Form 706 Example: Complete in a Few Easy Steps [2022]

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Paul Sundin, CPA

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Form 706 for an estate tax return is an often misunderstood form. That’s why we created a Form 706 example.

All estates that exceed the exemption amount must file form 706. In addition, there are 11 states that have an estate tax as well.

Therefore, I’ve decided to go step by step through Form 706 to create the definitive guide of everything you need to know. This will not replace a qualified CPA and estate attorney. But it will give you some insight into the basics of the form and it will make the process easier.

I will give you some screenshots as well as quick navigation links to the specific sections to help guide you. Let’s get started!

Quick Links

Form 706, Part 1, Page 1 – Decedent & Executor

Take a look at the screenshot. This section is for some basic information regarding:

  1. Decedent’s name, address, social security number, domicile at the time of death, the year that domicile was established, dates of birth and death;
  2. Executor’s name, address, and social security number;
  3. Court where the estate is being probated or administered (including case number);
  4. Whether the decedent died testate;
  5. Whether an extension of time to file and/or pay tax was obtained; and
  6. Whether the return includes a generation-skipping transfer tax.

Form 706, Part 3, Page 2 – Elections by the Executor

The executor may elect to make the following elections:

  1. The alternate valuation. If the alternate valuation is elected, then throughout the return both the date of death value and the alternate value for each item must be shown.
  2. The special use valuation under §2032A,
  3. Installment payment of estate tax under §6166, and
  4. Postponement of taxes attributable to reversionary or remainder interests under §6163.

Some elections are made elsewhere on the return. Elections affecting the marital deduction are made on Schedule M. The election by a beneficiary to report lump-sum distributions is on Schedule I.

Form 706, Part 4, Pages 2 & 3 – General Information

This section requests a variety of information. Special items to note when completing Part 4 are:

  1. A Form 2848 must be filed for someone other than the executor to enter into a closing agreement for the estate, and Note: Form 8821 has replaced the Form 2848-D.
  2. This is where the attorney, accountant, or enrolled agent who prepared the return signs.

Schedule A, Page 5 – Real Estate

Schedule A is used to report the value of all real estate, including foreign real estate, which is part of the gross estate (§2031). The full value of the real estate is reported and there is no reduction for homestead, dower, or curtsey. If the estate is liable for a mortgage on the property, describe the mortgage but deduct the mortgage on the Schedule K. Some real estate is reported elsewhere on the return:

  1. Jointly owned property is reported on Schedule E;
  2. Property owned by a sole proprietorship is reported on Schedule F;
  3. Property includible under §§2035 through 2038 is reported on Schedule G; and
  4. Property subject to a power of appointment is reported on Schedule H. Describe the property in detail and indicate what the valuation is based on. If a special valuation election is made, the Schedule A-1 must also be completed.

In a typical Form 706 example, section A is the most important schedule.

Schedule A-1, Pages 6 thru 9 – Section 2032A Valuation

The requirements under §2032A for special valuation have been discussed earlier. Some special items to note are:

  1. The property must pass to a qualified heir, who must sign the agreement for special use valuation;
  2. The property must have been devoted to a qualified use on the date of death, Note: Qualified use means farm or business use for an aggregate of five out of eight years prior to the date of death.
  3. The adjusted value of the real and personal property used in farming or a closely held business must constitute at least 50% of the adjusted value of the gross estate.
  4. The executor must elect the special use valuation and the heir must agree to it, and Note: A protective election may be used when it is not clear whether all requirements are satisfied (Reg. §20.2032A-8(b)).
  5. Recapture will occur if the property ceases to be used in a qualified use or is disposed of outside the family within 10 years. Form 706-A is actually used to report the recapture of these tax benefits.

Schedule B, Page 10 – Stocks and Bonds

Schedule B is used to report the value of all stocks and bonds included in the gross estate. In doing so, some special items include:

  1. Group and denote any stocks or bonds subject to foreign death taxes;
  2. Be sure to include even tax-exempt securities;
  3. Treat interest and dividends separately from the securities to which they relate;
  4. If the stocks are publicly traded, valuation is based on selling price;
  5. If the securities are not publicly traded, special rules apply including potential minority discounts and the effect of buy-sell agreements.

Schedule C, Page 11 – Mortgages, Notes, and Cash

Schedule C is used to report cash and all items owed to the decedent at the time of death. Mortgages and notes are valued based on their unpaid principal plus accrued interest unless special circumstances (e.g., below-market in-10-13 terest rate or insolvency of the debtor) permit a lower valuation.

Schedule D, Page 12 – Insurance on Decedent’s Life

All insurance on decedent’s life whether or not includible in the gross estate is listed on the Schedule D. This includes insurance receivable:

  1. By or for the benefit of the estate, and
  2. By beneficiaries other than the estate from a policy in which the decedent possessed incidents of ownership.

Incidents of ownership include (i) the right of the insured or his or her estate to economic benefits, (ii) the power to change beneficiaries, (iii) the power to assign the policy, (iv) the power to borrow on the policy, or (v) a reversionary interest of more than 5% of the policy’s value. Include the name of each insurance company, the number of the policy and attach Form 712. Lump-sum payments are on line 24 of Form 712. Installment payments are on line 25.

Schedule E, Page 13 – Jointly Owned Property

In Part 1, report qualified jointly owned interests owned with his or her spouse as tenants by the entirety or as joint tenants.

In Part 2, report interests owned with other tenants. The full value of all property must be included unless there is proof that the other tenant furnished some or all the consideration. There are some joint interests that are not reported on Schedule E, for example:

  1. Tenancy in common (Schedule A);
  2. Community property (Schedules A through I); and
  3. Partnership interests unless the interest itself is held jointly (Schedule F).

Schedule F, Page 14 – Other Miscellaneous Property

This is the catchall schedule and includes:

  1. Unincorporated business and partnership interests;
  2. Insurance on the life of another
  3. QTIP property in the estate of the surviving spouse,
  4. Household goods and personal effects,
  5. Claims (e.g., refunds of federal and state income tax),
  6. Rights, royalties, leaseholds, judgments, autos, and shares in a trust,
  7. Reversionary or remainder interests, and
  8. Farm products and growing crops, livestock and farm equipment.

Schedule G, Page 15 – Transfers During Decedent’s Life

There are five types of transfers reported on the Schedule G:

  1. Gift tax paid on transfers within 3 years of death by the decedent or his or her spouse,
  2. Transfers within three years of death under §2035(a);
  3. Transfers with a retained life estate under §2036;
  4. Transfers taking effect at death under §2037; and
  5. Revocable transfers under §2038.

Schedule H, Page 15 – Powers of Appointment

Reported on this schedule is the value of property for which the decedent had a general power of appointment at death (§2041). Limited powers are not included.

Schedule I, Page 16 – Annuities

Annuities payable to someone on the death of the decedent are included in the gross estate and reported on this schedule if four requirements are met:

  1. The contract or agreement is not a policy of life insurance on the decedent,
  2. The agreement was entered into after March 3, 1931,
  3. The annuity is receivable because of having survived the decedent, and
  4. The annuity had been payable to the decedent.

Schedule J, Page 17 – Funeral and Administration Expenses

This schedule lists estate tax deductions for:

  1. Funeral expenses, which includes tombstone, monument, mausoleum, burial lot, and cost of transportation to the cemetery. In community property states the amount deductible depends on whether the community or the decedent’s estate was responsible for the cost.
  2. Administration expenses incurred to administer estate property subject to claims. Any portion of administrative expenses which are attributable to the surviving spouse’s community property, may be deducted on the spouse’s individual income tax return, but not by the estate.
  3. Executors’, accountants’ and attorneys’ fees.
  4. Miscellaneous expenses such as appraisals, probate fees, cost of collecting assets, and selling expenses.

Executors’, attorneys’, and accountants’ fees, administration and other miscellaneous expenses can be claimed as a deduction on the estate’s income tax return, Form 1041 if a waiver is filed on the Form 706 example.

If the executor is the primary beneficiary, he or she should consider waiving his or her fees depending on a comparison of his or her individual tax bracket versus the estate’s bracket.

Typically, there is no double deduction. However, it is possible to get a double deduction for such items as interest, taxes, business expenses, and other §691(b) deductions in respect of a decedent, provided the items were accrued and unpaid at death (§642(g)).

For example, interest paid on federal estate taxes is a proper expense of administration and the double deduction rule applies. While estates using the maximum marital deduction may benefit by claiming expenses on Form 1041, it is impossible to generalize when the waiver is advisable. When the entire estate is left to the surviving spouse, there will be no tax savings by deducting administration expenses on the estate tax return.

Schedule K, Page 18 – Debts of Decedent, and Mortgages and Liens

This Schedule reports all valid debts owed by the decedent at death (§2053(a)(3)). This can include:

  1. Past due alimony,
  2. Medical expenses of last illness incurred for the care of the decedent and paid by the estate within one year of death, Note: An election can be made to claim these expenses on the decedent’s final income tax return, Form 1040, instead of Form 706. However, no double deduction is allowed. Compare income and estate tax rates before deciding since there is a “Catch-22.” Using the medical expenses on the decedent’s final income tax return reduces the decedent’s final income tax liability, which in turn reduces the estate tax return’s deduction of that income tax liability. If the expense is used on the estate tax return, there is more income tax on the final return but a larger tax liability deduction on the estate tax return.
  3. Outstanding utility bills and credit card charges on date of death,
  4. Income taxes unpaid but attributable to income earned while alive,
  5. Property taxes accrued prior to death, and
  6. Mortgages and liens.

A Form 706 example is not complete until this information is provided.

Schedule L, Page 19 – Net Losses During Administration and Expenses Incurred in Administering Property Not Subject to Claims

Items here include:

  1. Casualty and theft losses (not claimed on the estate’s income tax return), and
  2. Expenses incurred in administering property not subject to claims.

Any Form 706 example is not complete until these items are addressed.

Schedule M, Page 20 – Bequests to Surviving Spouse

This Schedule computes the deduction for property passing to the surviving spouse that is not terminable interest property.

  • Part 1 is for interests not subject to the QTIP election.
  • Part 2 is for property interest subject to the QTIP election.
  • Part 3 is a reconciliation that totals parts 1 and 2.

Schedule O, Page 21 – Charitable Gifts and Bequests

This schedule permits a full deduction for the value of amounts passing to charity (§2055). The property must pass to the federal, state, or local government for exclusively public purposes or to a charitable institution or fraternal society approved by the IRS. Charitable remainder trusts qualify for the charitable deduction.

Schedule P, Page 22 – Credit for Foreign Death Taxes

This Schedule allows a credit for estate, inheritance, legacy and succession taxes paid to a foreign country (§2014). Complete a separate Schedule P for each country to which foreign taxes paid. This section is typically not applicable and will generally not be completed on a Form 706 example.

Schedule Q, Page 22 – Credit for Tax on Prior Transfers

A credit is permitted on this schedule for estate taxes on property where the property was taxed in another estate within the last 10 years. If the prior decedent predeceased the current decedent by more than two years, the credit is reduced by 20% for each full two years the original decedent’s death preceded the current decedent’s death.

Schedules R & R-1, Pages 23 thru 27 – Generation-Skipping Transfer Tax

The GST is due on direct skips occurring at death (§2601 et seq.). If the tax is payable by the estate, file Schedule R. If the tax is payable by a trust includible in the estate, file Schedule R-1.

Old Schedule T Gone – Qualified Family-Owned Business Interest

This Schedule was based on §2057 and allowed a deduction (formerly an exclusion) for the value of certain family-owned business interests from the gross estate. The election to use the deduction (assuming the interest qualifies) was made by filing Schedule T, attaching all required statements, and 10-17 deducting the value of the interest in Part 5, Recapitulation. This provision expired in 2004 and Schedule T is no longer part of Form 706. Note: You can only deduct the value of property that was also reported on Schedules A, B, C, F, G, or H.

Schedule U, Page 28 – Qualified Conservation Easement Exclusion

This Schedule is based on §2031(c) and permits an election to exclude a portion of the land value subject to a qualified conservation easement. The election is made by filing Schedule U with all the required information and excluding the applicable value of the land that is subject to the easement in Part 5, Recapitulation.

Note: To elect the exclusion, you must include on Schedules A, B, E, F, G, or H, as appropriate, the decedent’s interest in the land that is subject to the exclusion.

Form 706, Part 5, Page 3 – Recapitulation

The recapitulation is completed by totaling the gross estate items (Schedules A-I) and the allowable deductions (Schedules J through T).

Form 706, Part 6, Page 4 – Portability of Deceased Spousal Unused Exclusion (DSUE)

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 authorized estates of decedents dying after December 31, 2010, to elect to transfer any unused exclusion to the surviving spouse.

The amount that is received by the surviving spouse is called the Deceased Spousal Unused Exclusion (DSUE). If the estate executor elects to transfer, or use portability, of the DSUE, the surviving spouse can apply the DSUE received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. Portability is not directly addressed in the Form 706 example.

Form 706, Part 2, Page 1 – Tax Computation

Total deductions are subtracted from the total gross estate. Adjusted taxable gifts are added. The gross estate tax is computed and credits are applied. For 2012, the estate tax applicable exclusion amount was $5.12 million. For 2020, the estate tax applicable exclusion amount was inflation adjusted to $11.58 million. Amounts exceeding the applicable exclusion amount are taxed at 40% (up from 35% in 2012). As a result, the applicable exclusion amounts and their credit equivalents are as follows:

Schedule PC, Pages 29 – 31 – Protective Claim for Refund

A protective claim for refund will preserve the estate’s right to a refund of tax paid on any amount included in the gross estate which would be deductible under §2053 but has not been paid or otherwise will not meet the requirements of §2053 until after the limitations period for filing the claim has passed (see §6511(a)).

Only use Schedule PC for §2053 protective claims for refund being filed with tax Form 706. If the initial notice of the protective refund claim is being submitted subsequent to the filing of Form 706, use Form 843, Claim for Refund and Request for Abatement, to file the claim.

Schedule PC may be used to file a §2053 protective claim for refund by estates of decedents who died after December 31, 2011. It also will be used to inform the IRS when the contingency leading to the protective claim for refund is resolved and the refund due the estate is finalized.

The estate is required to indicate whether the Schedule PC that is being filed is the initial notice of protective claim for refund, notice of partial claim for refund, or notice of the final resolution of the claim for refund.

Discharge from Personal Liability

Under §2204, an executor may make written application to the IRS for early determination of the amount of estate tax and discharge from personal liability. The IRS must respond within 9 months of the application notifying the executor of the estate tax. On payment of the noticed amount the executor is discharged from personal liability.

Form 706 Example

So there you have it. A complete Form 706 example. We wanted to make sure that we covered all the important schedules and attachments.

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Gilbert, AZ