Losing a loved one can be incredibly difficult, but not knowing how to wrap up their affairs with the Internal Revenue Service (IRS) can make the loss even harder. IRS Form 706 is used to report the value of a decedent’s estate, including the property the deceased left to their heirs. Many people are not quite sure what this form is or does, though — despite it being fundamental when an individual passes away. This guide will walk you through everything you need to know about Form 706 for generation-skipping transfers, including what it is, what it does, and how to fill it out correctly.
What to File with the IRS When Someone Passes Away
The job of an estate executor can be challenging. These individuals are not only grieving because their family member or close friend recently died, but are now also in charge of wrapping up critical documents with the IRS, including:
- Notifying the IRS that the person has passed away by mailing the agency a copy of the death certificate as soon as possible.
- Notifying all three national credit reporting agencies to let them know about the death.
- Requesting and reviewing the credit reports of the deceased.
- Filing the deceased’s last income tax return and including a copy of the death certificate with the forms.
- Paying property tax payments. If a property is left behind, the taxing authority will continue to assess the property taxes. If the taxes are not paid, the taxing authority can put a lien on the property and eventually foreclose.
As an executor, it is crucial to understand your role when a loved one passes away. Not taking care of the deceased’s estate properly can leave their estate tied up in financial investigations for a significant period of time. Effective estate planning can help mitigate these issues.
IRS Form 706
Form 706 or the United States Estate (and Generation-Skipping Transfer) Tax Return Form is an IRS form by an executor of a decedent’s estate to calculate the estate tax owed according to Internal Revenue Code, Chapter 11. This estate tax is levied on the entire taxable estate and not just the beneficiary’s specific share. Consequently, executors also need to use this form to calculate the generation-skipping transfer tax imposed by Chapter 13.
The Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GSTT) is a federal tax that occurs when there is a property transfer either by inheritance or gift to a beneficiary who is 37.5 years younger than the donor. This transfer tax serves the purpose of ensuring taxes are paid when the assets are placed in a trust, and that the beneficiary of this inheritance or gift receives amounts above the generation-skipping estate tax credit. The GSTT essentially closed the loophole that allowed wealthy individuals to legally gift money and give their grandchildren property without paying any federal estate taxes.
How to File Form 706
Before you can begin filling out Form 706, you first need to understand when this form is used. Typically, an executor would fill out Form 706 in the following circumstances:
- The decedent’s gross estate is valued at more than the exemption amount after adding the lifetime gifts that were made and exceeded the annual gift tax exclusion.
- Note: In 2021, the federal estate tax exemption is $11.7 million, and the gift tax exclusion remains $15,000 per individual.
- The executor chose to transfer the Deceased Spousal Unused Exclusion (DSUE) to the surviving spouse, regardless of the gross estate size.
Once it is determined that you must file Form 706, you will now need to work through the following six parts and 19 supplemental schedules:
Part 1: Decedent and Executor
Part one requires vital information about the executor and the decedent, including names, Social Security numbers, and addresses.
Part 2: Tax Computations
The next part requires the executor to figure out the estate tax owed. The instructions will indicate how these taxes are calculated.
Part 3: Elections By the Executor
The executor will need to specify whether they are making any elections, including the allowance, special-use election, or the option to pay estate taxes in installments or postpone these taxes.
Part 4: General Information
This portion will reinforce why the executor can serve as the estate representative. The executor will provide information such as their title, the death certificate number, and marital status.
Part 5: Recapitulation
This section requires the executor to calculate the gross estate value by totaling the value of specific assets such as stocks, bonds, and real estate.
Part 6: Portability of the Deceased Spousal Unused Exclusion
This part will be used by the executor to opt-out of portability of the Deceased Spousal Unused Exclusion (DSUE) or specify the DSUE amount that is to be transferred to the surviving spouse.
Once you are complete with Form 706, you will need to mail the forms to the appropriate IRS address within nine months of the decedent’s death. You cannot e-file this form. In addition, if any tax is due, you will also need to pay your estate tax by mailing in the amount or completing the payment electronically.
Common Issues with Form 706
The process of filing a Form 706 is not necessarily complicated, but there are common issues that come up with this form that individuals need to watch out for:
Missing the Filing Deadline
If Form 706 is not filed on time, it can jeopardize elections and cause penalties and interests to be due. For these reasons, if you cannot file this form on time, you need to promptly file for an extension.
Not Providing Adequate Documentation
When filing Form 706, you need to provide documentation for the assets (real estate, tangible personal property, foreign rental property, etc.) valued on the return. If proper documentation is not provided, the risk of an audit will dramatically increase.
Additionally, individuals need to carefully read each section of the form and review everything before filing.
Get Help Filing IRS Form 706
Taking care of these critical tasks and forms following a loved one’s passing can be extremely overwhelming, but you do not have to tackle everything by yourself. Reach out to Silver Tax Group to get the assistance and support you need during this difficult time. Contact us today and speak with an expert about any Form 706 questions (or other tax filing questions) you might have.
