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FORM 706, 706NA & 706QDT FEDERAL ESTATE TAX RETURNS

FORM 706, 706NA & 706QDT

FEDERAL ESTATE TAX RETURNS

FORM 706

The federal 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.

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 $11.4 million (2019).

Common Questions Regarding Federal Estate Tax

 

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 Federal 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 Federal Estate Tax return?

 

See Form 706 and Instructions and Publication 950. 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 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 if one has been requested.  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:

Federal Estate Tax Return, Form 706-NA

Form 706NA, Estate Tax for Nonresidents not Citizens of the United States

 

For estates of decedent nonresidents not citizens of the United States, the Estate Tax is a tax on the transfer of U.S.-situated property, which may include both tangible and intangible assets owned at the decedent’s date of death. The computation of the tax requires that you state the total value of assets situated in the United States, and generally requires a separate statement of the total value of assets situated outside the United States. The two totals are the “gross estate in the United States” and the “gross estate outside the United States.” Property includible in these two totals may consist of cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. To value the assets held at the date of death, the fair market value is used, not necessarily what was paid for them or what their values were when they were acquired. See the Instructions for Form 706 for additional information on property includible in the gross estate and its valuation for estate tax purposes.

To arrive at the “taxable estate,” certain deductions are allowed if properly documented. These deductions may include funeral and administration expenses, claims against the estate, unpaid mortgages and liens, and certain uncompensated losses. Charitable and marital deductions are subject to additional limitations, which are found in the Instructions for Form 706-NA.

To the taxable estate, add the value of lifetime taxable gifts, beginning with gifts made in 1977, of tangible or intangible property located in the United States that was transferred directly or indirectly, and not included in the gross estate.

If the date of death value of the decedent’s U.S.-situated assets, together with the gift tax specific exemption and the amount of the adjusted taxable gifts, exceeds the filing threshold of $60,000, the executor must file a Form 706-NA for the decedent’s estate. The filing threshold for Form 706-NA is not indexed for inflation. See the Instructions for Form 706-NA for additional information on the gift tax specific exemption and the amount of adjusted taxable gifts.

 

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.

 

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.

 

International:
Federal Estate Tax Return, Form 706-QDT

Form 706QDT, Living Trusts For Non-Citizens

 

Purpose: The purpose of a Qualified Domestic Trust (known as a QDT or QDOT) is to preserve the marital deduction when the surviving spouse is not a United States citizen and whose assets are likely to be subject to the federal estate tax if the marital deduction is not available. The marital deduction allows transfers of unlimited amounts of assets between spouses at death. The result is that the surviving spouse does not have to pay any tax on the estate of the first spouse to die, provided the surviving spouse is a citizen of the United States.

Note that the marital deduction only postpones the federal estate tax on the estate, and, in some cases, may cost a couple additional taxes if there are no other provisions to reduce estate taxes.

But while the marital deduction is only a postponement of taxes, that postponement can be for decades and given the uncertainty of the estate tax as a law, may act to practically eliminate the taxes forever. Clearly anyone who can should take full advantage of that particular tool.

No marital deduction is allowed if the surviving spouse is not a U.S. citizen and does not become a citizen by the time that the estate tax return is filed. Thus, an estate of, for instance, one million dollars which would have no estate tax whatsoever if the surviving spouse was a citizen would easily have three hundred thousand dollars in tax if the surviving spouse was a non-citizen, due nine months from date of death!

However, the marital deduction can be still be used if the assets are transferred to a Qualified Domestic Trust (QDT). This is important for estates that exceed the applicable exclusion amount ($$11.18 million for singles, but only for 2018 through 2025, reverting back to the 2017 level of $5 million, as adjusted for inflation), because the marital deduction is often used to postpone or avoid estate taxes for estates that are larger than $1.5 million. Without the marital deduction, larger estates of non-U.S. citizens will have to pay taxes that estates of U.S. citizens would not have to pay until the surviving spouse died.

REQUIREMENTS FOR QDT

To qualify as a QDT, a trust must meet the following requirements:

  1. At least one trustee must be a U.S. citizen or a U.S. corporation.
  2. No distribution can be made from the trust, except for income, unless the trustee who is the U.S. citizen or corporation has the right to withhold estate taxes from the distribution.
  3. The trust must meet Treasury regulations regarding the collection of any tax.
  4. The executor must elect on the estate tax return to treat the trust as a QDT.

After the death of the surviving spouse, the assets in the QDT are subject to the estate tax as though they were included in the estate of the first spouse to die. These assets are not included in the surviving spouse's estate and a Form 706QDT must be filed.

The trustee or designated filer of qualified domestic trust (QDOT) uses this form to figure and report the estate tax due on:

  • Certain distributions from the QDOT,
  • The value of the property remaining in the QDOT on the date of the surviving spouse's death, and
  • The corpus portion of certain annuity payments.

 

We Can Help!

 

Marini & Associates, PA’s, lawyers (TaxAid.com) can handle all of the paperwork and dealings associated with preparing and filing ALL Estate Tax Returns, including Form 706, Form 706NA & Form 706QDT, so the personal representative and trustee can continue with the responsibilities, while leaving these estate IRS filings to us, without ever meeting with or dealing with the IRS.

We are skilled at eliciting the information to minimize the taxes associated with these filings, have successfully represented numerous clients with these estate tax filings and with any associated IRS Estate Tax Audits.

If you are Personal Representative or Trustee responsible for filing one of the above-mentioned estate tax returns, contact Marini & Associates, PA immediately for assistance in in preparing the requisite Estate or Trust tax filings for Domestic Estates or International Estates!

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