The Ultimate Guide to Decedent’s Estate Tax – Form 706

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Paul Sundin, CPA

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The executor of a decedent’s estate uses Form 706 to figure the estate tax. This tax is levied on the entire taxable estate, not just the share received by a particular beneficiary. Form 706 is also used to compute the generation-skipping transfer tax. In August 2013, the IRS released a revised Form 706 for use by estates of decedents dying after December 31, 2012. Changes reflected in the revision included law and indexing changes. 

Overview of Form 706 

The Federal Estate Tax Return – Form 706 comprises five parts and more than two dozen schedules and sub-schedules. Completing Form 706 requires the preparer to work backward by filling out the schedules first and then the front pages of the form. The schedules are used to report assets, deductions, tax credits, and additional taxes if any.

Filing Requirements

Form 706 is required to be filed by the executor for the estate of every U.S. citizen or resident where the value of the gross estate on the date of death exceeds $11,580,000 in 2020 (§6018(a)(1)). 

For purposes of determining this $11,580,000 (in 2020) value, the gross estate must be increased by: (i) The adjusted taxable gifts (under §2001(b)) made by the decedent after December 31, 1976, and (ii) The specific exemption (under §2521 before its repeal) of gifts made after September 8, 1976, and before January 1, 1977. 

The obligation to file is on the executor of the estate (§6018(a)(1)). Executor means the personal representative or administrator of the estate. Suppose none of these are appointed or qualified in the U.S. In that case, every person in actual or constructive possession of any property of the decedent (i.e., the beneficiaries) must file a return (§6018(b)). 

However, suppose one is executor because no other person was appointed or qualified in the U.S. In that case, his or her liability is limited to the property’s value in his or her possession. Suppose the executor cannot complete the return for any property interest in the gross estate. In that case, the executor must include on the return the names of everyone holding a legal or beneficial interest in that property and furnish a description of the property. 

If notified by the district director, anyone holding a legal or beneficial interest in this property must file a return for that part of the gross estate. The estate tax return is due nine months after death (§6075(a)). For missing persons, the due date is nine months after the date set by the local statute for declaring a missing person dead (R.R. 80-347). 

A six-month extension of time to file is available by filing Form 4768 (§6018(a)). However, the extension to file does not extend the due date for paying the tax. 1 Additional time may be permitted if the executor is abroad. Form 706 is filed with the Internal Revenue Service Center for the state in which the decedent was domiciled at the time of his or her death (§6091(b)(3)). 

If the decedent was not a resident or a citizen of the U.S., the executor must file Form 706NR if the gross estate value in the U.S. is more than $60,000. Suppose the estate tax return is not filed timely. In that case, the IRS will impose a penalty of .5% of the estate tax liability per month, up to a maximum of 25%, until the return is filed, unless the estate representative can show that the failure to file is due to reasonable cause and is not the result of willful neglect (§6651(a)(1)). 

If the failure to file is shown to be fraudulent, the penalties range from 25% to a maximum of 75% (§6151(f)). 

Paying the Estate Tax 

Payment of the estate tax is due at the same time as the return is filed (i.e., nine months after death) unless:

An extension of time to pay was granted under §6161.

  1. The estate has properly elected under §6166 to pay in installments.
  2. An election under §6163 has been made to postpone the part of the tax attributable to a reversionary or remainder interest. 

The executor must pay the entire estate tax, even if some of the gross estate property is not in the executor’s possession. All checks should be made to the “Internal Revenue Service” and contain the decedent’s name and social security number. 

Failure to pay the tax with the return can cause the imposition of a penalty of .5% of the estate tax liability for each month or part of a month that the tax remains unpaid, up to a maximum of 25% (§6651). This penalty is in addition to the late-filing penalty. 

In cases when there is a failure to pay after notice and demand by the IRS, the penalty is increased to 1% per month (§6651(d)), where both the failure to file penalty and failure to pay the penalty to apply, the failure to file penalty is reduced by the amount of the failure to pay the penalty (§6651(c)(1)). 

Can you file an extension? 

An extension of time to pay can be obtained by filing a Form 4768 and showing reasonable cause (§6161(a)(2)), such as when: (i) The estate includes a claim subject to a lawsuit, (ii) Liquid assets are not within the executor’s control, and (iii) When the majority of estate assets are rights to receive payments in the future.

While the extension to pay can be for up to ten years, the extension allowed is generally 12 months. File two copies of Form 4768 if requesting only an extension of time to pay the tax. If also requesting an extension of time to file the return, file four copies of Form 4768. 

Note: An extension of time to pay does not relieve the estate from liability for paying interest on the balance due during the extension period. If a request for an extension of time is denied, a written appeal may be made to the regional commissioner. This appeal must be made within ten days after the denial is mailed. 

Section 6166 

If the gross estate includes an interest in a closely held business, the executor may be able to elect to pay part of the estate tax in installments. Section 6166 is available where the interest in the closely held business exceeds 35% of the adjusted gross estate (gross estate less estate expenses and losses). 

Section 6163 

Suppose the gross estate includes the value of a reversionary or remainder interest. In that case, the executor may elect to postpone the tax payment attributable to that interest until six months after the preceding interests in the property have ended. The executor elects this extension in Part 3 on page 2 of Form 706. 

Note: Prepayment of the tax attributable to such property is allowed without the payment of accrued interest or acceleration of the remaining estate tax (R.R. 83-103). If at the end of the six months, the executor shows reasonable cause, the Service may grant additional time of up to 3 years for payment of the tax attributable to these interests. 

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Estate CPA

Gilbert, AZ