Preparing the Form 706 - Allen Pritchett & Bassett, LLP€¦ · · 2016-09-21Preparing the Form...

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CHECKPOINT LEARNING® WEBINARS

Preparing the Form 706

Preparing the Form 706

Presented by: Brian Eisenmenger, CPA, MST

Copyright 2016 Thomson Reuters/Tax & Accounting

All Rights Reserved.

CHECKPOINT LEARNING® WEBINARS

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Copyright 2016 Thomson Reuters All Rights Reserved

This course, or parts thereof, may not be reproduced in another

document or manuscript in any form without the permission of the

publisher.

This material is designed to provide accurate and authoritative

information in regard to the subject matter covered. It is sold with the

understanding that the publisher is not engaged in rendering legal,

accounting or other professional service. If legal advice or other expert

assistance is required, the services of a competent professional person

should be sought – From a Declaration of Principles jointly adopted by a

Committee of the American Bar Association and a Committee of

Publishers and Associations.

“The Thomson Reuters content in this webinar is copyright protected.

If your certificate of attendance has been issued by anyone other than

Thomson Reuters, this material has been obtained in violation of

copyright law.”

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Brian Eisenmenger, CPA, MST

Brian Eisenmenger, is a CPA located in Wheaton, Illinois. His practice concentrates on serving corporate executives and successful small business owners with their tax planning needs.

Brian earned his Bachelor’s Degree from Eastern Illinois University and his Masters of Science in Taxation from Northern Illinois University.

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Learning Objectives

• Explain how to prepare a basic Form 706.

• Recognize the deceased spousal unused exclusion (DSUE).

• Determine which elements comprise the gross estate.

• Assess issues related to the valuation of assets.

• List deductible expenses and determine their treatment on the return.

Purpose of the Form 706

• The executor of a decedent’s estate uses Form 706 to figure the estate tax levied on the entire taxable estate.

• Used to figure the generation-skipping transfer tax (GST) on direct skips

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Which Estates Must File Form 706

For decedents who died in 2015, Form 706 must be filed by the executor of the estate of every U.S. citizen or resident:

• Whose gross estate, plus adjusted taxable gifts and specific exemption is more than $5,430,000, or

• Whose executor elects to transfer the deceased spousal unused exclusion (DSUE) amount to the surviving spouse, regardless of the size of the decedent’s gross estate.

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Which Estates Must File Form 706

To determine if you must file a return whose gross estate is more than $5,430,000 add:

1. The adjusted taxable gifts made by the decedent after December 31, 1976;

2. The total specific exemption allowed under Section 2521 (as in effect before its repeal by the Tax Reform Act of 1976) for gifts made by the decedent after September 8, 1976; and

3. The decedent’s gross estate valued as of the date of death.

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Polling Question #1

Who is the Chief Justice of the Supreme Court?

A. John Roberts

B. Anthony Rizzo

C. Aaron Rodgers

D. Michael Jordan

E. Michael Phelps

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Gross Estate

The gross estate includes all property in which the decedent had an interest (including real property outside the United States). It also includes:

• Certain transfers made during the decedent’s life without an adequate and full consideration in money;

• Annuities;

• The includible portion of joint estates with right of survivorship.

• The includible portion of tenancies by the entirety.

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Gross Estate

• Certain life insurance proceeds (even though payable to beneficiaries other than the estate).

• Property over which the decedent possessed a general power of appointment;

• Dower or curtesy (or statutory estate) of the surviving spouse (think QTIP), and

• Community property to the extent of the decedent’s interest as defined by state law.

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Executor

• The term executor includes the executor, personal representative, or administrator of the decedent’s estate. If none of these is appointed, qualified and acting in the United States, every person in actual or constructive possession of any property of the decedent is considered and executor and must file a return.

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Executor

• Executors must provide documentation proving their status. Documentation will vary, but may include documents such as a certified copy of the will or a court order designating the executor(s). A statement by the executor attesting to their status is insufficient.

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Multiple Executors

• If there is more than one executor, all listed executors are responsible for the return. However, it is sufficient for only one of the co-executors to sign the return.

• All executors are liable for penalties imposed for erroneous or false returns.

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When to file

• The Form 706 to report estate and/or GST tax must be filed within 9 months after the decedent’s death.

• An automatic 6-month extension of time to file may be obtained by filing form 4768.

Part 1 – Decedent and Executor

See Page 1 / Part 1 of Form 706.

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Part 3 - Elections

Alternate Valuation - if elected, value the property as of the following dates as applicable…

• Any property distributed, sold, exchanged or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent’s death is valued on the date of distribution, sale, exchange, or other disposition.

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Part 3 - Elections

• Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued as of the 6 months after the date of the decedent’s death.

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Part 3 - Elections

• You may not elect alternate valuation unless the election will decrease both the value of the gross estate and the sum of the estate and GST taxes payable.

• The alternate valuation cannot be applied to only a part of the property.

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Part 3 - Elections

• Interest accrued to the date of the decedent’s death on bonds, notes, and other interest-bearing obligations is property of the gross estate on the date of death and is included in the alternate valuation.

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Part 3 - Elections

• Outstanding dividends that were declared to stockholders of record on or before the date of the decedent’s death are considered property of the gross estate on the date of death and are included in the alternate valuation.

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Part 3 - Elections

• Ordinary dividends declared to stockholders of record after the date of the decedent’s death are not included in the gross estate on the date of death and are not eligible for alternate valuation.

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Polling Question #2

Which of these currently serves on the Supreme Court?

A. Brett Favre

B. Ruth Bader Ginsburg

C. Joe Maddon

D. LeBron James

E. Fred Flintstone

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Part 3 - Elections

On Schedules A through I, you must show:

1. What property is included in the gross estate on the date of the decedent’s death;

2. What property was distributed, sold, exchanged, or otherwise disposed of within the 6-month period after the decedent’s death, and the dates of these distributions;

3. The date of death value, entered in the appropriate value column with items of principal and includible income shown separately, and

4. The alternate value, entered in the appropriate value column with items of principal and includible income shown separately.

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Part 3 - Elections

Distributions, sales, exchanges and other dispositions of the property within the 6-month period after the decedent’s death must be supported by evidence.

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Part 3 - Elections

Special-Use Valuation – Under section 2032A, you may elect to value certain farm and closely held business real property at its farm or business use value rather than its FMV.

Both special-use valuation and alternate valuation may be elected.

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Part 3 - Elections

To elect the special-use valuation check “Yes” on line 2 and attach Schedule A-1.

The total value of the property valued under section 2032A may not be decreased from FMV by more than $1,100,000 for decedents dying in 2015.

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Part 3 - Elections

Real property may qualify for the section 2032A election if:

• The decedent was a U.S. citizen or resident at the time of death;

• The real property is located in the U.S;

• At the decedent’s death, the real property was used by the decedent or a family member for farming or in a trade or business, or was rented for such use by either the surviving spouse or a lineal descendant of the decedent to a family member on a net cash basis;

• The real property was acquired from or passed from the decedent to a qualified heir of the decedent;

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Part 3 - Elections

• The real property was owned and used in a qualified manner by the decedent or a member of the decedent’s family during 5 of the 8 years before the decedent’s death; and

• The property meets the following percentage requirements;

– At least 50% of the adjusted value of the gross estate must consist of the adjusted value of real or personal property that was being used as a farm or in a closely held business and that was acquired from, or passed from the decedent to a qualified heir of the decedent, and

– At least 25% of the adjusted value of the gross estate must consist of the adjusted value of qualified farm or closely-held business real property.

(For this purpose, adjusted value is the value of the property determined without regard to its special-use value).

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Line 3 – Section 6166 Installment Payments

If the gross estate includes an interest in a closely-held business, you can elect to pay part of the estate tax in installments under section 6166.

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Part 3 - Elections

The maximum amount that can be paid in installments is that part of the estate tax that is attributable to the closely-held business.

The IRS may require that an estate furnish a surety bond when granting the installment election.

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Part 3 - Elections

To qualify for installment payments, the value of the interest in the closely-held business that is included in the gross estate must be more than 35% of the adjusted gross estate (the gross estate less expenses, indebtedness, taxes and losses (Schedules J, K, L of Form 706 – do not include any portion of the state death tax deduction)).

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Part 3 - Elections

For purposes of the installment payment election, an interest in a closely-held business means:

• Ownership of a trade or business carried on as a proprietorship.

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• An interest as a partner in a partnership carrying on a trade or business if 20% or more of the total capital interest was included in the gross estate of the decedent or the partnership had no more than 45 partners, or

• Stock in a corporation carrying on a trade or business if 20% or more in value of the voting stock of the corporation is included in the gross estate of the decedent or the corporation had no more than 45 shareholders.

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Polling Question #3

Who was the first Chief Justice of the Supreme Court?

A. John Wayne

B. John Denver

C. John Jay

D. John Travolta

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Part 3 - Elections

• Time for payment – under the installment method, the executor may elect to defer payment of the qualified estate tax, but not interest for up to 5 years from the original payment due date. After the first installment of tax is paid, you must pay the remaining installments annually by the date 1 year after the date of the preceding installment.

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Part 3 - Elections

• Interest on the unpaid portion of the tax is not deferred and must be paid annually. Interest must be paid at the same time as and as part of each installment payment of the tax.

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Part 4 – General Information

Question 12 – “Did the decedent make any transfer described in sections 2035, 2036, 2037 or 2038?”

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IRC Sec. 2035(a) – any transfer by the decedent with respect to a life insurance policy within three years before death.

a. Any transfer within three years before death of a retained section 2036 life estate, section 2037 reversionary interest or section 2038 power to revoke if the property, subject to the life estate, interest or power would have been included in the gross estate if the decedent had continued to possess the life estate, interest or power until death.

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IRC Sec. 2035(b) applying to the required inclusion in the estate of gift taxes paid within the three year period prior to death.

a. Report on Schedule G the amount of any gift taxes that were paid by the decedent of the estate on gifts made by the decedent or the decedent’s spouse within three years before death.

b. The date of the gift, not the date of payment of the gift tax, determines whether a gift tax paid is included in the gross estate under this rule.

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IRC Sec. 2036(a) applying to transfers with a retained life estate.

a. These are transfers by the decedent in which the decedent retained an interest in the transferred property.

b. The transfer can be in trust or otherwise but excludes bona fide sales for adequate and full consideration.

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Examples of transfers with a retained life estate:

• Retaining the right to the income from the transferred property.

• Retaining the right to the possession or enjoyment of the property.

• Retaining the right to designate the persons who shall receive the income from, or possess or enjoy the property.

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IRC Section 2036(b) applies to transfers of stock in a controlled corporation with retained voting rights.

a. If the decedent retained direct or indirect voting rights in a controlled corporation, the decedent is considered to have retained enjoyment of the transferred stock.

b. Controlled corporation – if the decedent owned or had the right to vote at least 20% of the total combined voting power of all classes of stock.

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Polling Question #4

Who is the only person to serve as President of the United States and Chief Justice of the Supreme Court?

A. Abraham Lincoln

B. Jimmy Carter

C. Theodore Roosevelt

D. George W. Bush

E. William Howard Taft

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IRC Section 2037 applies to transfers taking effect at death under which possession or enjoyment can be obtained only by surviving the decedent.

a. The decedent must have retained a reversionary interest in the property that immediately before the decedent’s death had a value of more than 5% of the value of the transferred property.

b. A reversionary interest is generally any right under which the transferred property will or may be returned to the decedent or the decedent’s estate.

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IRC Section 2038 applies to revocable transfers.

a. Includes the power to alter, amend, revoke or terminate any transfer.

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IRC Section 2038 examples…

a. Revocable living trusts

b. A decedent’s power to change the beneficiaries.

c. Any power to hasten or increase any beneficiary’s enjoyment of the property.

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Question 17 –– “Was the decedent ever the beneficiary of a trust for which a deduction was claimed by the estate of a predeceased spouse under section 2056(b)(7) and which is not reported on this return?”

If answered yes, unless adequate explanation exists, this would flag the return since IRC Section 2044 (QTIP) requires inclusion of the value of such a trust.

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Part 5 - Recapitulation

For items 1 through 9 you must make an entry in each of the items and attach the appropriate schedules unless you are filing Form 706 only to elect portability of the DSUE amount.

If you are filing to elect portability you enter a best estimate on line 10. You do not enter anything on lines 1 through 9.

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Part 5 - Recapitulation

For items 14 through 20 you must make an entry in each of the items and attach the appropriate schedules unless you are filing Form 706 only to elect portability of the DSUE amount.

If you are filing to elect portability you enter the amount from line 10 on line 23.

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Part 6 – Portability of Deceased Spousal Unused Exclusion (DSUE)

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 authorized estates of decedents dying after December 31, 2010 to elect to transfer any unused exclusion to the surviving spouse.

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If the executor of the decedent’s estate elects portability of the DSUE, the surviving spouse can apply the DSUE amount received from the estate of the last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.

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A nonresident surviving spouse who is not a US citizen may not take into account the DSUE amount of a deceased spouse, except to the extent allowed by treaty with their country of citizenship.

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The last deceased spouse is the most recently deceased person who was married to the surviving spouse at the time of that person’s death.

The identity of the last deceased spouse is determined as of the day a taxable gift is made, or in the case of a transfer at death, the date of the surviving spouse’s death.

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The identity of the last deceased spouse is not impacted by whether the decedent’s estate elected portability or whether the last deceased spouse had any DSUE amount available.

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Remarriage also does not affect the designation of the last deceased spouse and does not prevent the surviving spouse from applying the DSUE amount to taxable transfers.

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When a taxable gift is made, the DSUE amount received from the last deceased spouse is applied before the surviving spouse’s basic exclusion amount.

A surviving spouse may use the DSUE amount of the last deceased spouse to offset the tax on any taxable transfer made after the deceased spouse’s death.

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Polling Question #5

How many people serve on the Supreme Court?

A. 7

B. 8

C. 9

D. 11

E. 15

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A surviving spouse who has more than one predeceased spouse is not precluded from using the DSUE amount of each spouse in succession.

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A surviving spouse may not use the sum of DSUE amounts from multiple predeceased spouses at one time nor may the DSUE amount of a predeceased spouse be applied after the death of a subsequent spouse.

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Making the Election…

A timely filed (one that is filed on or before the due date of the return, including extensions) and complete Form 706 is required to elect portability of the DSUE to a surviving spouse.

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The election is effective as of the decedent’s date of death, so the DSUE amount received by a surviving spouse may be applied to any transfer occurring after the decedent’s death.

A portability election is irrevocable unless an adjustment or amendment to the election is made on a subsequent return filed on or before the due date.

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Under Regulations section 20.2010-2(a)(5), the executor of an estate of a nonresident decedent who was not a US citizen at the time of death cannot make a portability election.

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Opting Out…

• Check the box in Section A of Part 6, or

• Do not file a form 706 (if no return is required).

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Example…Brad and Angelina are married. Brad dies in 2015 having made $3 million in taxable transfers and no taxable estate. An election is made on his estate tax return to permit Angelina to use his unused exclusion amount. Thereafter Angelina’s applicable exclusion is $7,860,000 (her $5,430,000 million basic exclusion plus $2,430,000 exclusion from Brad).

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Example 2…assume same facts except that Angelina now marries Billy Bob. Billy Bob dies having made $4 million in taxable transfers and having no taxable estate. Only Billy Bob’s $1,430,000 unused exclusion is available for use by Angelina. Angelina’s applicable exclusion is now $6,860,000.

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Schedule A – Real Estate

List the real estate the decedent owned or had contracted to purchase. Number each parcel in the left-hand column.

You must describe the real estate in enough detail so that the IRS can easily locate it for inspection and valuation.

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For city or town property, report the street and number, ward, subdivision, block and lot, etc.

For rural property, report the township, range, landmarks, etc.

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If any item of real estate is subject to a mortgage for which the decedent’s estate is liable, you must report the full value of the property in the value column.

Enter the amount of the mortgage under “Description” on this schedule. The unpaid amount of the mortgage is deducted on Schedule K.

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If the decedent’s estate is not liable for the amount of the mortgage, report only the value of the equity of redemption (or the value of the property less the indebtedness) in the value column as part of the gross estate.

Do not enter any amount less than zero. Do not deduct the amount of indebtedness on Schedule K.

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Report the value of real estate without reducing it for homestead or other exemption and explain how the reported values were determined.

Attach copies of any appraisals.

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For community property, show the full value of the property and subtract the surviving spouse’s interest in the community property.

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If you are completing the Form 706 only to elect portability of the DSUE, do not enter any value in the last three columns.

Polling Question #6

For 2015, what was the salary of an associate justice of the Supreme Court?

A. $249,300

B. $351,300

C. $401,600

D. $550,000

E. $701,203

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Schedule B – Stocks and Bonds

If the total gross estate contains any stocks or bonds you must complete Schedule B and file it with the return.

On Schedule B, list the stocks and bonds included in the decedent’s gross estate. Number each item in the left-hand column.

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Bonds that are exempt from federal income tax are NOT exempt from estate tax. These bonds should be listed on Schedule B.

If you paid any estate, inheritance, legacy, or succession tax to a foreign country on any stocks or bonds included in this schedule, group those stock and bonds together and label them “Subjected to Foreign Death Taxes”

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List interest and dividends on each stock or bond on a separate line.

Indicate as a separate item dividends that have not been collected at death and are payable to the decedent or the estate because the decedent was a stock holder of record on the date of death.

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However, if the stock is being traded on an exchange and is selling ex-dividend on the date of the decedent’s death, do not include the amount of the dividend as a separate item.

Instead, add it to the ex-dividend quotation in determining the FMV of the stock on the date of the decedent’s death.

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Dividends declared on shares of stock before the death of the decedent but payable to stockholders of record on a date after the decedent’s death are not includible in the gross estate for federal estate tax purposes and should not be listed on Schedule B.

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“Description” – Stocks

• Number of shares

• Whether common or preferred

• Issue

• Par value where needed for identification

• Price per share

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“Description” – Stocks

• Exact name of corporation

• Principal exchange upon which sold (if listed on an exchange)

• Nine-digit CUSIP number

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“Description” – Bonds

• Quantity and denomination

• Name of obligor

• Date of maturity

• Interest rate

• Interest due date

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“Description” – Bonds

• Principal exchange upon which sold (if listed on an exchange)

• Nine-digit CUSIP number

If the stock or bond is unlisted, show the company’s principal business office.

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If the gross estate includes any interest in a trust, partnership, or closely-held entity, provide the employer identification number in the description.

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Valuation – list the FMV of the stock or bonds. The FMV of a stock or bond is the mean between the highest and lowest selling prices quoted on the valuation date.

If only the closing selling prices are available, then the FMV is the mean between the quoted closing selling price on the valuation date and on the trading day before the valuation date.

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What if there were no sales on the valuation date (person died on the weekend or holiday)?

1. Find the mean between the highest and lowest selling prices on the nearest trading date before and the nearest trading date after the valuation date.

2. Prorate the difference between the mean prices to the valuation date.

3. Add or subtract (whichever applies) the prorated part of the difference to or from the mean price figured for the nearest trading date before the valuation date.

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Example…Henry died on June 15th. Sales of the stock nearest the valuation date occurred two trading days before (June 13th) and three trading days after (June 18th) his date of death.

On those days, the mean sales prices per share were $10 and $15, respectively.

Therefore, the price of $12 is considered the FMV of a share of stock on the valuation date.

If, however, on June 13th and 18th, the mean sales prices per share were $15 and $10 respectively, the FMV of a share of stock on the valuation date is $13.

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For inactive stocks and closely held corporations, attach to Schedule B complete financial and other data used to determine value, including balance sheets (particularly the one nearest to the valuation date) and statements of net earnings or operating results and dividends paid for each of the 5 years immediately before the valuation date.

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Polling Question #7

Where is the Supreme Court building located in Washington DC?

A. Across the street from the IRS

B. Across the street from the White House

C. Across the street from the FBI building

D. Across the street from the Lincoln Memorial

E. Next to Starbucks (you need lots of caffeine if you are studying law all day)

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Schedule C – Mortgages, Notes and Cash

Schedule C is completed if the total gross estate contains any:

• Mortgages

• Promissory notes

• Contracts by decedent to sell land

• Cash in possession

• Cash in banks or other types of financial organizations

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“Description” – for mortgages, list:

• Face value,

• Unpaid balance,

• Date of mortgage,

• Name of maker,

• Property mortgaged,

• Date of maturity,

• Interest rate, and

• Interest date

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“Description” – example

“Mortgage of $50,000, unpaid balance: $17,000; dated January 1, 2000; Jon Doe to Richard Roe; premises: 22 Clinton Street; Newark, NJ; due January 1, 2020; interest payable at 10% a year – January 1 and July 1.”

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“Description” – Contracts to sell land, list:

• Name of purchaser

• Contract date

• Property description

• Sale price

• Initial payment

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“Description” – Contracts to sell land, list:

• Amounts of installment payment

• Unpaid balance of principal

• Interest rate

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“Description” – Cash in banks and savings institutions…

• Name and address of each financial organization

• Amount in each account

• Serial or account number

• Nature of account (checking, savings, etc.)

• Unpaid interest accrued from date of last interest payment to the date of death

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Schedule D – Insurance on the Decedent’s Life

You must include in the gross estate:

• Insurance on the decedent’s life receivable by or for the benefit of the estate; and

• Insurance on the decedent’s life receivable by beneficiaries other than the estate

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• The proceeds of all insurance on the life of the decedent not receivable, or for the benefit of the decedent’s estate if the decedent possessed at death any of the following incidents of ownership, exercisable either alone or in conjunction with any person or entity:

– The right of the insured or estate to its economic benefits;

– The power to change the beneficiary;

– The power to surrender or cancel the policy;

– The power to assign the policy or to revoke an assignment;

– The power to pledge the policy for a loan;

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– The power to obtain from the insurer a loan against the surrender value of the policy; and

– A reversionary interest if the value of the reversionary interest was more than 5% of the value of the policy immediately before the decedent died.

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You must list every insurance policy on the life of the decedent, whether or not it is included in the gross estate.

Under “Description” list:

• The name of the insurance company, and

• The number of the policy

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For every life insurance policy listed on the schedule, request a statement of Form 712, Life Insurance Statement, from the company that issued the policy.

Attach the Form 712 to Schedule D.

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If the policy proceeds are paid in one sum, enter the net proceeds received (from Form 712, line 24) in the value columns of Schedule D.

If the policy proceeds are not paid on one sum, enter the value of the proceeds as of the date of the decedent’s death (from Form 712, line 25).

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If part or all of the policy proceeds are not included in the gross estate, explain why they were not included.

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Polling Question #8

Are you a premium bundle subscriber?

A. Yes

B. No

C. Don’t know

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Schedule E – Jointly Owned Property

Enter on this schedule all property of whatever kind or character, whether real estate, personal property, or bank accounts, in which the decedent held at the time of death an interest either as a joint tenant with right to survivorship or as a tenant by the entirety.

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DO NOT list on this schedule property that the decedent held as a tenant in common but report the value of the interest on the appropriate schedule.

Similarly, community property held by the decedent and spouse should be reported on the appropriate schedule.

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Part 1. Qualified joint interests held by decedent and spouse.

A joint interest is a qualified joint interest if the decedent and the surviving spouse held the interest as:

• Tenants by the entirety, or

• Joint tenants with right of survivorship if the decedent and decedent’s spouse are the only joint tenants.

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Interests that meet either of the two requirements should be entered in Part 1.

Joint interests that do not meet either of the two requirements should be entered in Part 2.

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Under “Description”, describe the property as required for Schedules A, B, C and F.

You cannot claim special treatment for property held jointly by a decedent and a surviving spouse who is not a US citizen. Report these joint interest on Part 2 of Schedule E.

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Part 2 – All other joint interests

For each item of property, enter the appropriate letter A, B, C, etc. from line 2a to indicate the name and address of the surviving co-tenant.

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In the “Percentage includible” column, enter the percentage of the total value of the property included in the gross estate.

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Generally, you must include the full value of the jointly-owned property in the gross estate. However, the full value should not be included if you can show that a part of the property originally belonged to the other tenant or tenants and was never received or acquired by the other tenant or tenants from the decedent for less than adequate and full consideration.

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Full value of jointly-owned property also does not have to be included in the gross estate if you can show that any part of the property was acquired with consideration originally belonging to the surviving joint tenant or tenants. In this case you may exclude from the value of the property an amount proportionate to the consideration furnished by the other tenant or tenants.

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If you believe that less than the full value of the entire property is includible in the gross estate for tax purposes, you must establish the right to include the smaller value by attaching proof of the extent, origin, and nature of the decedent’s interest and the interest(s) of the decedent’s co-tenant or co-tenants.

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Schedule F – Other Miscellaneous Property

On Schedule F, list all items that must be included in gross estate that are not reported on any other schedule including:

• Schedule C businesses

• Collectibles

• Personal items

• Automobiles

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If the decedent was a surviving spouse, he or she may have received qualified terminable interest property (QTIP) from the predeceased spouse.

This property is listed on Schedule F.

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Schedule G – Transfers During the Decedent’s Life

Schedule G is completed and filed with the return if you answered “Yes” to question 12 or 13a of Part 4 or transfers were made that are described in the next few slides.

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Enter at item A the total value of gift taxes that were paid by the decedent or the estate on gifts made by the decedent or the decedent’s spouse within 3 years of death.

The date of gift, not the date of payment of the gift tax, determines whether a gift tax paid is included in the gross estate under this rule.

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Enter at item B:

• Transfers within 3 years of death [IRC Section 2035(a)]. These include only the following:

– Any transfer by the decedent with respect to a life insurance policy within 3 years of death; or

– Any transfer within 3 years of death of a retained section 2036 life estate, section 2037 reversionary interest, or 2038 power to revoke if the property subject to the life estate interest or power would have been included in the gross estate had the decedent continued to possess the life estate, interest or power until death.

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Enter at item B:

• Transfers with retained life estate (IRC Section 2036). These are transfers by the decedent in which the decedent retained an interest in the transferred property.

• Transfers taking effect at the decedent’s death (IRC Section 2037).

• Revocable transfers (IRC Section 2038).

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Schedule H – Powers of Appointment

Schedule H is completed and filed with the return if you answered “Yes” to question 14 of Part 4.

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On Schedule H, include in the gross estate:

• The value of property for which the decedent possessed a general power of appointment on the date of his/her death, and

• The value of property for which the decedent possessed a general power of appointment that he or she exercised or released before death by disposing of it in such a way that if it were a transfer of property owned by the decedent, the property would be includible in the decedent’s gross estate as a transfer with a retained life estate, a transfer taking effect at death, or a revocable transfer.

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If the decedent ever possessed a power of appointment, attach a certified or verified copy of the instrument granting the power and a certified or verified copy of any instrument by which the power exercised or released. You must file these copies even if you contend that the power was not a general power of appointment, and that the property is not otherwise includible in the gross estate.

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Schedule I - Annuities

Include all contracts where:

1. The contract provides for payments over a period of time. The payments do not have to be equal.

2. The decedent possessed a right to payments that would have continued if not for the decedent’s passing.

3. A beneficiary is entitled to the payments as a result of the decedent’s death.

4. The agreement was entered into after March 3, 1931.

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Schedule I - Annuities

Valuation –

1. Commercial annuities are valued at replacement cost.

2. Non-commercial annuities are valued using IRS valuation tables in effect for the month of death. The interest factor used is 120% of the applicable federal mid-term rate.

3. Only the portion of the annuity representing the decedent’s contribution is taxed. For this purpose, employer contributions are attributable to the decedent.

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Schedule J – Funeral and Administration Expenses

Allowed on Form 706, never as an income tax deduction.

Includes:

Flowers Wake

Cremation Burial Plot

Fees to Clergy Certain Travel

Tombstones Telephone

Transportation Food/Refreshments

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Community Property Laws Effect on Funeral Expenses

In community property states, whether funeral expenses and/or final illness expenses are chargeable in full against the estate of the decedent or are a community obligation for which the deceased spouse’s estate may deduct only 50% of the amount must be determined under state law.

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• Arizona – All funeral expenses paid are deductible

• California – Deduction of funeral expenses is allowed in full

• Idaho – Deduction of funeral expenses is allowed in full

• Washington – Deduction of only 50% is allowed

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Expenses incurred in settling the estate are deductible if reasonable and necessary including:

• Executor commissions

• Attorney fees for estate administration

• Selling expenses incurred in selling estate property

• Interest expense accrued on debts after date of death.

• Executor commissions, accountant and/or attorney fees not paid at the time of audit can be estimated as long as they are supported by affidavit (Form 4421)

• You may elect to deduct these fees on Form 1041 but not on both the 706 and 1041

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Schedule K – Debts of the Decedent and Mortgages and Liens

Include on this schedule:

• Mortgages and other indebtedness on property, the value of which is included in the gross estate; and

• Certain other claims against the decedent’s estate – personal obligations of the decedent at the time of death, which are enforceable claims against the estate.

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In a community property state, the estate may deduct only those debts allocable to the decedent.

Contingent claims are deductible, if they can be valued with reasonable certainty and will be paid.

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Payments made by an estate under guarantees made by a decedent are deductible if the guarantee is binding on the estate and is based on full and adequate consideration.

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Taxes (other than federal death taxes) accrued to date of death are deductible

• Gift taxes unpaid at date of death

• Property taxes, if there is a lien against the property

• Income taxes on taxable income earned prior to the decedent’s death

• State death taxes are deductible on Page 1 Part 2 of the Form 706

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Schedule L – Net Losses and Administration Expenses

As with administrative expenses, the representative can elect to claim casualty losses on either the Form 706 or the income tax return (but not on both).

• If the losses are claimed as an estate tax deduction, they should be claimed in the top section of Schedule L.

• The property should be fully identified, including reference to the schedule of Form 706 where its value is reported for inclusion in the gross estate.

• Only one-half of the deduction is allowed with respect to losses of community property.

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Expenses related to settlement of assets not subject to claims (living trusts, joint tenancy, life insurance) are deducted on Schedule L.

• Expenses must be incurred as a result of the death of the decedent to be deductible.

• These expenses might include appraisal fees, filing fees, publications and notices, legal fees and accounting and tax preparation.

• Expenses incurred on behalf of the transferees are not deductible.

• The surviving spouse’s share of expense with respect to community property is not deductible.

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• There may be a deduction for selling expenses of non-probate assets if the expenses are necessary to:

– Pay debts

– Pay the expenses of selling assets not subject to administration

– Pay taxes, including estate taxes

– Preserve the estate

– Affect distribution

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Schedule M – Bequests to Surviving Spouse

Decedents can claim an unlimited marital deduction against the gross estate.

• Property must pass from decedent to surviving spouse.

• The spouse must survive the decedent.

• Surviving spouse must be a U.S. citizen legally married, unless:

– The surviving spouse was a U.S. resident at the time of death and becomes a citizen prior to filing Form 706; or

– Property passes to a qualified domestic trust (QDT).

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• Property qualifying for marital deduction cannot be paid to a spouse in satisfaction of a claim.

• Property must not represent a terminable interest – an interest that will terminate upon the passage of time or occurrence or non-occurrence of an event.

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Exceptions to rule that property must not represent a terminable interest…

1. Interest passing to surviving spouse can be conditional upon surviving the decedent by at least six months.

2. Transfers proving income for life to the surviving spouse and giving the spouse a broad power of appointment over income.

3. Life insurance and annuity payments.

4. A qualified terminable interest (QTIP) granting a life estate without the power of appointment.

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Schedule O – Charitable Bequests

• Exhibits should include a copy of will or instrument establishing the donation.

• If the charitable deduction comes from residue, taxes and expenses coming out of residue will effect the deduction.

• Where the decedent had established an inter vivos charitable remainder trust, the trust assets would normally be included in the gross estate (Schedule G) as a retained interest, with a corresponding deduction on Schedule O for the amount of the trust assets distributed to charity.

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• A charitable contribution deduction may be claimed for a qualifying conservation easement granted after the decedent’s death under the provisions of section 2031(c)(9).

• A charitable contribution deduction may also be claimed for amounts that are transferred to charitable organizations as a result of either a qualified disclaimer or the complete termination of a power to consume, invade, or appropriate property for the benefit of an individual.

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• A charitable contribution deduction may also be claimed for amounts that are transferred to charitable organizations as a result of either a qualified disclaimer or the complete termination of a power to consume, invade, or appropriate property for the benefit of an individual.

• There is no maximum on this deduction. Therefore, if the entire estate is left to charity there will be no estate tax.

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Schedule PC – Protective Claim for Refund

A protective claim for refund preserves the estate’s right to a refund of tax payable on any amount included in the gross estate which would be deductible under Section 2053 but has not been paid or otherwise will not meet the requirements of Section 2053 until after the statute of limitations period for filing the claim has passed.

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• Schedule PC may be used to file a section 2053 protective claim for refund.

• It is also used by the Estate to inform the IRS when the contingency leading to the protective claim for refund has been resolved and the refund due the Estate is finalized.

• The Estate must indicate whether the Schedule PC being filed is the initial notice of protective claim, notice of partial claim for refund, or notice of the final resolution of the claim for refund.

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• Because each separate claim or expense requires a separate Schedule PC, more than one Schedule PC may be included with Form 706, if applicable. Two copies of each Schedule PC must be included with Form 706.

• Filing a section 2053 protective claim for refund on Schedule PC will not suspend the IRS’ review and examination of Form 706, nor will it delay the issuance of a closing letter for the estate.

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Q&A

We will be happy to take questions at this time.

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