Form 706: Guide to Filling Out the Estate Tax Return

Estate taxes are a dangerous and scary buzzword – some tax professionals, accountants, politicians, and media figures have even taken to calling them death taxes. But they currently only affect a fraction of a percent of the American population. Could that change soon?

Estates receive the federal estate tax when their total value is higher than the current exemption limit – in 2022, that exemption limit is $12.06 million per individual and $24.12 million for married couples filing jointly. It is a progressive tax, meaning the tax rate depends on how much of your estate is taxable after considering deductions and exemptions. At its highest bracket, it has a tax rate of 40 percent. Form 706 is the document required for filing the United States Estate Tax Return.

The current exemption limit is exceptionally high but will only remain so high until the end of 2025. Then, the exemption limit will revert to what it was before 2017, adjusted for inflation.

2017 Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act made sweeping changes to the estate tax exemption limit and the standard deduction in income taxes, among other things. Unless those changes are written into law, these provisions will be sunset in the coming years.

For wealthy Americans, this doesn’t change much. They will be every bit as prepared then as they are now. But for Americans with a more modest estate, a drop in the exemption limit could mean that Americans passing away after 2025 could face an unexpected estate tax.

For now, unless your total real estate and investment assets are valued at millions of dollars, the estate tax is not typically something you will have to worry about. If you count yourself as wealthy, managing your estate to minimize or potentially even eliminate the estate tax is an integral part of estate planning.

But what happens if you cannot eliminate your estate tax burden? How does the IRS figure out what you owe? The fun part is that you must figure out what you owe, and the IRS gets to double-check if you're right. This is where IRS Form 706 comes into play.

What is IRS Form 706?

IRS Form 706 is the United States Estate (and Generation-Skipping Transfer) Tax Return.

The estate tax and the generation-skipping transfer tax use the same form because the GSTT is a second estate tax applied to an estate that skips a generation.

Let’s take a step back. Under the current tax provisions, exceptional wealth is taxed at death when it transfers from one generation to the next.

Skipping a generation (i.e., transferring millions in wealth to your grandchildren) effectively means skipping one instance of taxation. If an estate is transferred normally (i.e., from parent to child, then child to grandchild), the IRS can tax that wealth twice. The GSTT matches the estate tax already levied on an estate if inherited by a younger generation, essentially taxing it for the generational gap.

The third tax not mentioned in the title, yet equally important, is the federal gift tax. This is a tax applied on all gifts made annually past a specific limit. This exemption limit is $16,000 a year (in 2022). However, going over the limit does not necessarily result in taxation. Instead, any excess gets deducted from your lifetime gift tax exemption, which is your estate tax (or GSTT) exemption limit. In other words, making significant gifts throughout your lifetime can drastically lower your exemption limit and alter whether you owe estate taxes or how much.

Figuring all that out is what Form 706 is all about.

Who Is Filling Out Form 706?

Estate taxes are only levied after death. While you can plan by optimizing your estate and minimizing your tax liability through trusts, wills, gifts, beneficiary designations, and clever deeds – all completely within the limits of what is legally possible – you will not witness the fruits of these labors by design.

Your chosen estate representative will undergo several complex administrative and logistical tasks following your death. These include:

• Petitioning for probate
• Arranging for the valuation of your estate
• Organizing probate dates
• Contacting beneficiaries and creditors alike
• Filing your final tax return
• Dealing with final payroll payments.

Even so, someone has to take care of the paperwork in your deathly absence. That's where an executor or trustee comes into play.

If your estate is unwieldy, you may even employ the help of multiple skilled trustees, including experienced estate planning lawyers, accountants, and financial institutions. When the time comes, an experienced lawyer will know how to fill out Form 706.

Guide to Filling Out Form 706

Nevertheless, knowing what they’ll be in for can be helpful during the estate planning stages.

1. Part 1 of Form 706 requires basic information about you (the decedent) and the person filing the form (the executor).
2. Part 2 cannot be completed immediately and involves the arduous tax computation process, through which your executor determines your estate's tax liabilities—circle back to this after completing the subsequent parts.
3. Part 3 includes several elections the executor will have to decline or accept. These include special-use valuation, payment in installments, or alternate valuation.
4. Part 4 includes general information. This is where the executor must begin attaching supplementary documentation to support the provided data. This includes:
5. Proper authorization to receive tax info (as a lawyer, CPA, or enrolled agent)
6. The decedent's death certificate number
7. The decedent's beneficiaries
8. Any surviving spouse
9. A series of yes or no questions.
10. Part 5 involves recapitulation, wherein the executor must list the value of the estate’s contents at the time of death minus deductions (such as debts, funeral expenses, bequests, and so on).
11. After Part 5, the Form includes sections for Schedules A through U, requiring a comprehensive listing of the estate's assets and exclusions for the accurate calculation of the estate's total taxable value before finally combining these numbers as per the instructions in Part 2 to arrive at the final tax liability.

Can I Avoid Paying Estate Taxes?

Estate taxes apply to what you own, not necessarily to what you control or what is associated with you. Trusts, business interests, and foundations are a few different ways the ultra-wealthy distribute their wealth and minimize their income and final death taxes. Even if you are modestly wealthy, you can do the same to minimize your end-of-year tax obligations and final tax bill through the use of a comprehensive estate plan.

A good estate plan is more than just a one-and-done. Revisit, revise, and renew your plan often – at least once every five years or after every significant financial or personal life event.