Federal Estate Tax Return, Form 706
The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The IRS form used for reporting is called the Federal Estate Tax Return, form 706. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $5,340,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2 percent of all Americans.
Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $5,340,000 in 2015.
What is included in the Estate?
The Gross Estate of the decedent consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Keep in mind that the Gross Estate will likely include non-probate as well as probate property.
I own a 1/2 interest in a farm (or building or business) with my brother (sister, friend, other). What is included?
Depending on how your 1/2 interest is held and treated under state law, and how it was acquired, you would probably only include 1/2 of its value in your gross estate. However, many other factors influence this answer, so you would need to visit with a tax or legal professional to make that determination.
What is excluded from the Estate?
Generally, the Gross Estate does not include property owned solely by the decedent’s spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the Gross Estate (but taxable gifts are used in the computation of the estate tax). Life estates given to the decedent by others in which the decedent has no further control or power at the date of death are not included. The value of life insurance, if it was neither owned by nor payable to the decedent, is excluded from the gross estate.
What deductions are available to reduce the Estate Tax?
- Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.” In some cases, certain life estates also qualify for the marital deduction.
- Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
- Mortgages and Debt.
- Administration expenses of the estate.
- Losses during estate administration.
What other information do I need to include with the return?
See Form 706 (PDF) and Instructions (PDF) and Publication 950, which can be found at www.irs.gov. Among other items listed:
- Copies of the death certificate
- Copies of the decedent’s will and/or relevant trusts
- Copies of appraisals
- Copies of relevant documents regarding litigation involving the estate
- Documentation of any unusual items shown on the return (partially included assets, losses, near date of death transfers, others).
What is “Fair Market Value?”
Fair Market Value is defined in the Internal Revenue Code Regulation §20.2031-1 as:
“The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”
What about the value of my family business/farm?
Generally, the fair market value of such interests owned by the decedent are includible in the gross estate at date of death. However, for certain farms operated as a family farm, reductions to these amounts may be available.
In the case of a qualifying Family Farm, IRC 2032A allows a reduction from value of up to $1,000,000.
A similar deduction for a qualifying family owned business (IRC 2057) was revoked beginning in 2004.
What if I do not have everything ready for filing by the due date?
The estate’s representative may request an extension of time to file for up to six months from the due date of the return. However, the correct amount of tax is still due by the due date and interest is accrued on any amounts still owed by the due date that are not paid at that time.
Who should I hire to represent me and prepare and file the return?
The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:
- How complex is the estate? By the time most estates reach $1,000,000, there is usually some complexity involved.
- How large is the estate?
- In what condition are the decedent’s records?
- How many beneficiaries are there and are they cooperative?
- Do I need an estate tax professional?
Finally, most estates engage the services of both attorneys and CPAs. The attorney usually handles probate matters, reviews the impact of documents on the estate tax return, and prepares the actual estate tax return. CPAs will usually handle the various income tax returns associated with an estate (final 1040; fiduciary income tax return, form 1041). In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time.
When can I expect the Estate Tax Closing Letter?
There can be some variation, but for returns that are accepted as filed and contain no other errors or special circumstances, you should expect to wait about 9-12 months after the return is filed to receive your closing letter. Returns that are selected for examination or reviewed for statistical purposes will take longer.
Do I have to talk to the IRS during an examination?
You do not have to be present during an examination unless an IRS representative needs to ask specific questions. Although you may represent yourself during an examination, most executors prefer that professional(s) they have employed handle this phase of administration. They may delegate authority for this by signing a designation on the Form 706 (PDF) itself, or executing Form 2848 “Power of Attorney” (PDF), which can be found at www.irs.gov.
What if I disagree with the examination proposals?
You have many rights and avenues of appeal if you disagree with any proposals made by the IRS. See Publications 1 and 5 (PDF) for an explanation of these options. The publications can be found at www.irs.gov.
What happens if I sell property that I have inherited?
The sale of such property is usually considered the sale of a capital asset and may be subject to capital gains (or loss) treatment. However, IRC §1014 provides that the basis of property acquired from a decedent is its fair market value at the date of death, so there is usually little or no gain to account for if the sale occurs soon after the date of death. (Remember, the rules are different for determining the basis of property received as a lifetime gift).
INTERNATIONAL: In a Form 706NA, how do I claim a pro-rata unified credit pursuant to a treaty?
Complete the entries for Lines 1 through 3 in Schedule B on the second page of the return. Attach a statement to the return that refers to the particular treaty applicable to the estate, and write that the estate is claiming its benefits. Show your computation of the pro-rata unified credit in the statement, and enter that figure in the Tax Computation on Line 7 on the front page of the return. Attach to the Form 706NA a copy of the return filed with the treaty partner. If no estate or inheritance tax return has been filed with the treaty partner, explain in your statement why no foreign return was due. If there was no foreign return, attach a copy of an inventory that sets forth the decedents assets and their values at the date of death, and explains how the figure shown on Line 3 of Schedule B was computed.
INTERNATIONAL: In a Form 706NA, how do I claim an exemption from U.S. estate tax pursuant to a treaty?
In Schedule A of the return, list the estates U.S. assets, but show no values for those that are exempt from U.S. estate tax pursuant to a treaty. Attach a statement to the return that refers to the particular treaty applicable to the estate, and write that the estate is claiming its benefits. Entries for the gross estate in the U.S., the taxable estate, and the tax amounts, should be “0” if all of the decedents U.S. assets are exempt from U.S. estate tax pursuant to the applicable treaty. Attach to the Form 706NA a copy of the return filed with the treaty partner. If no estate or inheritance tax return has been filed with the treaty partner, explain in your statement why no foreign return was due.
Source: Most information for this page came from the Internal Revenue Code: Chapter 11, Estate Tax and from www.irs.gov.