IRS Form 706: Reporting United States Estates TransfersPersonal Taxes
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Estate executors must complete a long list of tasks, such as filing the estate income return on Form 1041, sending the decedent’s death certificate to the IRS, or paying property taxes before they can distribute the estate’s assets to beneficiaries.
Preparing IRS Form 706, or the so-called estate tax return, is among the estate executor’s tasks, but only if the gross estate value is over $12.92 million.
The IRS adjusts this amount for inflation annually, so you must check the current filing threshold to determine if you must complete this form. In addition, IRS Form 706 is also used to report generation-skipping transfer taxes for property based in or outside of the United States.
We’ll take you through IRS Form 706 and determine when you must use it to report United States estate transfers.
- Completing IRS Form 706 is only necessary if the gross estate exceeds $12.92 million.
- IRS Form 706 estate or GST tax is due nine months after the decedent’s death.
- The estate tax isn’t levied on parts of the estate that should be distributed to beneficiaries but to the whole taxable estate.
Table of Contents
The Basics of Generation-Skipping Transfers
Chapter 11 of the Internal Revenue Code (IRC) contains taxation guidelines for the estates of US citizens and residents. Hence, according to this chapter, the due tax amount is the sum of taxable estate and adjusted taxable gifts.
This chapter doesn’t cover generation-skipping transfers that usually occur when a grandparent leaves assets or property to a grandchild. Chapter 13 of the IRC defines a generation-skipping transfer as:
‘Any transfer which would not be treated as a taxable gift by reason of Section 2503(e) or any transfer of property subject to prior tax imposed under Chapter 13.’
For a GST to occur, a decedent must be 37.5 years older than the beneficiary. The purpose of Chapter 13 is to prevent decedents from avoiding taxation by transferring their estates to their grandchildren.
An estate executor must complete IRS Form 706 whenever an estate is subject to tax under Chapter 11 or Chapter 13.
What is IRS Form 706?
IRS Form 706 is a 29-page tax document used by estate executors to calculate and pay estate tax. This form isn’t a substitute for Form 1041, and depending on the case, you may have to submit both, just one or neither.
Hence, if the value of a decedent’s gross estate, including the adjusted taxable gifts and specific exemption, is under $12,92 million, an executor doesn’t have to file this form.
To determine whether the estate qualifies for the federal estate tax exemption, an executor adds up all adjusted taxable gifts a decedent made from December 1976 onward and determines the gross estate value at the time of the decedent’s death.
If a decedent donated gifts prior to September 8, 1976, an estate executor must check if those gifts qualify for the specific exemption under Section 2521.
All estates, regardless of their size, must file Form 706 if an executor transfers the deceased spousal unused exclusion (DSUE) amount to the surviving spouse.
It’s also worth adding that gross estate includes all liquid and non-liquid assets, such as annuities, digital assets, or certain life insurance proceeds.
Gathering Additional Documents
Form 706 is one of many documents you must submit when reporting estate taxes. Besides the decedent’s death certificate, you may also be required to complete Form 706-NA if the decedent is a nonresident alien.
On the other hand, beneficiaries of generation-skipping transfers (skip persons) must report their taxes on Form 706-GS(D).
The IRS won’t reject an estate tax return if you don’t include each of these documents. However, the processing of your return will be delayed until you provide all necessary documents.
Representatives of estates of nonresident aliens must attach a copy of the return filed under foreign inheritance, schedule of liabilities, and a copy of the estate’s property inventory to Form 706.
You must check which of the form’s schedules you must complete before filling out Form 706 to avoid underreporting estate taxes.
Overview of IRS Form 706
Checking if the estate meets the filing requirements and collecting the documents and additional information you must submit with IRS Form 706 is only half the job. This tax form is 29 pages long, and it includes 19 schedules.
Consequently, you’ll need a substantial amount of time to complete each form’s section and correctly compute the estate’s tax liability. You can also use Form 706 to reduce the value of gross estate’s qualified real property by making Section 2032A election.
Here’s a brief overview of IRS Form 706.
1. Decedent and Executor
This part of the form collects the basic information about the decedent and the estate executor, such as their SSNs or addresses.
The form preparer should indicate if the decedent had a valid will when they died, the location of the court that administers the estate, and similar information.
If the estate has to pay generation-skipping transfer tax, you must complete Schedule R-1 (Form 706) and check the appropriate box in this section.
2. Tax Computation
The IRS utilizes the step-up valuation method to determine the gross estate value by adjusting the cost basis to the property’s fair market value on the day of the decedent’s death.
The estate’s representative must be familiar with this valuation method to complete the form’s second section. Moreover, determining the tentative allowable deductions or different tax credits is only possible after completing other parts of this form.
You must declare the value of the taxable estate, adjusted taxable gifts, and various other tax credits to calculate the estate’s tax liability.
A paid preparer or the estate executor should sign and date the form on its first page.
3. Elections by the Executor
The estate’s representative can select an alternative valuation method, opt out of the DSUE election, or elect to pay the balance in installments under Section 6166 in this part of Form 706.
However, an affirmative answer to questions in this part of the form means the executor must complete Schedule A-1 or post bonds or liens if they make the Section 6166 election.
4. General Information
The form’s fourth part gathers information about the decedent’s marital status at the time of death, their surviving spouse, and beneficiaries of the estate.
It also contains questions regarding the nature of the decedent’s estate, tax filing obligations, and assets. The executor must attach additional documents if they answer yes to questions in this section.
After completing the schedules necessary to calculate the gross estate value and allowable deductions, you must fill out this part of the form.
As a result, you must first compute the value of the estate’s real estate, bonds and stocks, cash, mortgages, jointly owned property, and other assets. The executioner must include the alternate value and the value at the date of death for each item listed in the gross estate.
The deduction amounts for mortgages and liens, debts, funeral expenses, and other allowable deductions should be listed in the lower part of this section.
6. Portability of Deceased Spousal Unused Election
A decedent can file Form 706 to elect the portability of the DSUE and specify the amount available to the surviving spouse after their death. An executor can use this section to opt out of the DSUE or calculate the amount portable to the surviving spouse.
The final portion of this section gathers information regarding the amounts received from deceased spouses.
7. Form 706 Schedules
An executor must use Form 706 schedules to report all assets such as real estate, stocks, insurance on the decedent’s life, annuities, transfers during the decedent’s life, etc.
Some Form 706 schedules are separate tax documents, and they must be attached to the form if the estate meets specific requirements.
Due Dates and Penalties
An estate executor has nine months after the date of the decedent’s death to file Form 706 or request a six-month filing extension on Form 4768.
Due taxes should also be paid within this time frame either through EFTPS or by check, but remember that the IRS cannot accept checks over $100,000 million. The payment is due a day before the deadline for filing Form 706 expires.
The IRS doesn’t allow taxpayers to e-file this form, so an estate representative must mail its paper version to the IRS’s Kansas City, Missouri, or Florence, Kentucky offices.
The estate must pay penalties if they don’t file Form 706 or pay their tax liability on time. Still, the IRS might waive these penalties if an executioner can reasonably explain the delay.
Moreover, the IRS assesses a 20% valuation understatement penalty to all estates that underpay their taxes for $5,000 or more. In case of a gross estate undervaluation, the penalty increases to 40%.
Frequently Asked Questions
Estate executioners can amend Form 706 after they file it by completing another Form 706.
The form preparer should write ‘Supplemental Information’ on the form’s first page, attach a statement listing the amended information, and include copies of the first four pages of the previous Form 706.
The decedent’s will is valid even if it doesn’t name an executor. A court will name an estate executor responsible for filing Form 706 if no eligible individuals apply to administer the estate.
The ceiling for special use valuations on Form 706 in 2023 is $1.31 million.
The form preparer must include all decedent’s interests in community property in the gross estate and report it on Form 706.
Determining Estate Tax with IRS Form 706
Planning and administering estates becomes more complex as their size increases.
The executor of your estate must file Form 706 and pay estate tax if its value is $12.92 million because, in this case, the estate’s beneficiaries cannot assume control over their share of the inheritance before the executor completes the estate tax return.
The person you name your estate’s executioner should be familiar with estate tax laws because your estate might pay high fines if Form 706 is filed too late or the gross estate amount is understated.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.