Filing Form 706: U.S. Estate Tax Guide

Filing Form 706 to report estate taxes can be a complex process for most people.

By following a step-by-step guide, you can ensure you accurately fill out and submit Form 706 to avoid issues.

This article will walk through key aspects of Form 706, from understanding filing requirements and reporting assets, to calculating deductions and finalizing submission. You'll get a checklist of must-knows to smoothly navigate estate tax return filing.

Introduction to Form 706: U.S. Estate Tax Return Filing Essentials

Understanding the U.S. Estate Tax Return (Form 706)

Form 706 is the United States Estate (and Generation-Skipping Transfer) Tax Return that must be filed for estates that exceed the applicable exclusion amount set by the IRS. This form is used to calculate and report the estate tax imposed on certain transfers of assets after death. The executor of the estate is responsible for filing Form 706, usually within 9 months after the date of the decedent's death. Key parties involved in the Form 706 filing process include the executor, heirs, accountants/tax professionals, and the IRS.

Determining the Form 706 Due Date and Extension Options

The standard due date for filing Form 706 is 9 months after the date of the decedent's death. An automatic 6-month extension can be requested by filing IRS Form 4768 on or before the original due date. This extends the deadline to 15 months from the date of death. Note that while an extension provides more time to file, any taxes owed are still due by the original deadline to avoid interest and penalties.

Identifying Who Must File Estate Tax Return 706

The executor of the estate is responsible for filing Form 706 if the gross estate exceeds the federal estate tax exclusion amount for the year of death. For 2023, this amount is $12,920,000. Even if no estate tax is due, Form 706 may still need to be filed for estates exceeding $12,920,000. There are also situations where an estate below this threshold may trigger a filing requirement, such as if the surviving spouse elects portability of the deceased spouse’s unused exclusion.

Overview of Estate Assets and Deductions Reported on Form 706

Form 706 requires reporting all assets owned or co-owned by the decedent as of the date of death. This includes but is not limited to real estate, bank accounts, stocks and bonds, life insurance proceeds, retirement accounts, vehicles, collectibles, and personal property. Allowable deductions that can decrease taxable estate value include debts owed by the decedent, funeral/administration expenses, charitable donations, and state estate taxes paid. Subsequent sections will explore reporting requirements on Form 706 schedules in greater detail.

Should I file form 706?

Form 706 must be filed by the executor of the estate of every U.S. citizen or resident:

• Whose gross estate, adjusted taxable gifts, and specific exemptions total more than the exclusion amount: $12.92 million for decedents who died in 2023 ($13.61 million in 2024), or

• Who made lifetime taxable gifts above the annual exclusion amount

So if the total value of the gross estate and adjusted taxable gifts exceeds the applicable exclusion amount for the year of death, Form 706 must be filed.

Some key things the executor should determine regarding whether Form 706 needs to be filed:

• Calculate the total gross estate value - Include all assets owned or controlled by the decedent.

• Determine if any lifetime taxable gifts were made - Any gifts over the annual exclusion amount made by the decedent prior to death must be accounted for.

• Compare the total to the exclusion amount - If greater than $12.92 million (2023), Form 706 must be filed.

Consult with a tax professional to accurately determine if Form 706 is required based on the decedent's specific situation. Failing to file Form 706 when required can result in penalties and interest charges.

Are retirement accounts included on form 706?

Yes, retirement accounts such as IRAs, 401(k)s, pensions, and annuities are included on Form 706. Specifically:

• IRAs, 401(k)s, and other qualified retirement plans are reported on Schedule I of Form 706. You must list each account individually along with its value and named beneficiary.

• Pensions and annuities that provide payments to a survivor are reported on Schedule M. You must include the value of the survivor's future interest.

• Life insurance proceeds are reported on Schedule D if paid to the estate. If paid to a named beneficiary, life insurance is not taxable and not reported.

Some key points on handling retirement accounts:

• Retirement assets can qualify for an unlimited marital deduction if left to a surviving spouse. No estate tax is owed.

• Retirement funds left to charities also avoid taxation.

• Non-spouse beneficiaries typically owe income tax on distributions from inherited IRAs and 401(k)s.

In summary, make sure all taxable retirement assets are fully disclosed on Form 706. List each account, its value, beneficiary, and other details as required. This ensures proper estate tax computation and reporting to beneficiaries.

Who fills out form 706?

The executor of a decedent's estate is responsible for filing Form 706. This form is used to calculate and report the estate tax imposed under chapter 11 of the Internal Revenue Code.

Some key points on who must file Form 706:

• The executor must file Form 706 if the gross estate exceeds the filing threshold set by law. For 2023, this threshold is $12,920,000.

• The executor may also need to file Form 706 if the decedent made large lifetime taxable gifts, even if the gross estate is under the threshold.

• If there are multiple executors, only one executor needs to file Form 706 on behalf of the estate.

• If there is no appointed executor, the person in charge of the decedent's assets must file Form 706.

So in summary, it is the legal responsibility of the executor, or the person administering the estate if no executor is named, to file Form 706 when required. Determining whether the gross estate exceeds thresholds for taxable assets and lifetime gifts dictates the Form 706 filing requirement.

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What goes on Schedule F of 706?

Real estate that is part of a sole proprietorship should be reported on Schedule F of Form 706. This includes land, buildings, and equipment used in the business.

Some key points about Schedule F:

• Used to report sole proprietorship real estate, including land, buildings, and equipment

• Should provide description, location, acquisition date and cost, and fair market value for each asset

• Any mortgages or liens on the property should be reported

• Real estate reported should match the business balance sheet

Real estate included due to sections 2035, 2036, 2037, or 2038 should be reported on Schedule G instead. And real estate included under section 2041 goes on Schedule H.

So in summary, Schedule F is specifically for reporting sole proprietorship real estate holdings that are part of the gross estate. The key is properly categorizing real estate across the various schedules based on why it is included. Accurately breaking out assets across schedules helps streamline Form 706 filing and processing.

Step-by-Step Guide to Completing Form 706

Documenting Assets and Liabilities for Form 706

To accurately complete Form 706, you first need to gather documentation of the decedent's assets and liabilities. This includes bank statements, brokerage accounts, real estate deeds and assessments, vehicle titles, business interests, retirement accounts, life insurance policies, debts owed by the decedent, and any other items that will transfer as part of the decedent's estate. Organize these documents so the information is easily accessible when filling out the return.

Valuation of Estate Assets and Where to Report IRA on Form 706

The assets included in the gross estate generally need to be valued at their fair market value on the date of death. Special rules apply for valuing certain assets, such as closely held business interests. Retirement accounts like IRAs must be included at their full value on the date of death before any distributions or rollovers. IRAs should be reported on Schedule I of Form 706.

Calculating Deductions and Taxable Estate

Certain deductions can be claimed against the gross estate, including funeral expenses, debts and mortgages owed by the decedent, and state death taxes paid. Charitable donations and marital deductions may also apply. These deductions are totaled and claimed on Part 2 of Form 706, arriving at the taxable estate value.

Applying Tax Rates and Using the Tax Table for Form 706

The net amount of estate tax owed is calculated by applying the estate tax rates from the IRS Tax Table to the taxable estate value. The rates range from 18% on the first $10,000 to 40% for amounts over $1 million. The total estate tax is reported on Part 2, Line 7 of Form 706.

Finalizing and Filing Form 706 Before the Due Date

Before submitting Form 706, make sure all required schedules are attached, figures are double checked, and the return is signed. Form 706 is generally due 9 months after the date of death. An automatic 6-month extension can be obtained by filing Form 4768 by the original due date.

Detailed Instructions for Form 706 Schedules

This section delves into the specific schedules attached to Form 706, explaining their purposes and how to fill them out correctly.

Completing Schedule A: Real Estate Details

Schedule A is used to report all real estate owned by the decedent. For each property, you must provide:

• Description of the property (address, parcel number, etc.)

• Type of property (residential, commercial, agricultural, etc.)

• Full ownership interest percentage

• Date the property was acquired

• Value of the land

• Value of buildings and improvements

To determine date of death property values, appraisals may be required. List the appraised values or document the valuation method used.

If only part of a property is included in the gross estate, explain the details of the partial interest under the property description.

Filling Out Schedule B: Stocks, Bonds, and Securities

Schedule B is for reporting stocks, bonds, and other securities owned by the decedent. For each security, provide:

• Number of shares owned

• Whether held jointly

• Series or class

• Primary exchange symbol

• CUSIP number

• Date acquired

• Unit value on date of death

Life insurance policies with cash surrender value are also reported here. Total the date of death values for each security listed.

Reporting Life Insurance on Schedule D

Schedule D is for reporting life insurance policies in which the decedent had an interest. For each policy, provide:

• Name of insurance company

• Policy number

• Date of death proceeds

• Policy proceeds received since death

To complete Schedule D fully, request Form 712 from each insurance company.

What is Reported on Form 706 Schedule F: Miscellaneous Property

Schedule F is for any other property that doesn't fit Schedules A-E. This includes:

• Mortgages, notes, and cash

• Household furnishings

• Vehicles

• Rental property furnishings

• Jewelry

• Artwork

• Mineral rights

• Copyrights

• Trust beneficiary interests

• Annuities

Provide description, ownership details, date acquired, and date of death value for each property. Appraisals may be needed.

Understanding Schedule M: Marital Deductions

Schedule M allows for deductions for property passing to a surviving spouse. To qualify for the unlimited marital deduction, list qualifying property passing to the surviving spouse. Provide details on each property, including:

• Description

• Ownership percentage

• Date acquired

• Value

The values here are used to calculate the allowable marital deduction amount.

Addressing Generation-Skipping Transfers on Form 706 Schedule R

If the decedent made any generation-skipping transfers (direct skips), complete Schedule R. Provide:

• Details on property transferred

• Transferee information

• Transfer date

• Property values

Also show how any GST exemption will be allocated to trusts created or funded on the return.

The Schedule R details allow proper calculation of any generation-skipping transfer tax owed.

Post-Filing Procedures and IRS Communications

Understanding the Estate Tax Closing Letter from the IRS

The IRS will issue an estate tax closing letter once the review of Form 706 is complete and all liabilities have been paid or settled. This letter serves as the IRS's acceptance that the estate tax return is closed and no further action is required.

Key points about the estate tax closing letter:

• May take up to 1 year after filing Form 706 to receive

• Indicates the estate tax return has been accepted as filed

• Releases the executor from personal liability for estate tax payments

• Allows for the distribution of assets to beneficiaries

• Does not prevent the IRS from auditing at a later date

If the letter states changes are required or taxes are still owed, prompt action must be taken to resolve outstanding issues.

Paying Estate Tax and Utilizing Form 4768 for Extensions

Any estate tax owed must be paid within 9 months of the decedent's date of death. Form 4768 can be filed to extend the payment deadline up to 12 months without penalty.

Key aspects regarding estate tax payments:

• Interest and penalties accrue on unpaid amounts after the 9-month window

• Form 4768 secures an extension of time to pay taxes but does not extend the filing deadline

• Multiple Form 4768 extensions can be submitted if needed

• Online payment plans may also be set up with the IRS

Careful planning should ensure funds are available to satisfy tax liabilities when they come due.

Using IRS Form 8971 to Inform Beneficiaries of Asset Values

Executors are required to file Form 8971 to report asset values to beneficiaries receiving property from the estate.

Key details on Form 8971 filing:

• Must be filed within 30 days of the estate tax closing letter

• Provides beneficiaries with the date-of-death values and descriptions of assets

• Allows beneficiaries to calculate capital gains when selling inherited assets

• IRS copy provided to corroborate basis reporting

Failure to file Form 8971 can result in penalties of up to $270 per beneficiary.

Record-Keeping and Preparing for Potential IRS Inquiries

Extensive records substantiating information on Form 706 should be maintained for a minimum of 3 years. These include:

• Financial statements

• Appraisals

• Receipts for expenses and taxes

• Correspondence with beneficiaries

If the IRS inquires about a return, the executor can rely on their documentation to support the original filing.

While rare, if an audit occurs, the executor must be able to provide paper trails for the estate's holdings, valuations, deductions, distributions, and tax payments. Organized files prove essential to validating figures and resolving questions efficiently.

Conclusion: Key Takeaways for Filing Form 706

Filing Form 706 accurately and on time is critical for estate tax compliance. Here are key takeaways:

Recap of Form 706 Filing Requirements and Deadlines

• Form 706 must be filed within 9 months of the decedent's death for estates over the filing threshold ($12.06 million in 2022)

• Extensions up to 6 months are possible with Form 4768

• Accurate valuations and tax computations are required

Final Checklist for Form 706 Submission

Before filing, ensure:

• Tax is fully paid or installment plan is set up

• All required documents are attached

• Math is double-checked

• Form is signed

Anticipating IRS Responses and Managing Post-Filing Actions

After filing Form 706, the IRS may:

• Request more information

• Assess penalties for errors

• Audit the return

Be prepared to respond to IRS in a timely manner. Keep records available in case further documentation is needed.

Accurately filing Form 706 protects estates from penalties and ensures compliance with estate tax laws. Consult a tax professional with any questions.

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• Form 706: U.S. Estate and Gift Tax Return
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