IRS Form 706: A Simplified Guide to Estate and GST Taxes

Navigating the complexities of estate taxes? IRS Form 706 is your roadmap, detailing the tax return for United States estates and generation-skipping transfers.

What Is IRS Form 706?

IRS Form 706 is crucial for calculating estate taxes, as imposed by Chapter 11 of the Internal Revenue Code, and GST taxes by Chapter 13 on direct skips.

Who Needs to File Form 706?

Executors of estates that exceed certain values are required to file Form 706. It’s crucial to stay current with the IRS for any updates to filing requirements and deadlines.

Step-by-Step Instructions for Completing Form 706

Filing IRS Form 706 is a complex process that is typically done with the help of a tax professional, especially for large and complicated estates. However, I can provide you with a general guide to completing this form.

This guide assumes that you have a basic understanding of estate taxation and that you have gathered all necessary documents, such as the will, appraisals, and account statements. The form and instructions are subject to change, so it’s important to ensure you have the latest version from the IRS website. Here’s how you would generally complete the form:

Step 1: Determine If You Need to File

1. Check the IRS filing thresholds to see if the estate exceeds the exemption amount for the year of death.
2. Determine if the decedent made any taxable gifts in their lifetime that would require filing.

Step 2: Gather Information

1. Collect the decedent’s personal information, including Social Security Number, date of birth, and date of death.
2. Obtain values for all assets as of the date of death, which may include real estate, stocks, bonds, and other personal property.
3. Gather information on any debts and expenses of the estate.
4. Find records of any lifetime taxable gifts.

Step 3: Complete the Form

1. Download the latest Form 706 from the IRS website.
2. Part 1 – Decedent and Executor Information: Fill in the decedent’s and executor’s information.
3. Part 2 – Tax Computation: Input the necessary amounts to compute the estate tax.
4. Part 3 – Elections by the Executor: Make any applicable elections regarding the estate.
5. Schedules: Complete the various schedules for different types of property and transfers (Schedules A-M, O, and R).
6. Signatures: Have the executor sign the form.

Step 4: Attach Required Documentation

1. Attach any required documents, such as appraisals or documentation of deductions and credits.
2. Attach a copy of the death certificate and the will, if applicable.
3. Attach payment if the estate owes estate tax.

Step 5: Review

1. Double-check all entries for accuracy.
2. Verify that all necessary schedules and attachments are included.
3. Consider having a tax professional review the form for accuracy and completeness.

Step 6: File the Form

1. Check the IRS instructions for where to file and whether you can file electronically or must mail a paper return.
2. Mail the completed Form 706 and any payment due to the appropriate IRS address, or file electronically if that option is available.
3. Keep a copy of everything you send to the IRS for your records.

Step 7: After Filing

1. Monitor for any correspondence from the IRS in case they have questions or require additional information.
2. If you receive any notices from the IRS, respond promptly.
3. Keep detailed records of all communications and submissions to the IRS.

Because of the complexity and potential tax implications of filing Form 706, it’s highly recommended to consult with an estate attorney or a tax professional specialized in estate taxation. They can provide guidance tailored to your specific situation and ensure compliance with all applicable tax laws and regulations.

Estate Tax and GST Tax Calculations

The Generation-Skipping Transfer (GST) tax is a federal tax on transfers of property to a beneficiary who is two or more generations below the transferor, such as a grandchild. The GST tax is separate from, and in addition to, the federal estate and gift taxes, but the way it interacts with the estate tax is an important aspect of estate planning and tax calculations.

Understanding GST Tax Calculations

The GST tax is imposed on both outright gifts and transfers in trust, provided the beneficiary is a “skip person” (someone who is at least 37½ years younger than the donor or the donor’s spouse if the spouse is the only non-skip person with an interest in the trust). Like the estate tax, the GST tax also has an exemption threshold, known as the GST exemption. This exemption allows a certain amount to be shielded from GST tax, similar to the estate tax exemption.

Impact on Estate Tax

When a transferor makes a generation-skipping transfer, they may be subject to both estate tax and GST tax. Here’s how the two taxes interact:

Exemptions and Allocations

The estate tax exemption and the GST exemption are often the same amount, but they are applied separately. When a person makes a transfer that is subject to GST tax, they must allocate some of their GST exemption to that transfer to prevent the GST tax from applying. The amount of the exemption that is used for GST purposes is no longer available to shield assets from the estate tax upon the transferor’s death.

Taxable Amount

If the transferor’s estate exceeds the estate tax exemption amount, the estate will owe estate tax. However, if the transferor also made generation-skipping transfers during their lifetime or at death that exceed their GST exemption, the estate may also owe GST tax. Thus, an estate could be subject to both taxes on the same transfer.

Inclusion Ratio

For GST tax calculation, an “inclusion ratio” is determined, which is the portion of a trust or transfer that is subject to GST tax. A transfer with an inclusion ratio of 1 (100% taxable) will be fully subject to GST tax, whereas an inclusion ratio of 0 (0% taxable) means the transfer is fully covered by the GST exemption and no GST tax is due. If the estate has not allocated GST exemption to a transfer, it increases the inclusion ratio, which could lead to a higher GST tax.

Timing and Strategy

The timing of when GST exemption is allocated can significantly impact the overall tax burden. For example, allocating GST exemption to lifetime transfers can lock in the exemption amount and remove future appreciation of the transferred assets from both the transferor’s estate and any future GST tax. Conversely, assets included in the estate may benefit from a step-up in basis, which can reduce capital gains taxes for heirs but may increase the estate and GST tax burden if the estate exceeds exemption amounts.

Trusts

When a transferor places assets in a trust with potential generation-skipping transfers, the trust itself may be designed to automatically allocate GST exemption upon the transferor’s death. This can reduce the estate tax by removing the trust’s assets from the estate, but the GST tax still applies to the portion of the trust that exceeds the GST exemption.

When the GST tax is applicable, it is essential to consider how the allocation of the GST exemption impacts the overall estate tax calculation. Careful planning is necessary to optimize the use of both exemptions and to minimize the combined tax burden on an estate. Due to the complexity of these calculations and the implications for estate planning, working with an estate planning attorney or tax professional is highly advisable.

Tips for Filing Form 706

When filing IRS Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return, there are several key points to keep in mind to ensure that the process is completed accurately and efficiently. Here are five tips to consider:

Understand the Filing Requirements

• Determine if the estate exceeds the filing threshold, which can change yearly due to inflation adjustments.
• Remember that even if no tax is due, filing may still be necessary to preserve portability, which allows the surviving spouse to use the deceased spouse’s unused exemption.

Accurately Value the Estate

• Obtain professional appraisals for real estate, businesses, and other valuable assets as of the date of death or the alternate valuation date, if applicable.
• Use fair market values, not necessarily what was paid for them or what their values were at a different time.

Take Advantage of Deductions and Elections

• Itemize deductible expenses, such as funeral costs, administrative expenses, debts, and losses during estate administration.
• Consider making elections that could benefit the estate and heirs, such as special use valuation or deferral of payment of estate taxes.

Keep Thorough Records

• Document how values were determined, including appraisals, broker statements, and sales receipts.
• Keep records of any estimated tax payments and be sure they are properly credited on Form 706.

Meet Deadlines to Avoid Penalties

• File Form 706 within nine months after the date of the decedent’s death unless an extension has been granted.
• Pay any estimated taxes by the due date to avoid interest and penalties, even if you have requested an extension to file the return itself.

Remember, the tax code and its interpretation can be complex. Therefore, it is often beneficial to consult with a tax professional or an estate attorney who specializes in this area to navigate the nuances of Form 706 and to ensure that you are complying with all federal and state tax laws.

Common Pitfalls to Avoid When Filing

When filing Form 706, there are several common mistakes you’ll want to avoid to ensure the process is done correctly and without delay. These errors can lead to an increased chance of an audit, additional taxes, penalties, or interest. Here are some of the most common pitfalls:

1. Missing the Filing Deadline: Form 706 is due nine months after the date of death. An extension can be requested, but this does not extend the time to pay any tax due.
2. Incorrect Valuation of Assets: Misreporting the value of estate assets is a frequent error. It’s critical to use fair market values and, when necessary, professional appraisals to determine the accurate value of real estate, business interests, and personal property.
3. Failing to Claim Available Deductions: Not taking advantage of allowable deductions such as debts owed by the decedent, funeral expenses, and administrative costs can result in overpayment of taxes.
4. Omitting Prior Taxable Gifts: Overlooking or failing to report gifts made during the decedent’s lifetime that count against the lifetime exemption amount can lead to inaccuracies in calculating the estate tax.
5. Neglecting to Attach Required Documentation: Forgetting to attach necessary documents such as death certificates, copies of appraisals, and documentation related to deductions and credits can result in processing delays and potential penalties.
6. Improper Allocation of Generation-Skipping Transfer (GST) Tax Exemption: Misunderstanding or misapplying the GST tax exemption can result in unexpected taxes or the unnecessary use of exemption amounts.
7. Inaccurate Schedules and Incomplete Forms: Form 706 includes many schedules that must be completed with precision. Leaving schedules incomplete, not attaching them, or filling them out inaccurately can trigger IRS scrutiny.
8. Not Filing for Portability: Failing to elect portability for a deceased spouse’s unused exemption amount can result in a lost opportunity for tax savings for the surviving spouse’s estate.
9. Miscalculating Estate Tax: Errors in math or misunderstanding the tax rates and brackets can lead to incorrect tax calculations.
10. Not Reviewing the Return Before Filing: Simple mistakes such as missing signatures, transposed numbers, and other oversights can cause unnecessary delays.

Avoiding these mistakes will help ensure that the estate tax return is filed correctly and on time. Given the complexity of the form and the potential for costly errors, it is often wise to seek professional assistance when preparing Form 706.

Additional Resources and Assistance

The IRS offers a variety of resources for assistance, including a dedicated Form 706 page with comprehensive instructions and updates

Final Thoughts

Proper understanding and preparation can demystify the filing process for IRS Form 706. Professional advice is encouraged for those in doubt.

FAQs for IRS Form 706

What is the threshold for filing IRS Form 706?

The filing threshold for IRS Form 706 depends on the value of the estate and the applicable exclusion amount for the year of the decedent’s death. The executor of an estate should file Form 706 if the total value exceeds the exclusion limit set by the IRS for that year.

Can IRS Form 706 be filed electronically?

As of my last update in April 2023, IRS Form 706 must be filed on paper and mailed to the IRS. It’s advisable to check the latest IRS updates for any changes to this filing requirement.

What are generation-skipping transfers, and how are they reported?

Generation-skipping transfers are gifts or bequests to a beneficiary at least two generations below the donor, such as a grandchild. These transfers can be subject to GST taxes, and IRS Form 706 is used to report and calculate the tax due for these transfers.

How long does an executor have to file Form 706?

Generally, Form 706 must be filed within nine months after the decedent’s date of death. However, an extension of time to file can be requested if more time is needed.

Learn More About Taxes

• Can You File Single if You Are Married?
• Are Life Insurance Proceeds Taxable?
• IRS Form 843: Claim for Refund and Request for Abatement
• IRS Form 926: Reporting Transfers to Foreign Corporations

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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