate. Below are the key components:

Part 1: Decedent and Executor

This section captures basic identification information about the decedent and the executor. Information such as the decedent’s name, Social Security number, date of death, and address is reported here.

Part 2: Tax Computation

This section is used to compute the net estate tax by summing the gross estate and subtracting allowable deductions to arrive at the taxable estate. Applicable tax rates are then applied.

Schedule A: Real Estate

This schedule reports all real estate owned by the decedent at the time of death. Each property must be individually described, along with its fair market value.

Schedule B: Stocks and Bonds

This schedule lists all stocks, bonds, and other securities owned by the decedent. Each security must be itemized with its date of purchase, acquisition cost, and market value at the date of death.

Schedule C: Mortgages, Notes, and Cash

This schedule details all mortgages and notes receivable, as well as cash on hand or in banks.

Schedule D: Insurance on the Decedent’s Life

This part covers all life insurance policies owned by the decedent or controlled by the decedent, including the policy’s face value and the name of the beneficiary.

Schedule E: Jointly Owned Property

Schedule E reports property held jointly with the right of survivorship. Each jointly owned asset must be reported, along with the percentage ownership the decedent had.

Schedule F: Other Miscellaneous Property

This schedule includes all other personal property not covered in previous schedules, such as jewelry, artwork, vehicles, and collectibles.

Schedule G: Transfers During Decedent’s Life

Transfers made by the decedent during their lifetime, which are subject to estate tax, are reported here. This includes gifts exceeding the annual exclusion amount and property transferred to a trust.

Schedule H: Powers of Appointment

This schedule records properties over which the decedent had a power of appointment, meaning the authority to designate who will own or enjoy the property.

Schedule I: Annuities

This section lists any annuities to which the decedent was entitled, including the issuer, terms, and value.

Schedule J: Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims

Details the decedent’s funeral expenses and administrative expenses incurred during the settlement of the estate.

Schedule K: Debts of the Decedent

This part lists all outstanding debts owed by the decedent at the time of death, which are deductible from the gross estate.

Schedule L: Net Losses During Administration and Expenses Incurred in Administering Property Not Subject to Claims

Reports any net losses or expenses incurred during the administration of the estate, which apply to property not subject to claims.

Schedule M: Bequests, etc., to Surviving Spouse

Documents the portion of the estate transferred to the surviving spouse, which may qualify for the marital deduction, effectively shielding it from estate tax.

Schedule O: Charitable, Public, and Similar Gifts and Bequests

Lists any charitable donations or bequests, which are deductible from the gross estate and contributions to qualified organizations.

Schedule P: Credit for Foreign Death Taxes

Provides details on any death taxes paid to foreign governments, which may be eligible for a tax credit.

Schedule Q: Credit for Tax on Prior Transfers

Reports any credit for estate taxes paid on property that had been transferred from a prior decedent within ten years.

Schedule R: Generation-Skipping Transfer Tax

Details any generation-skipping transfers subject to GST tax, including trusts and gifts to skip persons.

Schedule U: Qualified Conservation Easement Exclusion

Reports the value of any qualified conservation easement granted by the decedent for which an exclusion from the taxable estate is claimed.

Deductions and Credits

Form 706 allows various deductions and credits that can reduce the taxable estate and the consequent tax liability:

• Marital Deduction: One of the largest deductions, this allows for an unlimited deduction of assets transferred to the surviving spouse.
• Charitable Deduction: Gifts and bequests to qualifying charitable organizations can be deducted.
• Administrative Expenses: This includes costs for administering the estate, such as executor fees, attorney fees, and court costs.
• Debts and Mortgages: Debts owed by the decedent and mortgages on the estate property are deductible.
• Casualty and Theft Losses: Any losses due to theft or casualty during the administration of the estate are deductible.
• State Death Taxes: Estate or inheritance taxes paid to state governments can be deducted from the federal estate tax.

Portability of Exemption

Under current law, the estate of a deceased spouse can transfer any unused portion of the deceased spouse’s exclusion amount to the surviving spouse. This provision, known as “portability,” allows the surviving spouse to potentially use both exclusion amounts, effectively doubling the amount of the estate that can pass tax-free.

To use the portability provision, the executor of the deceased spouse’s estate must timely file Form 706, even if the estate is not otherwise required to file because its value is under the filing threshold.

Penalties for Failure to File

Failure to timely file Form 706, or file it accurately, can result in penalties. The IRS may assess a failure-to-file penalty, which is typically 5% of the net estate tax due for each month the return is late, up to a maximum of 25%. Moreover, negligence or fraud in filing can lead to additional penalties and interest on any unpaid tax.

Conclusion

Form 706 plays a crucial role in the administration of estates, ensuring that the federal government collects estate taxes as required by law. Executors need to be diligent in accurately reporting all assets and liabilities, taking advantage of allowable deductions and credits, and ensuring timely filing to minimize penalties. Proper planning, often with the help of professionals, can also allow estates to maximize their benefits and ensure compliance with IRS regulations.

For more detailed information and access to Form 706, visit the IRS website: IRS Form 706.