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Instructions for Form 706
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Department of the Treasury
Internal Revenue Service
Instructions for Form 706
(Rev. October 2006)
United States Estate (and Generation-Skipping Transfer) Tax Return
For decedents dying after December 31, 2005 and before January 1, 2007.
Section references are to the Internal
Revenue Code unless otherwise noted.
Prior Revisions of Form 706
For
Decedents
Dying
and
After
October
8, 1990
December
31, 1997
December
31, 1998
December
31, 2000
December
31, 2001
December
31, 2002
December
31, 2003
December
31, 2004
Before
January
1, 1998
January
1, 1999
January
1, 2001
January
1, 2002
January
1, 2003
January
1, 2004
January
1, 2005
January
1, 2006
Use
Revision
of
Form 706
Dated
April 1997
July 1998
July 1999
November
2001
August
2002
August
2003
August
2004
August
2005
Contents
General Instructions . . . . . . . . .
Purpose of Form . . . . . . . . . . . .
Which Estates Must File . . . . . . .
Executor . . . . . . . . . . . . . . . . . .
When To File . . . . . . . . . . . . . . .
Where To File . . . . . . . . . . . . . .
Paying the Tax . . . . . . . . . . . . . .
Signature and Verification . . . . . .
Amending Form 706 . . . . . . . . . .
Supplemental Documents . . . . . .
Rounding Off to Whole Dollars . .
Penalties . . . . . . . . . . . . . . . . . .
Obtaining Forms and
Publications . . . . . . . . . . . . . .
Specific Instructions . . . . . . . .
Part 1 — Decedent and Executor
(Page 1 of Form 706) . . . . . . .
Part 2 — Tax Computation (Page
1 of Form 706) . . . . . . . . . . . .
Part 3 — Elections by the
Executor (Page 2 of Form 706)
Part 4 — General Information
(Pages 2 and 3 of Form 706) . .
Part 5 — Recapitulation (Page 3
of Form 706) . . . . . . . . . . . . .
*Schedule A — Real Estate . . . . .
*Schedule A-1 — Section 2032A
Valuation . . . . . . . . . . . . . . . .
Schedule B — Stocks and Bonds
*Schedule C — Mortgages,
Notes, and Cash . . . . . . . . . . .
*Schedule D — Insurance on the
Decedent’s Life . . . . . . . . . . . .
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Contents
*Schedule E — Jointly Owned
Property . . . . . . . . . . . . . . . . .
*Schedule F — Other
Miscellaneous Property . . . . . .
Schedule G — Transfers During
Decedent’s Life . . . . . . . . . . . .
Schedule H — Powers of
Appointment . . . . . . . . . . . . . .
Schedule I — Annuities . . . . . . . .
*Schedule J — Funeral Expenses
and Expenses Incurred in
Administering Property Subject
to Claims . . . . . . . . . . . . . . . .
Schedule K — Debts of the
Decedent and Mortgages and
Liens . . . . . . . . . . . . . . . . . . .
Schedule L — Net Losses During
Administration and Expenses
Incurred in Administering
Property Not Subject to Claims
*Schedule M — Bequests, etc., to
Surviving Spouse (Marital
Deduction) . . . . . . . . . . . . . . .
Schedule O — Charitable, Public,
and Similar Gifts and Bequests
Schedule P — Credit for Foreign
Death Taxes . . . . . . . . . . . . . .
Schedule Q — Credit for Tax on
Prior Transfers . . . . . . . . . . . .
Schedules R and R-1 —
Generation-Skipping Transfer
Tax . . . . . . . . . . . . . . . . . . . .
Schedule U — Qualified
Conservation Easement
Exclusion . . . . . . . . . . . . . . . .
Continuation Schedule . . . . . . . .
Privacy Act and Paperwork
Reduction Act . . . . . . . . . . . . .
Worksheet for Schedule Q . . . . .
Index . . . . . . . . . . . . . . . . . . . . .
Checklist . . . . . . . . . . . . . . . . . .
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* For Schedules A, A-1, C, D, E, F,
J, and M, see instructions in the
Form 706 itself.
.... 6
What’s New
. . . 11
• Use this revision of Form 706 only for
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the estates of decedents dying in
calendar year 2006.
• The maximum tax rate for the estates
of decedents dying in 2006 has
decreased to 46%.
• The executor must now file Form 706
at the Cincinnati Service Center,
regardless of whether the decedent was a
U.S. citizen residing in the U.S., a
resident alien, or a nonresident U.S.
Cat. No. 16779E
citizen. See Where To File on page 2 for
the address.
• The Pension Protection Act of 2006
(PPA) has amended the provisions used
to determine substantial and gross
misstatements of valuation of property.
The PPA applies to returns filed after
August 17, 2006. See Penalties,
Valuation understatement on page 3 and
section 6662 for more details.
• The state death tax credit has been
repealed for estates of decedents dying
after December 31, 2004. Beginning in
2005, the credit has been replaced with a
state death tax deduction against the
value of the gross federal estate. See
Line 3b. State Death Tax Deduction on
page 5 for details.
• Various dollar amounts and limitations
relevant to Form 706 are indexed for
inflation. For decedents dying in 2006, the
following amounts have increased:
(a) the annual exclusion for gifts of
present interests made to a donee is
$12,000;
(b) the ceiling on special-use valuation
is $900,000; and
(c) the amount used in computing the
2% portion of estate tax payable in
installments is $1,200,000.
The IRS will publish amounts for future
years in an annual revenue procedure.
• Beginning with the estates of
decedent’s dying and generation-skipping
transfers occurring after December 31,
2003, the generation-skipping transfer
(GST) exemption is equal to the
applicable exclusion amount. For 2006,
that amount is $2,000,000.
• You can request an automatic 6-month
extension of time to file Form 706 by filing
Form 4768, Application for Extension of
Time To File a Return and/or Pay U.S.
Estate (and Generation-Skipping
Transfer) Taxes (Rev. January 2006).
When asking for an automatic 6-month
extension, you are not required to provide
an explanation for your request. For
additional information, see Form 4768
and its instructions.
General Instructions
Purpose of Form
The executor of a decedent’s estate uses
Form 706 to figure the estate tax imposed
by Chapter 11 of the Internal Revenue
Code. This tax is levied on the entire
taxable estate, not just on the share
received by a particular beneficiary. Form
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Instructions for Form 706
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706 is also used to compute the
generation-skipping transfer (GST) tax
imposed by Chapter 13 on direct skips
(transfers to skip persons of interests in
property included in the decedent’s gross
estate).
Which Estates Must File
For decedents dying in 2006, Form 706
must be filed by the executor for the
estate of every U.S. citizen or resident
whose gross estate, plus adjusted taxable
gifts and specific exemption, is more than
$2,000,000.
To determine whether you must file a
return for the estate, add:
1. The adjusted taxable gifts (under
section 2001(b)) 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
at the date of death.
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 or money’s
worth,
• Annuities,
• The includible portion of joint estates
with right of survivorship (see the
instructions on the back of Schedule E),
• The includible portion of tenancies by
the entirety (see the instructions on the
back of Schedule E),
• Certain life insurance proceeds (even
though payable to beneficiaries other than
the estate) (see the instructions on the
back of Schedule D),
• Property over which the decedent
possessed a general power of
appointment,
• Dower or curtesy (or statutory estate)
of the surviving spouse, and
• Community property to the extent of the
decedent’s interest as defined by
applicable law.
For more specific information, see the
instructions for Schedules A through I.
U. S. Citizens or Residents;
Nonresident Noncitizens
File Form 706 for the estates of
decedents who were either U.S. citizens
or U.S. residents at the time of death. For
estate tax purposes, a resident is
someone who had a domicile in the
United States at the time of death. A
person acquires a domicile by living in a
place for even a brief period of time, as
long as the person had no intention of
moving from that place.
File Form 706-NA, United States
Estate (and Generation-Skipping
Transfer) Tax Return, Estate of
nonresident not a citizen of the United
States, for the estates of nonresident
alien decedents (decedents who were
neither U.S. citizens nor residents at the
time of death).
Residents of U. S. Possessions
All references to citizens of the United
States are subject to the provisions of
sections 2208 and 2209, relating to
decedents who were U.S. citizens and
residents of a U.S. possession on the
date of death. If such a decedent became
a U.S. citizen only because of his or her
connection with a possession, then the
decedent is considered a nonresident
alien decedent for estate tax purposes,
and you should file Form 706-NA. If such
a decedent became a U.S. citizen wholly
independently of his or her connection
with a possession, then the decedent is
considered a U.S. citizen for estate tax
purposes, and you should file Form 706.
Executor
The term “executor” means 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 an executor
and must file a return.
When To File
You must file Form 706 to report estate
and/or generation-skipping transfer tax
within 9 months after the date of the
decedent’s death unless you receive an
extension of time to file. Use Form 4768
to apply for an automatic 6-month
extension of time to file.
Private delivery services. You can use
certain private delivery services
designated by the IRS to meet the “timely
mailing as timely filing/paying” rule for tax
returns and payments. These private
delivery services include only the
following.
• DHL Express (DHL): DHL Same Day
Service, DHL Next Day 10:30 am, DHL
Next Day 12:00 pm, DHL Next Day 3:00
pm, and DHL 2nd Day Service.
• Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard
Overnight, FedEx 2Day, FedEx
International Priority, FedEx International
First.
• United Parcel Service (UPS): UPS Next
Day Air, UPS Next Day Air Saver, UPS
2nd Day Air, UPS 2nd Day Air A.M., UPS
Worldwide Express Plus, and UPS
Worldwide Express.
The private delivery service can tell
you how to get written proof of the mailing
date.
Where To File
File Form 706 at the following address:
Internal Revenue Service Center
Cincinnati, OH 45999
-2-
Paying the Tax
The estate and GST taxes are due within
9 months after the date of the decedent’s
death unless an extension of time for
payment has been granted, or unless you
have been granted an election under
section 6166 to pay in installments, or
under section 6163 to postpone the part
of the tax attributable to a reversionary or
remainder interest. These elections are
made by checking lines 3 and 4
(respectively) of Part 3 — Elections by the
Executor, and attaching the required
statements.
If the tax paid with the return is
different from the balance due as figured
on the return, explain the difference in an
attached statement. If you have made
prior payments to the IRS, attach a
statement to Form 706 including these
facts.
Paying by check. Make the check
payable to the “United States Treasury.”
Please write the decedent’s name, social
security number, and “Form 706” on the
check to assist us in posting it to the
proper account.
Signature and Verification
If there is more than one executor,
all listed executors are responsible
CAUTION for the return. However, it is
sufficient for only one of the co-executors
to sign the return.
All executors are responsible for the
return as filed and are liable for penalties
provided for erroneous or false returns.
If two or more persons are liable for
filing the return, they should all join
together in filing one complete return.
However, if they are unable to join in
making one complete return, each is
required to file a return disclosing all the
information the person has in the case,
including the name of every person
holding an interest in the property and a
full description of the property. If the
appointed, qualified, and acting executor
is unable to make a complete return, then
every person holding an interest in the
property must, on notice from the IRS,
make a return regarding that interest.
The executor who files the return must,
in every case, sign the declaration on
page 1 under penalties of perjury. If the
return is prepared by someone other than
the person who is filing the return, the
preparer must also sign at the bottom of
page 1.
!
Amending Form 706
If you find that you must change
something on a return that has already
been filed, you should:
• File another Form 706;
• Enter “Supplemental Information”
across the top of page 1 of the form; and
• Attach a copy of pages 1, 2, and 3 of
the original Form 706 that has already
been filed.
If you have already been notified that the
return has been selected for examination,
General Instructions
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Instructions for Form 706
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you should provide the additional
information directly to the office
conducting the examination.
Supplemental Documents
Note. You must attach the death
certificate to the return.
If the decedent was a citizen or
resident and died testate, attach a
certified copy of the will to the return. If
you cannot obtain a certified copy, attach
a copy of the will and an explanation of
why it is not certified. Other supplemental
documents may be required as explained
below. Examples include Forms 712, 709,
and 706-CE, trust and power of
appointment instruments, death
certificate, and state certification of
payment of death taxes. If you do not file
these documents with the return, the
processing of the return will be delayed.
If the decedent was a U.S. citizen but
not a resident of the United States, you
must attach the following documents to
the return:
1. A copy of the inventory of property
and the schedule of liabilities, claims
against the estate, and expenses of
administration filed with the foreign court
of probate jurisdiction, certified by a
proper official of the court;
2. A copy of the return filed under the
foreign inheritance, estate, legacy,
succession tax, or other death tax act,
certified by a proper official of the foreign
tax department, if the estate is subject to
such a foreign tax; and
3. If the decedent died testate, a
certified copy of the will.
Rounding Off to Whole
Dollars
You may show the money items on the
return and accompanying schedules as
whole-dollar amounts. To do so, drop any
amount less than 50 cents and increase
any amount from 50 cents through 99
cents to the next higher dollar.
Penalties
Late filing and late payment. Section
6651 provides for penalties for both late
filing and for late payment unless there is
reasonable cause for the delay. The law
also provides for penalties for willful
attempts to evade payment of tax. The
late filing penalty will not be imposed if
the taxpayer can show that the failure to
file a timely return is due to reasonable
cause. Executors filing late (after the due
date, including extensions) should attach
an explanation to the return to show
reasonable cause.
Valuation understatement. Section
6662 provides a 20% penalty for the
underpayment of estate tax that exceeds
$5,000 when the underpayment is
attributable to valuation understatements.
A valuation understatement occurs when
the value of property reported on Form
General, Specific, and Part Instructions
706 is 65% or less of the actual value of
the property.
This penalty increases to 40% if there
is a gross valuation understatement. A
gross valuation understatement occurs if
any property on the return is valued at
40% or less of the value determined to be
correct.
These penalties also apply to late
filing, late payment, and underpayment of
GST taxes.
Obtaining Forms and
Publications To File or Use
Internet. You can access the IRS
website 24 hours a day, 7 days a week at
www.irs.gov to:
• Download forms, instructions, and
publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or
keyword; and
• Sign up to receive local and national
tax news by email.
IRS Tax Products CD. You can order
Publication 1796, IRS Tax Products CD,
and obtain:
• Current-year forms, instructions, and
publications.
• Prior-year forms, instructions, and
publications.
• Bonus: Historical Tax Products DVD
(Ships with the final release).
• Tax Map: An electronic research tool
and finding aid.
• Tax law frequently asked questions
(FAQs).
• Tax Topics from the IRS telephone
response system.
• Fill-in, print, and save features for most
tax forms.
• Internal Revenue Bulletins.
• Toll-free and email technical support.
The CD is released twice during the
year: The first release will ship the
beginning of January 2007. The final
release will ship the beginning of March
2007.
Purchase the CD from National
Technical Information Service at: www.irs.
gov/cdorders for $25 (no handling fee) or
call 1-877-CDFORMS (1-877-233-6767)
toll-free to buy the CD for $25 (plus a $5
handling fee). Price is subject to change.
Forms and Publications to file or use.
• Forms. The title for forms to file or use
are given within these instructions.
• Publications. Publication 910, Guide
to Free Tax Services; and Publication
559, Survivors, Executors, and
Administrators.
Specific Instructions
You must file the first three pages of Form
706 and all required schedules. File
Schedules A through I, as appropriate, to
support the entries in items 1 through 9 of
Part 5 — Recapitulation.
-3-
IF . . .
THEN . . .
you enter zero on any
item of the
Recapitulation,
you need not file the
schedule (except for
Schedule F) referred to
on that item.
you claim an exclusion complete and attach
on item 11,
Schedule U.
you claim any
deductions on items 13
through 21 of the
Recapitulation,
complete and attach the
appropriate schedules to
support the claimed
deductions.
you claim the credits
complete and attach
for foreign death taxes Schedule P or Q.
or tax on prior
transfers,
there is not enough
attach a Continuation
space on a schedule to Schedule (or additional
list all the items,
sheets of the same size)
to the back of the
schedule;
(see the Form 706
package for the
Continuation Schedule);
photocopy the blank
schedule before
completing it, if you will
need more than one
copy.
Also consider the following:
• Form 706 has 40 numbered pages.
The pages are perforated so that you can
remove them for copying and filing.
• Number the items you list on each
schedule, beginning with the number “1”
each time, or using the numbering
convention as indicated on the schedule
(for example, Schedule M).
• Total the items listed on the schedule
and its attachments, Continuation
Schedules, etc.
• Enter the total of all attachments,
Continuation Schedules, etc., at the
bottom of the printed schedule, but do not
carry the totals forward from one
schedule to the next.
• Enter the total, or totals, for each
schedule on page 3, Part 5 —
Recapitulation.
• Do not complete the “Alternate
valuation date” or “Alternate value”
columns of any schedule unless you
elected alternate valuation on line 1 of
Part 3 — Elections by the Executor.
• When you complete the return, staple
all the required pages together in the
proper order.
Part 1—Decedent and
Executor (Page 1 of Form
706)
Line 2
Enter the social security number assigned
specifically to the decedent. You cannot
use the social security number assigned
to the decedent’s spouse. If the decedent
did not have a social security number, the
executor should obtain one for the
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Instructions for Form 706
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Table A — Unified Rate Schedule
Column A
Taxable amount over
Column B
Taxable amount not
over
Column C
Tax on amount in
column A
Column D
Rate of tax on excess
over amount in column
A
(Percent)
18
20
22
24
26
0
$10,000
20,000
40,000
60,000
$10,000
20,000
40,000
60,000
80,000
0
$1,800
3,800
8,200
13,000
80,000
100,000
150,000
250,000
500,000
100,000
150,000
250,000
500,000
750,000
18,200
23,800
38,800
70,800
155,800
28
30
32
34
37
750,000
1,000,000
1,250,000
1,500,000
2,000,000
1,000,000
1,250,000
1,500,000
2,000,000
--------
248,300
345,800
448,300
555,800
780,800
39
41
43
45
46
decedent by filing Form SS-5, Application
for Social Security Card, with a local
Social Security Administration office.
Line 6b. Executor’s Address
If there is more than one executor, enter
the name of the executor to be contacted
by the IRS. List the other executors’
Use Form 8822, Change of Address, to
report a change of the executor’s
address.
Only individual executors should
complete this line. If there is more than
one individual executor, all should list
their social security numbers on an
attached sheet.
Part 2—Tax Computation
(Page 1 of Form 706)
In general, the estate tax is figured by
applying the unified rates shown in Table
A on this page to the total of transfers
both during life and at death, and then
subtracting the gift taxes.
Note. You must complete Part 2 — Tax
Computation.
Line 1
If you elected alternate valuation on line
1, Part 3 — Elections by the Executor,
enter the amount you entered in the
“Alternate value” column of item 12 of
Part 5 — Recapitulation. Otherwise, enter
the amount from the “Value at date of
death” column.
names, addresses, and SSNs (if
applicable) on an attached sheet.
Line 6a. Name of Executor
Line 6c. Executor’s Social
Security Number
a.
b.
Calendar year or
calendar quarter
Total taxable gifts for
period (see Note)
Note. For the definition of a taxable gift, see section 2503. Follow Form 709. That
is, include only the decedent’s one-half of split gifts, whether the gifts were made
by the decedent or the decedent’s spouse. In addition to gifts reported on Form
709, you must include any taxable gifts in excess of the annual exclusion that
were not reported on Form 709.
c.
1.
Total taxable gifts
made before 1977
Taxable amount
included in col. b
for gifts included
in the gross estate
d.
Taxable amount
included in col. b for
gifts that qualify for
“special treatment of
split gifts” described
on page 6
e.
f.
Gift tax paid by
decedent on gifts
in col. d
Gift tax paid by
decedent’s spouse on
gifts in col. c
Gifts made
after 1976
Gifts made after June 6,
1932, and before 1977
Worksheet TG— Taxable Gifts Reconciliation
(To be used for lines 4 and 7 of the Tax Computation)
2.
Totals for gifts made after 1976
Line 4 Worksheet—Adjusted Taxable Gifts Made After 1976
1. Taxable gifts made after 1976. Enter the amount from line 2, column b, Worksheet TG
1
2. Taxable gifts made after 1976 reportable on Schedule G. Enter the amount
2
from line 2, column c, Worksheet TG
3. Taxable gifts made after 1976 that qualify for “special treatment.” Enter the
amount from line 2, column d, Worksheet TG
4. Add lines 2 and 3
5. Adjusted taxable gifts. Subtract line 4 from line 1. Enter here and on line 4 of the
Tax Computation of Form 706
-4-
3
4
5
Part Instructions
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Line 7 Worksheet — Gift Tax on Gifts Made After 1976
a.
Calendar year or
calendar quarter
b.
Total taxable gifts for
prior periods (from Form
709, Part 2, Tax
Computation, line 2)
Total pre-1977 taxable
gifts. Enter the amount
from line 1, Worksheet
TG
c.
Taxable gifts for this
period (from Form 709,
Part 2, Tax Computation,
line 1)
(see below)
d.
Tax payable using
Table A
(see below)
e.
Unused unified credit
(applicable credit amount)
for this period
(see below)
1.
Total gift taxes payable on gifts made after 1976 (combine the amounts in column f) . . . . . . . . . . . . . . . . . . . . . . . . .
1
2.
Gift taxes paid by the decedent on gifts that qualify for “special treatment.” Enter the amount from line 2, column e,
Worksheet TG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
3.
Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
4.
Gift tax paid by decedent’s spouse on split gifts included on Schedule G. Enter the amount from line 2, column f,
Worksheet TG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Add lines 3 and 4. Enter here and on line 7 of the Tax Computation of Form 706 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
5.
f.
Tax payable for this
period (subtract col.
e from col. d)
Columns b and c. In addition to gifts reported on Form 709, you must include in these columns any taxable gifts in excess of the annual exclusion
that were not reported on Form 709.
Column d. To figure the “tax payable” for this column, you must use Table A in these instructions, as it applies to the year of the decedent’s death
rather than to the year the gifts were actually made. To compute the entry for column d, you should figure the “tax payable” on the amount in column
b and subtract it from the “tax payable” on the amounts in columns b and c added together. Enter the difference in column d.
“Tax payable” as used here is a hypothetical amount and does not necessarily reflect tax actually paid. Figure “tax payable” only on gifts made
after 1976. Do not include any tax paid or payable on gifts made before 1977. However, if the decedent made taxable gifts before January 1, 1977, a
special computation is required. The amount of gift tax payable (line 7) should be determined by applying the unified rate schedule, in effect at date
of death, to the cumulative lifetime taxable transfers made both before January 1, 1977, and after December 31, 1976, and then subtracting the taxes
payable on the lifetime transfers made before December 31, 1976.
To calculate the tax, enter the amount for the appropriate year from column c of the worksheet on line 1 of the Tax Computation of the Form 709.
Enter the amount from column b on line 2 of the Tax Computation. Complete the Tax Computation through the tax due before any reduction for the
unified credit (applicable credit amount) and enter that amount in column d, above.
Column e. To figure the unused unified credit, (applicable credit amount), use the unified credit (applicable credit amount) in effect for the year the
gift was made. This amount should be on line 12 of the Tax Computation of the Form 709 filed for the gift.
Line 3b. State Death Tax
Deduction
The estates of decedents dying
after December 31, 2004 will be
CAUTION allowed a deduction for state
death taxes, instead of a credit. The state
death tax credit is repealed, effective
January 1, 2005.
!
You may take a deduction on line 3b
for estate, inheritance, legacy, or
succession taxes paid as the result of the
decedent’s death to any state or the
District of Columbia.
You may claim an anticipated amount
of deduction and figure the federal estate
tax on the return before the state death
taxes have been paid. However, the
deduction cannot be finally allowed
unless you pay the state death taxes and
claim the deduction within 4 years after
the return is filed, or later (see section
2058(b)) if:
• A petition is filed with the Tax Court of
the United States,
• You have an extension of time to pay,
or
Part Instructions
• You file a claim for refund or credit of
an overpayment which extends the
deadline for claiming the deduction.
Note. The deduction is subject to no
dollar limits.
If you make a section 6166 election to
pay the federal estate tax in installments
and make a similar election to pay the
state death tax in installments, see
section 2058(b) for exceptions and
periods of limitation.
If you transfer property other than cash
to the state in payment of state
inheritance taxes, the amount you may
claim as a deduction is the lesser of the
state inheritance tax liability discharged or
the fair market value of the property on
the date of the transfer. For more
information on the application of such
transfers, see the principles discussed in
Rev. Rul. 86-117, 1986-2 C.B. 157, prior
to the repeal of section 2011.
You should send the following
evidence to the IRS:
1. Certificate of the proper officer of
the taxing state, or the District of
Columbia, showing the:
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a. Total amount of tax imposed
(before adding interest and penalties and
before allowing discount),
b. Amount of discount allowed,
c. Amount of penalties and interest
imposed or charged,
d. Total amount actually paid in cash,
and
e. Date of payment.
2. Any additional proof the IRS
specifically requests.
You should file the evidence requested
above with the return if possible.
Otherwise, send it as soon after you file
the return as possible.
Line 6
To figure the tentative tax on the amount
on line 5, use Table A on page 4.
Lines 4 and 7
Three worksheets are provided to help
you compute the entries for these lines.
You need not file these worksheets with
your return but should keep them for your
records. Worksheet TG — Taxable Gifts
Reconciliation, on page 4, allows you to
reconcile the decedent’s lifetime taxable
gifts to compute totals that will be used for
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the line 4 worksheet on page 4 and the
line 7 worksheet on page 5.
You must get all of the decedent’s gift
tax returns (Form 709, United States Gift
(and Generation-Skipping Transfer) Tax
Return) before you complete Worksheet
TG — Taxable Gifts Reconciliation. The
amounts you will enter on Worksheet TG
can usually be derived from these returns
as filed. However, if any of the returns
were audited by the IRS, you should use
the amounts that were finally determined
as a result of the audits.
In addition, you must include in column
b of Worksheet TG any gifts in excess of
the annual exclusion made by the
decedent (or on behalf of the decedent
under a power of attorney) but for which
no Forms 709 were filed. You must make
a reasonable inquiry as to the existence
of any such gifts. The annual exclusion
for 1977 through 1981 was $3,000 per
donee per year, $10,000 for years 1981
through 2001, and $11,000 for years
2002 through 2005. For calendar year
2006, the annual exclusion for gifts of
present interests is $12,000 per donee.
Note. In figuring the line 7 amount, do
not include any tax paid or payable on
gifts made before 1977. The line 7
amount is a hypothetical figure used to
calculate the estate tax.
Special treatment of split gifts. These
special rules apply only if:
• The decedent’s spouse predeceased
the decedent;
• The decedent’s spouse made gifts that
were “split” with the decedent under the
rules of section 2513;
• The decedent was the “consenting
spouse” for those split gifts, as that term
is used on Form 709; and
• The split gifts were included in the
decedent’s spouse’s gross estate under
section 2035.
If all four conditions above are met, do
not include these gifts on line 4 of the Tax
Computation and do not include the gift
taxes payable on these gifts on line 7 of
the Tax Computation. These adjustments
are incorporated into the worksheets.
Line 9. Maximum Unified Credit
(applicable credit amount)
The applicable credit amount (formerly
the unified credit), is $780,800 for the
estates of decedents dying in 2006. The
amount of the credit cannot exceed the
amount of estate tax imposed.
Line 10. Adjustment to Unified
Credit (applicable credit
amount)
If the decedent made gifts (including gifts
made by the decedent’s spouse and
treated as made by the decedent by
reason of gift splitting) after September 8,
1976, and before January 1, 1977, for
which the decedent claimed a specific
exemption, the unified credit (applicable
credit amount) on this estate tax return
must be reduced. The reduction is figured
by entering 20% of the specific exemption
claimed for these gifts.
Note. The specific exemption was
allowed by section 2521 for gifts made
before January 1, 1977.
If the decedent did not make any gifts
between September 8, 1976, and January
1, 1977, or if the decedent made gifts
during that period but did not claim the
specific exemption, enter zero.
Line 15. Total Credits
Generally, line 15 is used to report the
total of credit for foreign death taxes (line
13) and credit for tax on prior transfers
(line 14).
However, you may also use line 15 to
report credit taken for federal gift taxes
imposed by Chapter 12 of the Code, and
the corresponding provisions of prior
laws, on certain transfers the decedent
made before January 1, 1977, that are
included in the gross estate. The credit
cannot be more than the amount figured
by the following formula:
Gross estate tax minus (the sum
of the state death taxes and
unified credit)
Value of gross estate minus (the
sum of the deductions for
charitable, public, and similar
gifts and bequests and marital
deduction)
x
Value of
included
gift
When taking the credit for pre-1977
federal gift taxes:
• Include the credit in the amount on line
15 and
• Identify and enter the amount of the
credit you are taking on the dotted line to
the left of the entry space for line 15 on
page 1 of Form 706 with a notation
“section 2012 credit.”
For more information, see the
regulations under section 2012. This
computation may be made using Form
4808, Computation of Credit for Gift Tax.
Attach a copy of a completed Form 4808
or the computation of the credit. Also
attach all available copies of Forms 709
filed by the decedent to help verify the
amounts entered on lines 4 and 7, and
the amount of credit taken (on line 15) for
pre-1977 federal gift taxes.
Canadian marital credit. In addition to
using line 15 to report credit for federal
gift taxes on pre-1977 gifts, you may also
use line 15 to claim the Canadian marital
credit, where applicable.
When taking the marital credit under
the 1995 Canadian Protocol:
• Include the credit in the amount on line
15 and
• Identify and enter the amount of the
credit you are taking on the dotted line to
the left of the entry space for line 15 on
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page 1 of Form 706 with a notation
“Canadian marital credit.”
Also, attach a statement to the return
that refers to the treaty, waives QDOT
rights, and shows the computation of the
marital credit. See the 1995 Canadian
income tax treaty protocol for details on
computing the credit.
Part 3—Elections by the
Executor (Page 2 of Form
706)
Line 1. Alternate Valuation
See the example on page 12
TIP showing the use of Schedule B
where the alternate valuation is
adopted.
Unless you elect at the time you file
the return to adopt alternate valuation as
authorized by section 2032, you must
value all property included in the gross
estate on the date of the decedent’s
death. Alternate valuation cannot be
applied to only a part of the property.
You may elect special-use valuation
(line 2) in addition to alternate valuation.
You may not elect alternate valuation
unless the election will decrease both the
value of the gross estate and the sum
(reduced by allowable credits) of the
estate and GST taxes payable by reason
of the decedent’s death with respect to
the property includible in the decedent’s
gross estate.
You elect alternate valuation by
checking “Yes” on line 1 and filing Form
706. You may make a protective alternate
valuation election by checking “Yes” on
line 1, writing the word “protective,” and
filing Form 706 using regular values.
Once made, the election may not be
revoked. The election may be made on a
late filed Form 706 provided it is not filed
later than 1 year after the due date
(including extensions actually granted).
Relief under sections 301.9100-1 and
301.9100-3 may be available to make an
alternate valuation election or a protective
alternate valuation election, provided a
Form 706 is filed no later than 1 year after
the due date of the return (including
extensions actually granted).
If you elect alternate valuation, value
the property that is included in the gross
estate as of the applicable dates as
follows.
• 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, whichever occurs first.
Value this property on the date it ceases
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to form a part of the gross estate; for
example, on the date the title passes as
the result of its sale, exchange, or other
disposition.
• Any property not distributed, sold,
exchanged, or otherwise disposed of
within the 6-month period is valued on the
date 6 months after the date of the
decedent’s death.
• Any property, interest, or estate that is
“affected by mere lapse of time” is valued
as of the date of decedent’s death or on
the date of its distribution, sale,
exchange, or other disposition, whichever
occurs first. However, you may change
the date of death value to account for any
change in value that is not due to a “mere
lapse of time” on the date of its
distribution, sale, exchange, or other
disposition.
The property included in the alternate
valuation and valued as of 6 months after
the date of the decedent’s death, or as of
some intermediate date (as described
above) is the property included in the
gross estate on the date of the decedent’s
death. Therefore, you must first determine
what property constituted the gross estate
at the decedent’s death.
Interest. 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.
Rent. Rent accrued to the date of the
decedent’s death on leased real or
personal property is property of the gross
estate on the date of death and is
included in the alternate valuation.
Dividends. 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.
Ordinary dividends declared to
stockholders of record after the date of
the decedent’s death are not property of
the gross estate on the date of death and
are not included in the alternate valuation.
However, if dividends are declared to
stockholders of record after the date of
the decedent’s death so that the shares of
stock at the later valuation date do not
reasonably represent the same property
at the date of the decedent’s death,
include those dividends (except dividends
paid from earnings of the corporation after
the date of the decedent’s death) in the
alternate valuation.
As part of each Schedule 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, etc.
(These two items should be entered in the
“Description” column of each schedule.
Part Instructions
Briefly explain the status or disposition
governing the alternate valuation date,
such as: “Not disposed of within 6 months
following death,” “Distributed,” “Sold,”
“Bond paid on maturity,” etc. In this same
column, describe each item of principal
and includible income);
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.
(In the case of any interest or estate, the
value of which is affected by lapse of
time, such as patents, leaseholds, estates
for the life of another, or remainder
interests, the value shown under the
heading “Alternate value” must be the
adjusted value; for example, the value as
of the date of death with an adjustment
reflecting any difference in its value as of
the later date not due to lapse of time.)
Distributions, sales, exchanges, and
other dispositions of the property within
the 6-month period after the decedent’s
death must be supported by evidence. If
the court issued an order of distribution
during that period, you must submit a
certified copy of the order as part of the
evidence. The IRS may require you to
submit additional evidence, if necessary.
If the alternate valuation method is
used, the values of life estates,
remainders, and similar interests are
figured using the age of the recipient on
the date of the decedent’s death and the
value of the property on the alternate
valuation date.
Line 2. Special-Use Valuation of
Section 2032A
In general. 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
fair market value (FMV). You may elect
both special-use valuation and alternate
valuation.
To elect this valuation, you must check
“Yes” on line 2 and complete and attach
Schedule A-1 and its required additional
statements. You must file Schedule A-1
and its required attachments with Form
706 for this election to be valid. You may
make the election on a late filed return so
long as it is the first return filed.
The total value of the property valued
under section 2032A may not be
decreased from FMV by more than
$900,000 for decedents dying in 2006.
Real property may qualify for the
section 2032A election if:
1. The decedent was a U.S. citizen or
resident at the time of death;
2. The real property is located in the
United States;
3. 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
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either the surviving spouse or a lineal
descendant of the decedent to a family
member on a net cash basis;
4. The real property was acquired
from or passed from the decedent to a
qualified heir of the decedent;
5. 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;
6. There was material participation by
the decedent or a member of the
decedent’s family during 5 of the 8 years
before the decedent’s death; and
7. The qualified property meets the
following percentage requirements:
a. 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
b. 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 property determined without
regard to its special-use value. The value
is reduced for unpaid mortgages on the
property or any indebtedness against the
property, if the full value of the decedent’s
interest in the property (not reduced by
such mortgage or indebtedness) is
included in the value of the gross estate.
The adjusted value of the qualified real
and personal property used in different
businesses may be combined to meet the
50% and 25% requirements.
Qualified Real Property
Qualified use. The term “qualified use”
means the use of the property as a farm
for farming purposes or the use of
property in a trade or business other than
farming. Trade or business applies only to
the active conduct of a business. It does
not apply to passive investment activities
or the mere passive rental of property to a
person other than a member of the
decedent’s family. Also, no trade or
business is present in the case of
activities not engaged in for profit.
Ownership. To qualify as special-use
property, the decedent or a member of
the decedent’s family must have owned
and used the property in a qualified use
for 5 of the last 8 years before the
decedent’s death. Ownership may be
direct or indirect through a corporation, a
partnership, or a trust.
If the ownership is indirect, the
business must qualify as a closely held
business under section 6166. The
ownership, when combined with periods
of direct ownership, must meet the
requirements of section 6166 on the date
of the decedent’s death and for a period
of time that equals at least 5 of the 8
years preceding death.
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If the property was leased by the
decedent to a closely held business, it
qualifies as long as the business entity to
which it was rented was a closely held
business with respect to the decedent on
the date of the decedent’s death and for
sufficient time to meet the “5 in 8 years”
test explained on page 7.
Structures and other real property
improvements. Qualified real property
includes residential buildings and other
structures and real property
improvements regularly occupied or used
by the owner or lessee of real property (or
by the employees of the owner or lessee)
to operate the farm or business. A farm
residence which the decedent had
occupied is considered to have been
occupied for the purpose of operating the
farm even when a family member and not
the decedent was the person materially
participating in the operation of the farm.
Qualified real property also includes
roads, buildings, and other structures and
improvements functionally related to the
qualified use.
Elements of value such as mineral
rights that are not related to the farm or
business use are not eligible for
special-use valuation.
Property acquired from the decedent.
Property is considered to have been
acquired from or to have passed from the
decedent if one of the following applies.
• The property is considered to have
been acquired from or to have passed
from the decedent under section 1014(b)
(relating to basis of property acquired
from a decedent);
• The property is acquired by any person
from the estate; or
• The property is acquired by any person
from a trust, to the extent the property is
includible in the gross estate.
Qualified heir. A person is a qualified
heir of property if he or she is a member
of the decedent’s family and acquired or
received the property from the decedent.
If a qualified heir disposes of any interest
in qualified real property to any member
of his or her family, that person will then
be treated as the qualified heir with
respect to that interest.
The term “member of the family”
includes only:
• An ancestor (parent, grandparent, etc.)
of the individual;
• The spouse of the individual;
• The lineal descendant (child, stepchild,
grandchild, etc.) of the individual, the
individual’s spouse, or a parent of the
individual; or
• The spouse, widow, or widower of any
lineal descendant described above.
A legally adopted child of an individual is
treated as a child of that individual by
blood.
Material Participation
To elect special-use valuation, either the
decedent or a member of his or her family
must have materially participated in the
operation of the farm or other business for
at least 5 of the 8 years ending on the
date of the decedent’s death. The
existence of material participation is a
factual determination, but passively
collecting rents, salaries, draws,
dividends, or other income from the farm
or other business does not constitute
material participation. Neither does
merely advancing capital and reviewing a
crop plan and financial reports each
season or business year.
In determining whether the required
participation has occurred, disregard brief
periods (that is, 30 days or less) during
which there was no material participation,
as long as such periods were both
preceded and followed by substantial
periods (more than 120 days) during
which there was uninterrupted material
participation.
Retirement or disability. If, on the date
of death, the time period for material
participation could not be met because
the decedent had retired or was disabled,
a substitute period may apply. The
decedent must have retired on Social
Security or been disabled for a
continuous period ending with death. A
person is disabled for this purpose if he or
she was mentally or physically unable to
materially participate in the operation of
the farm or other business.
The substitute time period for material
participation for these decedents is a
period totaling at least 5 years out of the
8-year period that ended on the earlier of:
• The date the decedent began receiving
social security benefits or
• The date the decedent became
disabled.
Surviving spouse. A surviving spouse
who received qualified real property from
the predeceased spouse is considered to
have materially participated if he or she
was engaged in the active management
of the farm or other business. If the
surviving spouse died within 8 years of
the first spouse’s death, you may add the
period of material participation of the
predeceased spouse to the period of
active management by the surviving
spouse to determine if the surviving
spouse’s estate qualifies for special-use
valuation. To qualify for this, the property
must have been eligible for special-use
valuation in the predeceased spouse’s
estate, though it does not have to have
been elected by that estate.
For additional details regarding
material participation, see Regulations
section 20.2032A-3(e).
Valuation Methods
The primary method of valuing
special-use value property that is used for
farming purposes is the annual gross
cash rental method. If comparable gross
cash rentals are not available, you can
substitute comparable average annual net
share rentals. If neither of these are
available, or if you so elect, you can use
the method for valuing real property in a
closely held business.
Average annual gross cash rental.
Generally, the special-use value of
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property that is used for farming purposes
is determined as follows:
1. Subtract the average annual state
and local real estate taxes on actual
tracts of comparable real property from
the average annual gross cash rental for
that same comparable property and
2. Divide the result in (1) by the
average annual effective interest rate
charged for all new Federal Land Bank
loans.
The computation of each average
annual amount is based on the 5 most
recent calendar years ending before the
date of the decedent’s death. See
Effective interest rate on page 9.
Gross cash rental. Generally, gross
cash rental is the total amount of cash
received in a calendar year for the use of
actual tracts of comparable farm real
property in the same locality as the
property being specially valued. You may
not use appraisals or other statements
regarding rental value or areawide
averages of rentals. You may not use
rents that are paid wholly or partly in-kind,
and the amount of rent may not be based
on production. The rental must have
resulted from an arm’s-length transaction.
Also, the amount of rent is not reduced by
the amount of any expenses or liabilities
associated with the farm operation or the
lease.
Comparable property. Comparable
property must be situated in the same
locality as the specially valued property
as determined by generally accepted real
property valuation rules. The
determination of comparability is based
on all the facts and circumstances. It is
often necessary to value land in
segments where there are different uses
or land characteristics included in the
specially valued land.
The following list contains some of the
factors considered in determining
comparability.
• Similarity of soil;
• Whether the crops grown would
deplete the soil in a similar manner;
• Types of soil conservation techniques
that have been practiced on the 2
properties;
• Whether the 2 properties are subject to
flooding;
• Slope of the land;
• For livestock operations, the carrying
capacity of the land;
• For timbered land, whether the timber
is comparable;
• Whether the property as a whole is
unified or segmented. If segmented, the
availability of the means necessary for
movement among the different sections;
• Number, types, and conditions of all
buildings and other fixed improvements
located on the properties and their
location as it affects efficient
management, use, and value of the
property; and
• Availability and type of transportation
facilities in terms of costs and of proximity
of the properties to local markets.
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You must specifically identify on the
return the property being used as
comparable property. Use the type of
descriptions used to list real property on
Schedule A.
Effective interest rate. See Rev. Rul.
2006-32, 2006-26 I.R.B. 1170, for the
average annual effective interest rates in
effect for 2006.
Net share rental. You may use
average annual net share rental from
comparable land only if there is no
comparable land from which average
annual gross cash rental can be
determined. Net share rental is the
difference between the gross value of
produce received by the lessor from the
comparable land and the cash operating
expenses (other than real estate taxes) of
growing the produce that, under the
lease, are paid by the lessor. The
production of the produce must be the
business purpose of the farming
operation. For this purpose, produce
includes livestock.
The gross value of the produce is
generally the gross amount received if the
produce was disposed of in an
arm’s-length transaction within the period
established by the Department of
Agriculture for its price support program.
Otherwise, the value is the weighted
average price for which the produce sold
on the closest national or regional
commodities market. The value is figured
for the date or dates on which the lessor
received (or constructively received) the
produce.
Valuing a real property interest in
closely held business. Use this method
to determine the special-use valuation for
qualifying real property used in a trade or
business other than farming. You may
also use this method for qualifying farm
property if there is no comparable land or
if you elect to use it. Under this method,
the following factors are considered.
• The capitalization of income that the
property can be expected to yield for
farming or for closely held business
purposes over a reasonable period of
time with prudent management and
traditional cropping patterns for the area,
taking into account soil capacity, terrain
configuration, and similar factors;
• The capitalization of the fair rental
value of the land for farming or for closely
held business purposes;
• The assessed land values in a state
that provides a differential or use value
assessment law for farmland or closely
held business;
• Comparable sales of other farm or
closely held business land in the same
geographical area far enough removed
from a metropolitan or resort area so that
nonagricultural use is not a significant
factor in the sales price; and
• Any other factor that fairly values the
farm or closely held business value of the
property.
Part Instructions
Making the Election
Include the words “section 2032A
valuation” in the “Description” column of
any Form 706 schedule if section 2032A
property is included in the decedent’s
gross estate.
An election under section 2032A need
not include all the property in an estate
that is eligible for special-use valuation,
but sufficient property to satisfy the
threshold requirements of section
2032A(b)(1)(B) must be specially valued
under the election.
If joint or undivided interests (that is,
interests as joint tenants or tenants in
common) in the same property are
received from a decedent by qualified
heirs, an election with respect to one
heir’s joint or undivided interest need not
include any other heir’s interest in the
same property if the electing heir’s
interest plus other property to be specially
valued satisfies the requirements of
section 2032A(b)(1)(B).
If successive interests (that is, life
estates and remainder interests) are
created by a decedent in otherwise
qualified property, an election under
section 2032A is available only with
respect to that property (or part) in which
qualified heirs of the decedent receive all
of the successive interests, and such an
election must include the interests of all of
those heirs.
For example, if a surviving spouse
receives a life estate in otherwise
qualified property and the spouse’s
brother receives a remainder interest in
fee, no part of the property may be valued
under a section 2032A election.
Where successive interests in
specially valued property are created,
remainder interests are treated as being
received by qualified heirs only if the
remainder interests are not contingent on
surviving a nonfamily member or are not
subject to divestment in favor of a
nonfamily member.
Protective Election
You may make a protective election to
specially value qualified real property.
Under this election, whether or not you
may ultimately use special-use valuation
depends upon values as finally
determined (or agreed to following
examination of the return) meeting the
requirements of section 2032A.
To make a protective election, check
“Yes” to line 2 and complete Schedule
A-1 according to its instructions for
“Protective Election.”
If you make a protective election, you
should complete this Form 706 by valuing
all property at its fair market value. Do not
use special-use valuation. Usually, this
will result in higher estate and GST tax
liabilities than will be ultimately
determined if special-use valuation is
allowed. The protective election does not
extend the time to pay the taxes shown
on the return. If you wish to extend the
time to pay the taxes, you should file
-9-
Form 4768 in adequate time before the
return due date.
If it is found that the estate qualifies for
special-use valuation based on the values
as finally determined (or agreed to
following examination of the return), you
must file an amended Form 706 (with a
complete section 2032A election) within
60 days after the date of this
determination. Complete the amended
return using special-use values under the
rules of section 2032A, and complete
Schedule A-1 and attach all of the
required statements.
Additional information
For definitions and additional information,
see section 2032A and the related
regulations.
Line 3. Installment Payments
If the gross estate includes an interest in
a closely held business, you may be able
to elect to pay part of the estate tax in
installments under section 6166.
The maximum amount that can be
paid in installments is that part of the
estate tax that is attributable to the closely
held business. In general, that amount is
the amount of tax that bears the same
ratio to the total estate tax that the value
of the closely held business included in
the gross estate bears to the total gross
estate.
Bond or lien required. The IRS requires
that an estate furnish a surety bond as a
prerequisite for granting the installment
payment election. In the alternative, the
executor may consent to elect the special
lien provisions of section 6324A, in lieu of
the bond.
If you elect the lien provisions, section
6324A requires that the lien be placed on
property having a value equal to the total
deferred tax plus four years of interest.
The property must be expected to survive
the deferral period.
To be eligible for the section 6166
election, you must agree to furnish a
bond. Alternatively, the executor may
consent to the special lien provisions of
section 6324A, in lieu of the bond. The
IRS will contact you regarding the
specifics of furnishing the bond or electing
the special lien.
Percentage requirements. 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).
Interests in two or more closely held
businesses are treated as an interest in a
single business if at least 20% of the total
value of each business is included in the
gross estate. For this purpose, include
any interest held by the surviving spouse
that represents the surviving spouse’s
interest in a business held jointly with the
decedent as community property or as
joint tenants, tenants by the entirety, or
tenants in common.
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Value. The value used for meeting the
percentage requirements is the same
value used for determining the gross
estate. Therefore, if the estate is valued
under alternate valuation or special-use
valuation, you must use those values to
meet the percentage requirements.
Transfers before death. Generally,
gifts made before death are not included
in the gross estate. However, the estate
must meet the 35% requirement by both
including in and excluding from the gross
estate any gifts made by the decedent in
the 3-year period ending on the date of
death.
Passive assets. In determining the
value of a closely held business and
whether the 35% requirement is met, do
not include the value of any passive
assets held by the business. A passive
asset is any asset not used in carrying on
a trade or business. Any asset used in a
qualifying lending and financing business
is treated as an asset used in carrying on
a trade or business; see section
6166(b)(10) for details. Stock in another
corporation is a passive asset unless the
stock is treated as held by the decedent
because of the election to treat holding
company stock as business company
stock; see Holding company stock below.
If a corporation owns at least 20% in
value of the voting stock of another
corporation, or the other corporation had
no more than 45 shareholders and at
least 80% of the value of the assets of
each corporation is attributable to assets
used in carrying on a trade or business,
then these corporations will be treated as
a single corporation, and the stock will not
be treated as a passive asset. Stock held
in the other corporation is not taken into
account in determining the 80%
requirement.
Interest in closely held business. 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,
• 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.
The partnership or corporation must be
carrying on a trade or business at the
time of the decedent’s death. For further
information on whether certain
partnerships or corporations owning real
property interests constitute a closely held
business, see Rev. Rul. 2006-34,
2006-26 I.R.B. 1171.
In determining the number of partners
or shareholders, a partnership or stock
interest is treated as owned by one
partner or shareholder if it is community
property or held by a husband and wife as
joint tenants, tenants in common, or as
tenants by the entirety.
Property owned directly or indirectly by
or for a corporation, partnership, estate,
or trust is treated as owned
proportionately by or for its shareholders,
partners, or beneficiaries. For trusts, only
beneficiaries with present interests are
considered.
The interest in a closely held farm
business includes the interest in the
residential buildings and related
improvements occupied regularly by the
owners, lessees, and employees
operating the farm.
Holding company stock. The
executor may elect to treat as business
company stock the portion of any holding
company stock that represents direct
ownership (or indirect ownership through
one or more other holding companies) in
a business company. A holding company
is a corporation holding stock in another
corporation. A business company is a
corporation carrying on a trade or
business.
In general, this election applies only to
stock that is not readily tradable.
However, the election can be made if the
business company stock is readily
tradable, as long as all of the stock of
each holding company is not readily
tradable.
For purposes of the 20% voting stock
requirement, stock is treated as voting
stock to the extent the holding company
owns voting stock in the business
company.
If the executor makes this election, the
first installment payment is due when the
estate tax return is filed. The 5-year
deferral for payment of the tax, as
discussed below under Time for payment,
does not apply. In addition, the 2%
interest rate, discussed below under
Interest computation, will not apply. Also,
if the business company stock is readily
tradable, as explained above, the tax
must be paid in 5 installments.
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 due date of the
preceding installment. There can be no
more than 10 installment payments.
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 a part of each
installment payment of the tax.
Acceleration of payments. If the estate
fails to make payments of tax or interest
within 6 months of the due date, the
Service may terminate the right to make
installment payments and force an
acceleration of payment of the tax upon
notice and demand.
-10-
Generally, if any portion of the interest
in the closely held business which
qualifies for installment payments is
distributed, sold, exchanged, or otherwise
disposed of, or money and other property
attributable to such an interest is
withdrawn, and the aggregate of those
events equals or exceeds 50% of the
value of the interest, then the right to
make installment payments will be
terminated, and the unpaid portion of the
tax will be due upon notice and demand.
See section 6166(g).
Interest computation. A special interest
rate applies to installment payments. For
decedents dying in 2006, the interest rate
is 2% on the lesser of:
• $552,000, or
• The amount of the estate tax that is
attributable to the closely held business
and that is payable in installments.
2% portion. The 2% portion is an
amount equal to the amount of the
tentative estate tax on ($1,000,000 plus
the applicable exclusion amount in effect)
minus the applicable credit amount in
effect. However, if the amount of estate
tax extended under section 6166 is less
than the amount computed above, the 2%
portion is the lesser amount.
Inflation adjustment. The $1,000,000
amount used to calculate the 2% portion
is indexed for inflation for the estates of
decedents dying in a calendar year after
1998. For an estate of a decedent dying
in calendar year 2006, the dollar amount
used to determine the “2% portion” of the
estate tax payable in installments under
section 6166 is $1,200,000.
Computation. Interest on the portion
of the tax in excess of the 2% portion is
figured at 45% of the annual rate of
interest on underpayments. This rate is
based on the federal short-term rate and
is announced quarterly by the IRS in the
Internal Revenue Bulletin.
If you elect installment payments and
the estate tax due is more than the
maximum amount to which the 2%
interest rate applies, each installment
payment is deemed to comprise both tax
subject to the 2% interest rate and tax
subject to 45% of the regular
underpayment rate. The amount of each
installment that is subject to the 2% rate
is the same as the percentage of total tax
payable in installments that is subject to
the 2% rate.
!
CAUTION
The interest paid on installment
payments is not deductible as an
administrative expense of the
estate.
Making the election. If you check this
line to make a protective election, you
should attach a notice of protective
election as described in Regulations
section 20.6166-1(d). If you check this
line to make a final election, you should
attach the notice of election described in
Regulations section 20.6166-1(b).
In computing the adjusted gross estate
under section 6166(b)(6) to determine
whether an election may be made under
Part Instructions
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section 6166, the net amount of any real
estate in a closely held business must be
used.
You may also elect to pay GST taxes
in installments. See section 6166(i).
Line 4. Reversionary or
Remainder Interests
For details of this election, see section
6163 and the related regulations.
Part 4—General
Information (Pages 2 and 3
of Form 706)
Authorization
Completing the authorization on page 2 of
Form 706 will authorize one attorney,
accountant, or enrolled agent to represent
the estate and receive confidential tax
information, but will not authorize the
representative to enter into closing
agreements for the estate.
Note. If you wish to represent the estate,
you must complete and sign the
authorization.
If you wish to authorize persons other
than attorneys, accountants, and enrolled
agents, or if you wish to authorize more
than one person, to receive confidential
information or represent the estate, you
must complete and attach Form 2848,
Power of Attorney and Declaration of
Representative. You must also complete
and attach Form 2848 if you wish to
authorize someone to enter into closing
agreements for the estate. Filing a
completed Form 2848 with this return
may expedite processing of the Form
706.
If you wish only to authorize someone
to inspect and/or receive confidential tax
information (but not to represent you
before the IRS), complete and file Form
8821, Tax Information Authorization.
Line 4
Complete line 4 whether or not there is a
surviving spouse and whether or not the
surviving spouse received any benefits
from the estate. If there was no surviving
spouse on the date of decedent’s death,
enter “None” in line 4a and leave lines 4b
and 4c blank. The value entered in line 4c
need not be exact. See the instructions
for “Amount” under line 5 below.
Line 5
Name. Enter the name of each individual,
trust, or estate who received (or will
receive) benefits of $5,000 or more from
the estate directly as an heir, next-of-kin,
devisee, or legatee; or indirectly (for
example, as beneficiary of an annuity or
insurance policy, shareholder of a
corporation, or partner of a partnership
that is an heir, etc.).
Identifying number. Enter the SSN of
each individual beneficiary listed. If the
number is unknown, or the individual has
no number, please indicate “unknown” or
“none.” For trusts and other estates, enter
the EIN.
Relationship. For each individual
beneficiary, enter the relationship (if
known) to the decedent by reason of
blood, marriage, or adoption. For trust or
estate beneficiaries, indicate “TRUST” or
“ESTATE.”
Amount. Enter the amount actually
distributed (or to be distributed) to each
beneficiary including transfers during the
decedent’s life from Schedule G required
to be included in the gross estate. The
value to be entered need not be exact. A
reasonable estimate is sufficient. For
example, where precise values cannot
readily be determined, as with certain
future interests, a reasonable
approximation should be entered. The
total of these distributions should
approximate the amount of gross estate
reduced by funeral and administrative
expenses, debts and mortgages,
bequests to surviving spouse, charitable
bequests, and any federal and state
estate and GST taxes paid (or payable)
relating to the benefits received by the
beneficiaries listed on lines 4 and 5.
All distributions of less than $5,000 to
specific beneficiaries may be included
with distributions to unascertainable
beneficiaries on the line provided.
Line 6. Section 2044 Property
If you answered “Yes,” these assets must
be shown on Schedule F.
Section 2044 property is property for
which a previous section 2056(b)(7)
election (QTIP election) has been made,
or for which a similar gift tax election
(section 2523) has been made. For more
information, see the instructions on the
back of Schedule F.
Line 8. Insurance Not Included
in the Gross Estate
If you answered “Yes” to either 8a or 8b,
you must complete and attach Schedule
D and attach a Form 712, Life Insurance
Statement, for each policy and an
explanation of why the policy or its
proceeds are not includible in the gross
estate.
Line 10. Partnership Interests
and Stock in Close
Corporations
If you answered “Yes” to line 10, you
must include full details for partnerships
and unincorporated businesses on
Schedule F (Schedule E if the partnership
interest is jointly owned). You must
include full details for the stock of inactive
or close corporations on Schedule B.
Value these interests using the rules of
Regulations section 20.2031-2 (stocks) or
20.2031-3 (other business interests).
A close corporation is a corporation
whose shares are owned by a limited
number of shareholders. Often, one
family holds the entire stock issue. As a
result, little, if any, trading of the stock
takes place. There is, therefore, no
established market for the stock, and
those sales that do occur are at irregular
intervals and seldom reflect all the
Example showing use of Schedule B where the alternate valuation is not adopted; date of death, January 1, 2006
Description, including face amount of bonds or number of shares and par value
Item
where needed for identification. Give CUSIP number. If trust, partnership, or closely
number
held entity, give EIN
Unit value
Alternate
valuation
date
Alternate
value
Value at
date of
death
CUSIP number or
EIN, where
applicable
1
2
$60,000-Arkansas Railroad Co. first mortgage 4%, 20-year
bonds, due 2008. Interest payable quarterly on Feb. 1, May 1,
Aug. 1 and Nov. 1; N.Y. Exchange . . . . . . . . . . . . . . . . . . . XXXXXXXXX
100
-------
$- - - - - - -
$ 60,000
Interest coupons attached to bonds, item 1, due and payable on
Nov. 1, 2005, but not cashed at date of death . . . . . . . . . . . .
-------
-------
-------
600
Interest accrued on item 1, from Nov. 1, 2005 to Jan. 1, 2006
-------
-------
-------
400
110
-------
-------
55,000
-------
-------
-------
1,000
500 shares Public Service Corp., common; N.Y. Exchange . . . XXXXXXXXX
Dividend on item 2 of $2 per share declared Dec. 10, 2005,
payable on Jan. 10, 2006, to holders of record on Dec. 30, 2005
Part Instructions
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Example showing use of Schedule B where the alternate valuation is adopted; date of death, January 1, 2006
Item
number
Description, including face amount of bonds or number of shares and par value
where needed for identification. Give CUSIP number. If trust, partnership, or closely
held entity, give EIN
Unit value
Alternate
valuation
date
Alternate
value
Value at
date of
death
CUSIP number or
EIN, where
applicable
1
2
$60,000-Arkansas Railroad Co. first mortgage 4%, 20-year
bonds, due 2008. Interest payable quarterly on Feb. 1, May 1,
Aug. 1 and Nov. 1; N.Y. Exchange . . . . . . . . . . . . . . . . . . . XXXXXXXXX
100
------
$- - - - - -
$ 60,000
$30,000 of item 1 distributed to legatees on Apr. 1, 2006 . . . . .
99
4/1/06
29,700
------
$30,000 of item 1 sold by executor on May 2, 2006 . . . . . . . .
98
5/1/06
29,400
------
Interest coupons attached to bonds, item 1, due and payable on
Nov. 1, 2005, but not cashed at date of death. Cashed by
executor on Feb. 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .
------
2/1/06
600
600
Interest accrued on item 1, from Nov. 1, 2005 to Jan. 1, 2006.
Cashed by executor on Feb. 1, 2006 . . . . . . . . . . . . . . . . . .
------
2/1/06
400
400
110
------
------
55,000
90
7/1/06
45,000
------
------
1/10/06
1,000
1,000
500 shares Public Service Corp., common; N.Y. Exchange . . . XXXXXXXXX
Not disposed of within 6 months following death . . . . . . . . . .
Dividend on item 2 of $2 per share declared Dec. 10, 2005, paid
on Jan. 10, 2006, to holders of record on Dec. 30, 2005 . . . . .
elements of a representative transaction
as defined by the term “fair market value”
(FMV).
Line 12. Trusts
If you answered “Yes” to either 12a or
12b, you must attach a copy of the trust
instrument for each trust.
You must complete Schedule G if you
answered “Yes” to 12a and Schedule F if
you answered “Yes” to 12b.
Line 14. Transitional Marital
Deduction Computation
Check “Yes” if property passes to the
surviving spouse under a maximum
marital deduction formula provision that
meets the requirements of section
403(e)(3) of the Economic Recovery Tax
Act of 1981 (P.L. 97-34; 95 Stat. 305).
If you check “Yes” to line 14, compute
the marital deduction under the rules that
were in effect before the Economic
Recovery Tax Act of 1981.
For a format for this computation, you
should obtain the November 1981
revision of Form 706 and its instructions.
The computation is items 19 through 26
of the Recapitulation. You should also
apply the rules of Rev. Rul. 80-148,
1980-1 C.B. 207, if there is property that
passes to the surviving spouse outside of
the maximum marital deduction formula
provision.
Entering zero for any of items 1 through 9
is a statement by the executor, made
under penalties of perjury, that the gross
estate does not contain any includible
assets covered by that item.
Do not enter any amounts in the
“Alternate value” column unless you
elected alternate valuation on line 1 of
Part 3 — Elections by the Executor on
page 2 of the Form 706.
Which schedules to attach for items 1
through 9. You must attach:
• Schedule F to the return and answer its
questions even if you report no assets on
it;
• Schedules A, B, and C if the gross
estate includes any (1) Real Estate, (2)
Stocks and Bonds, or (3) Mortgages,
Notes, and Cash, respectively;
• Schedule D if the gross estate includes
any life insurance or if you answered
“Yes” to question 8a of Part 4 — General
Information;
• Schedule E if the gross estate contains
any jointly owned property or if you
answered “Yes” to question 9 of Part 4;
• Schedule G if the decedent made any
of the lifetime transfers to be listed on that
schedule or if you answered “Yes” to
question 11 or 12a of Part 4;
• Schedule H if you answered “Yes” to
question 13 of Part 4; and
• Schedule I if you answered “Yes” to
question 15 of Part 4.
Exclusion
Part 5—Recapitulation
(Page 3 of Form 706)
Gross Estate
Items 1 through 10. You must make an
entry in each of items 1 through 9.
If the gross estate does not contain
any assets of the type specified by a
given item, enter zero for that item.
Item 11. Conservation easement
exclusion. You must complete and
attach Schedule U (along with any
required attachments) to claim the
exclusion on this line.
Deductions
Items 13 through 21. You must attach
the appropriate schedules for the
deductions you claim.
-12-
Item 17. If item 16 is less than or equal to
the value (at the time of the decedent’s
death) of the property subject to claims,
enter the amount from item 16 on item 17.
If the amount on item 16 is more than
the value of the property subject to
claims, enter the greater of:
• The value of the property subject to
claims or
• The amount actually paid at the time
the return is filed.
In no event should you enter more on
item 17 than the amount on item 16. See
section 2053 and the related regulations
for more information.
Schedule A—Real Estate
See the reverse side of Schedule A on
Form 706.
Schedule A-1—Section
2032A Valuation
See Schedule A-1 on Form 706.
Schedule B—Stocks and
Bonds
Before completing Schedule B,
TIP read the examples showing use of
Schedule B where the alternate
valuation is not adopted (see page 11)
and adopted (see above).
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. Bonds that are exempt from
federal income tax are not exempt from
estate tax unless specifically exempted by
an estate tax provision of the Code.
Part Instructions and Instructions for Schedules
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Therefore, you should list these bonds on
Schedule B.
Public housing bonds includible in the
gross estate must be included at their full
value.
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 stocks and
bonds together and label them “Subjected
to Foreign Death Taxes.”
List interest and dividends on each
stock or bond separately. Indicate as a
separate item dividends that have not
been collected at death, but which are
payable to the decedent or the estate
because the decedent was a stockholder
of record on the date of death. 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
fair market value of the stock on the date
of the decedent’s death. 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.
Description
Stocks. For stocks, indicate:
Number of shares;
Whether common or preferred;
Issue;
Par value where needed for
identification;
• Price per share;
• Exact name of corporation;
• Principal exchange upon which sold, if
listed on an exchange; and
• Nine-digit CUSIP number.
•
•
•
•
Bonds. For bonds, indicate:
Quantity and denomination;
Name of obligor;
Date of maturity;
Interest rate;
Interest due date;
Principal exchange, if listed on an
exchange; and
• Nine-digit CUSIP number.
•
•
•
•
•
•
If the stock or bond is unlisted, show
the company’s principal business office.
If the gross estate includes any
interest in a trust, partnership, or closely
held entity, provide the employer
identification number (EIN) of the entity in
the description column on Schedules B,
E, F, G, M, and O, where applicable. You
must also provide the EIN of the estate (if
any) in the description column on the
above-noted schedules, where
applicable.
The CUSIP (Committee on Uniform
Security Identification Procedure) number
Instructions for Schedules
is a nine-digit number that is assigned to
all stocks and bonds traded on major
exchanges and many unlisted securities.
Usually, the CUSIP number is printed on
the face of the stock certificate. If the
CUSIP number is not printed on the
certificate, it may be obtained through the
company’s transfer agent.
Valuation
List the fair market value (FMV) of the
stocks or bonds. The FMV of a stock or
bond (whether listed or unlisted) 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.
If there were no sales on the valuation
date, figure the FMV as follows.
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. Both
trading dates must be reasonably close to
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.
If no actual sales were made
reasonably close to the valuation date,
make the same computation using the
mean between the bona fide bid and
asked prices instead of sales prices. If
actual sales prices or bona fide bid and
asked prices are available within a
reasonable period of time before the
valuation date but not after the valuation
date, or vice versa, use the mean
between the highest and lowest sales
prices or bid and asked prices as the
FMV.
For example, assume that sales of
stock nearest the valuation date (June 15)
occurred 2 trading days before (June 13)
and 3 trading days after (June 18). On
those days, the mean sale 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 13
and 18, the mean sale prices per share
were $15 and $10, respectively, the FMV
of a share of stock on the valuation date
is $13.
inactive stock and stock in close
corporations. Send with the schedule
complete financial and other data used to
determine value, including balance sheets
(particularly the one nearest to the
valuation date) and statements of the net
earnings or operating results and
dividends paid for each of the 5 years
immediately before the valuation date.
Securities reported as of no value,
nominal value, or obsolete should be
listed last. Include the address of the
company and the state and date of the
incorporation. Attach copies of
correspondence or statements used to
determine the “no value.”
If the security was listed on more than
one stock exchange, use either the
records of the exchange where the
security is principally traded or the
composite listing of combined exchanges,
if available, in a publication of general
circulation. In valuing listed stocks and
bonds, you should carefully check
accurate records to obtain values for the
applicable valuation date.
If you get quotations from brokers, or
evidence of the sale of securities from the
officers of the issuing companies, attach
to the schedule copies of the letters
furnishing these quotations or evidence of
sale.
Schedule C—Mortgages,
Notes, and Cash
See the reverse side of Schedule C on
Form 706.
Schedule D—Insurance on
the Decedent’s Life
See the reverse side of Schedule D on
Form 706.
Schedule E—Jointly
Owned Property
See the reverse side of Schedule E on
Form 706.
Schedule F—Other
Miscellaneous Property
See the reverse side of Schedule F on
Form 706.
Schedule G—Transfers
During Decedent’s Life
If only closing prices for bonds are
available, see Regulations section
20.2031-2(b).
Complete Schedule G and file it with the
return if the decedent made any of the
transfers described in (1) through (5) on
page 14, or if you answered “Yes” on line
11 or 12a of Part 4 — General Information.
Apply the rules in the section 2031
regulations to determine the value of
Report the following types of transfers
on this schedule.
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IF. . .
AND . . .
the decedent
at the time of
made a transfer the transfer, the
from a trust,
transfer was
from a portion
of the trust that
was owned by
the grantor
under section
676 (other than
by reason of
section 672(e))
by reason of a
power in the
grantor,
THEN . . .
for purposes of
sections 2035
and 2038, treat
the transfer as
made directly
by the
decedent.
Any such
transfer within
the annual gift
tax exclusion is
not includible in
the gross
estate.
1. Certain gift taxes (section
2035(b)). Enter at item A of Schedule G
the total value of the 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 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. Therefore,
you should carefully examine the Forms
709 filed by the decedent and the
decedent’s spouse to determine what part
of the total gift taxes reported on them
was attributable to gifts made within 3
years of death.
For example, if the decedent died on
July 10, 2006, you should examine gift tax
returns for 2006, 2005, 2004, and 2003.
However, the gift taxes on the 2003 return
that are attributable to gifts made on or
before July 10, 2003, are not included in
the gross estate.
Attach an explanation of how you
computed the includible gift taxes if you
do not include in the gross estate the
entire gift taxes shown on any Form 709
filed for gifts made within 3 years of
death. Also attach copies of any pertinent
gift tax returns filed by the decedent’s
spouse for gifts made within 3 years of
death.
2. Other transfers within 3 years of
death (section 2035(a)). These transfers
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
section 2038 power to revoke, etc., 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.
These transfers are reported on
Schedule G, regardless of whether a gift
tax return was required to be filed for
them when they were made. However,
the amount includible and the information
required to be shown for the transfers are
determined:
• For insurance on the life of the
decedent using the instructions to
Schedule D (attach Forms 712);
• For insurance on the life of another
using the instructions to Schedule F
(attach Forms 712); and
• For sections 2036, 2037, and 2038
transfers, using paragraphs (3), (4), and
(5) of these instructions.
3. Transfers with retained life
estate (section 2036). These are
transfers by the decedent in which the
decedent retained an interest in the
transferred property. The transfer can be
in trust or otherwise, but excludes bona
fide sales for adequate and full
consideration.
Interests or rights. Section 2036
applies to the following retained interests
or rights:
• The right to income from the
transferred property;
• The right to the possession or
enjoyment of the property; and
• The right, either alone or with any
person, to designate the persons who
shall receive the income from, or possess
or enjoy, the property.
Retained voting rights. Transfers
with a retained life estate also include
transfers of stock in a controlled
corporation after June 22, 1976, if the
decedent retained or acquired voting
rights in the stock. If the decedent
retained direct or indirect voting rights in a
controlled corporation, the decedent is
considered to have retained enjoyment of
the transferred property. A corporation is
a controlled corporation if the decedent
owned (actually or constructively) or had
the right (either alone or with any other
person) to vote at least 20% of the total
combined voting power of all classes of
stock. See section 2036(b). If these voting
rights ceased or were relinquished within
3 years of the decedent’s death, the
corporate interests are included in the
gross estate as if the decedent had
actually retained the voting rights until
death.
The amount includible in the gross
estate is the value of the transferred
property at the time of the decedent’s
death. If the decedent kept or reserved an
interest or right to only a part of the
transferred property, the amount
includible in the gross estate is a
corresponding part of the entire value of
the property.
A retained life estate does not have to
be legally enforceable. What matters is
that a substantial economic benefit was
retained. For example, if a mother
transferred title to her home to her
daughter but with the informal
understanding that she was to continue
living there until her death, the value of
the home would be includible in the
mother’s estate even if the agreement
would not have been legally enforceable.
4. Transfers taking effect at death
(section 2037). A transfer that takes
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effect at the decedent’s death is one
under which possession or enjoyment can
be obtained only by surviving the
decedent. A transfer is not treated as one
that takes effect at the decedent’s death
unless the decedent retained a
reversionary interest (defined below) in
the property that immediately before the
decedent’s death had a value of more
than 5% of the value of the transferred
property. If the transfer was made before
October 8, 1949, the reversionary interest
must have arisen by the express terms of
the instrument of transfer.
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. It also includes the
possibility that the transferred property
may become subject to a power of
disposition by the decedent. It does not
matter if the right arises by the express
terms of the instrument of transfer or by
operation of law. For this purpose,
reversionary interest does not include the
possibility the income alone from the
property may return to the decedent or
become subject to the decedent’s power
of disposition.
5. Revocable transfers (section
2038). The gross estate includes the
value of transferred property in which the
enjoyment of the transferred property was
subject at decedent’s death to any
change through the exercise of a power
to alter, amend, revoke, or terminate. A
decedent’s power to change the
beneficiaries and to hasten or increase
any beneficiary’s enjoyment of the
property are examples of this.
It does not matter whether the power
was reserved at the time of the transfer,
whether it arose by operation of law, or
was later created or conferred. The rule
applies regardless of the source from
which the power was acquired, and
regardless of whether the power was
exercisable by the decedent alone or with
any person (and regardless of whether
that person had a substantial adverse
interest in the transferred property).
The capacity in which the decedent
could use a power has no bearing. If the
decedent gave property in trust and was
the trustee with the power to revoke the
trust, the property would be included in
his or her gross estate. For transfers or
additions to an irrevocable trust after
October 28, 1979, the transferred
property is includible if the decedent
reserved the power to remove the trustee
at will and appoint another trustee.
If the decedent relinquished within 3
years of death any of the includible
powers described above, figure the gross
estate as if the decedent had actually
retained the powers until death.
Only the part of the transferred
property that is subject to the decedent’s
power is included in the gross estate.
For more detailed information on which
transfers are includible in the gross
estate, see the Estate Tax Regulations.
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Special Valuation Rules for
Certain Lifetime Transfers
Code sections 2701 through 2704 provide
rules for valuing certain transfers to family
members.
Section 2701 deals with the transfer of
an interest in a corporation or partnership
while retaining certain distribution rights,
or a liquidation, put, call, or conversion
right.
Section 2702 deals with the transfer of
an interest in a trust while retaining any
interest other than a qualified interest. In
general, a qualified interest is a right to
receive certain distributions from the trust
at least annually, or a noncontingent
remainder interest if all of the other
interests in the trust are distribution rights
specified in section 2702.
Section 2703 provides rules for the
valuation of property transferred to a
family member but subject to an option,
agreement, or other right to acquire or
use the property at less than FMV. It also
applies to transfers subject to restrictions
on the right to sell or use the property.
Finally, section 2704 provides that in
certain cases, the lapse of a voting or
liquidation right in a family-owned
corporation or partnership will result in a
deemed transfer.
These rules have potential
consequences for the valuation of
property in an estate. If the decedent (or
any member of his or her family) was
involved in any such transactions, see
Code sections 2701 through 2704 and the
related regulations for additional details.
How To Complete Schedule G
All transfers (other than outright transfers
not in trust and bona fide sales) made by
the decedent at any time during life must
be reported on the Schedule, regardless
of whether you believe the transfers are
subject to tax. If the decedent made any
transfers not described in the instructions
on page 14, the transfers should not be
shown on Schedule G. Instead, attach a
statement describing these transfers by
listing:
• The date of the transfer,
• The amount or value of the transferred
property, and
• The type of transfer.
Complete the schedule for each
transfer that is included in the gross
estate under sections 2035(a), 2036,
2037, and 2038 as described in the
Instructions for Schedule G beginning on
page 13.
In the “Item number” column, number
each transfer consecutively beginning
with “1.” In the “Description” column, list
the name of the transferee, the date of
the transfer, and give a complete
description of the property. Transfers
included in the gross estate should be
valued on the date of the decedent’s
death or, if alternate valuation is adopted,
according to section 2032.
Instructions for Schedules
If only part of the property transferred
meets the terms of section 2035(a), 2036,
2037, or 2038, then only a corresponding
part of the value of the property should be
included in the value of the gross estate.
If the transferee makes additions or
improvements to the property, the
increased value of the property at the
valuation date should not be included on
Schedule G. However, if only a part of the
value of the property is included, enter the
value of the whole under the column
headed “Description” and explain what
part was included.
Attachments. If a transfer, by trust or
otherwise, was made by a written
instrument, attach a copy of the
instrument to Schedule G. If the copy of
the instrument is of public record, it
should be certified; if not of public record,
the copy should be verified.
Schedule H—Powers of
Appointment
Complete Schedule H and file it with the
return if you answered “Yes” to line 13 of
Part 4 — General Information.
On Schedule H, include in the gross
estate:
• The value of property for which the
decedent possessed a general power of
appointment (defined below) on the date
of his or 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.
With the above exceptions, property
subject to a power of appointment is not
includible in the gross estate if the
decedent released the power completely
and the decedent held no interest in or
control over the property.
If the failure to exercise a general
power of appointment results in a lapse of
the power, the lapse is treated as a
release only to the extent that the value of
the property that could have been
appointed by the exercise of the lapsed
power is more than the greater of $5,000
or 5% of the total value, at the time of the
lapse, of the assets out of which, or the
proceeds of which, the exercise of the
lapsed power could have been satisfied.
Powers of Appointment
A power of appointment determines who
will own or enjoy the property subject to
the power and when they will own or
enjoy it. The power must be created by
someone other than the decedent. It does
not include a power created or held on
property transferred by the decedent.
A power of appointment includes all
powers which are in substance and effect,
powers of appointment regardless of how
they are identified and regardless of local
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property laws. For example, if a settlor
transfers property in trust for the life of his
wife, with a power in the wife to
appropriate or consume the principal of
the trust, the wife has a power of
appointment.
Some powers do not in themselves
constitute a power of appointment. For
example, a power to amend only
administrative provisions of a trust that
cannot substantially affect the beneficial
enjoyment of the trust property or income
is not a power of appointment. A power to
manage, invest, or control assets, or to
allocate receipts and disbursements,
when exercised only in a fiduciary
capacity, is not a power of appointment.
General power of appointment. A
general power of appointment is a power
that is exercisable in favor of the
decedent, the decedent’s estate, the
decedent’s creditors, or the creditors of
the decedent’s estate, except:
1. A power to consume, invade, or
appropriate property for the benefit of the
decedent that is limited by an
ascertainable standard relating to health,
education, support, or maintenance of the
decedent.
2. A power exercisable by the
decedent only in conjunction with:
a. the creator of the power or
b. a person who has a substantial
interest in the property subject to the
power, which is adverse to the exercise of
the power in favor of the decedent.
A part of a power is considered a
general power of appointment if the
power:
1. May only be exercised by the
decedent in conjunction with another
person and
2. Is also exercisable in favor of the
other person (in addition to being
exercisable in favor of the decedent, the
decedent’s creditors, the decedent’s
estate, or the creditors of the decedent’s
estate).
The part to include in the gross estate
as a general power of appointment is
figured by dividing the value of the
property by the number of persons
(including the decedent) in favor of whom
the power is exercisable.
Date power was created. Generally, a
power of appointment created by will is
considered created on the date of the
testator’s death.
A power of appointment created by an
inter vivos instrument is considered
created on the date the instrument takes
effect. If the holder of a power exercises it
by creating a second power, the second
power is considered as created at the
time of the exercise of the first.
Attachments
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 was
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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.
Schedule I—Annuities
You must complete Schedule l and file it
with the return if you answered “Yes” to
question 15 of Part 4 — General
Information.
Enter on Schedule I every annuity that
meets all of the conditions under General,
below, and every annuity described in
paragraphs (a) through (h) of Annuities
Under Approved Plans below, even if the
annuities are wholly or partially excluded
from the gross estate.
See the instructions for line 3 of
Schedule M for a discussion regarding
the QTIP treatment of certain joint and
survivor annuities.
General
In general, you must include in the gross
estate all or part of the value of any
annuity that meets the following
requirements:
• It is receivable by a beneficiary
following the death of the decedent and
by reason of surviving the decedent;
• The annuity is under a contract or
agreement entered into after March 3,
1931;
• The annuity was payable to the
decedent (or the decedent possessed the
right to receive the annuity) either alone
or in conjunction with another, for the
decedent’s life or for any period not
ascertainable without reference to the
decedent’s death or for any period that
did not in fact end before the decedent’s
death; and
• The contract or agreement is not a
policy of insurance on the life of the
decedent.
These rules apply to all types of
annuities, including pension plans,
individual retirement arrangements,
purchased commercial annuities, and
private annuities.
Note. A private annuity is an annuity
issued from a party not engaged in the
business of writing annuity contracts,
typically a junior generation family
member or a family trust.
An annuity contract that provides
periodic payments to a person for life and
ceases at the person’s death is not
includible in the gross estate. Social
Security benefits are not includible in the
gross estate even if the surviving spouse
receives benefits.
An annuity or other payment that is not
includible in the decedent’s or the
survivor’s gross estate as an annuity may
still be includible under some other
applicable provision of the law. For
example, see Powers of Appointment on
page 15.
If the decedent retired before January
1, 1985, see Annuities Under Approved
Plans below for rules that allow the
exclusion of part or all of certain
annuities.
Part Includible
If the decedent contributed only part of
the purchase price of the contract or
agreement, include in the gross estate
only that part of the value of the annuity
receivable by the surviving beneficiary
that the decedent’s contribution to the
purchase price of the annuity or
agreement bears to the total purchase
price.
For example, if the value of the
survivor’s annuity was $20,000 and the
decedent had contributed three-fourths of
the purchase price of the contract, the
amount includible is $15,000 (3/4 ×
$20,000).
Except as provided under Annuities
Under Approved Plans below,
contributions made by the decedent’s
employer to the purchase price of the
contract or agreement are considered
made by the decedent if they were made
by the employer because of the
decedent’s employment. For more
information, see section 2039.
Definitions
Annuity. The term “annuity” includes one
or more payments extending over any
period of time. The payments may be
equal or unequal, conditional or
unconditional, periodic or sporadic.
Examples. The following are
examples of contracts (but not
necessarily the only forms of contracts)
for annuities that must be included in the
gross estate.
1. A contract under which the
decedent immediately before death was
receiving or was entitled to receive, for
the duration of life, an annuity with
payments to continue after death to a
designated beneficiary, if surviving the
decedent.
2. A contract under which the
decedent immediately before death was
receiving or was entitled to receive,
together with another person, an annuity
payable to the decedent and the other
person for their joint lives, with payments
to continue to the survivor following the
death of either.
3. A contract or agreement entered
into by the decedent and employer under
which the decedent immediately before
death and following retirement was
receiving, or was entitled to receive, an
annuity payable to the decedent for life
and after the decedent’s death to a
designated beneficiary, if surviving the
decedent, whether the payments after the
decedent’s death are fixed by the contract
or subject to an option or election
exercised or exercisable by the decedent.
However, see Annuities Under Approved
Plans below.
4. A contract or agreement entered
into by the decedent and the decedent’s
employer under which at the decedent’s
death, before retirement, or before the
expiration of a stated period of time, an
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annuity was payable to a designated
beneficiary, if surviving the decedent.
However, see Annuities Under Approved
Plans below.
5. A contract or agreement under
which the decedent immediately before
death was receiving, or was entitled to
receive, an annuity for a stated period of
time, with the annuity to continue to a
designated beneficiary, surviving the
decedent, upon the decedent’s death and
before the expiration of that period of
time.
6. An annuity contract or other
arrangement providing for a series of
substantially equal periodic payments to
be made to a beneficiary for life or over a
period of at least 36 months after the date
of the decedent’s death under an
individual retirement account, annuity, or
bond as described in section 2039(e)
(before its repeal by P.L. 98-369).
Payable to the decedent. An annuity or
other payment was payable to the
decedent if, at the time of death, the
decedent was in fact receiving an annuity
or other payment, with or without an
enforceable right to have the payments
continued.
Right to receive an annuity. The
decedent had the right to receive an
annuity or other payment if, immediately
before death, the decedent had an
enforceable right to receive payments at
some time in the future, whether or not at
the time of death the decedent had a
present right to receive payments.
Annuities Under Approved
Plans
The following rules relate to whether part
or all of an otherwise includible annuity
may be excluded. These rules have been
repealed and apply only if the decedent
either:
• On December 31, 1984, was both a
participant in the plan and in pay status
(for example, had received at least one
benefit payment on or before December
31, 1984) and had irrevocably elected the
form of the benefit before July 18, 1984 or
• Had separated from service before
January 1, 1985, and did not change the
form of benefit before death.
The amount excluded cannot exceed
$100,000 unless either of the following
conditions is met:
• On December 31, 1982, the decedent
was both a participant in the plan and in
pay status (for example, had received at
least one benefit payment on or before
December 31, 1982) and the decedent
irrevocably elected the form of the benefit
before January 1, 1983 or
• The decedent separated from service
before January 1, 1983, and did not
change the form of benefit before death.
Approved Plans
Approved plans may be separated into
two categories:
• Pension, profit-sharing, stock bonus,
and other similar plans and
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• Individual retirement arrangements
(IRAs), and retirement bonds.
Different exclusion rules apply to the
two categories of plans.
Pension, etc., plans. The following
plans are approved plans for the
exclusion rules:
a. An employees’ trust (or under a
contract purchased by an employees’
trust) forming part of a pension, stock
bonus, or profit-sharing plan that met all
the requirements of section 401(a), either
at the time of the decedent’s separation
from employment (whether by death or
otherwise) or at the time of the
termination of the plan (if earlier);
b. A retirement annuity contract
purchased by the employer (but not by an
employees’ trust) under a plan that, at the
time of the decedent’s separation from
employment (by death or otherwise), or at
the time of the termination of the plan (if
earlier), was a plan described in section
403(a);
c. A retirement annuity contract
purchased for an employee by an
employer that is an organization referred
to in section 170(b)(1)(A)(ii) or (vi), or that
is a religious organization (other than a
trust), and that is exempt from tax under
section 501(a);
d. Chapter 73 of Title 10 of the United
States Code; or
e. A bond purchase plan described in
section 405 (before its repeal by P.L.
98-369, effective for obligations issued
after December 31, 1983).
Exclusion rules for pension, etc.,
plans. If an annuity under an “approved
plan” described in (a) through (e) above is
receivable by a beneficiary other than the
executor and the decedent made no
contributions under the plan toward the
cost, no part of the value of the annuity,
subject to the $100,000 limitation (if
applicable), is includible in the gross
estate.
If the decedent made a contribution
under a plan described in (a) through (e)
above toward the cost, include in the
gross estate on this schedule that
proportion of the value of the annuity
which the amount of the decedent’s
contribution under the plan bears to the
total amount of all contributions under the
plan. The remaining value of the annuity
is excludable from the gross estate
subject to the $100,000 limitation (if
applicable). For the rules to determine
whether the decedent made contributions
to the plan, see Regulations section
20.2039.
IRAs and retirement bonds. The
following plans are approved plans for the
exclusion rules:
Instructions for Schedules
f. An individual retirement account
described in section 408(a),
g. An individual retirement annuity
described in section 408(b), or
h. A retirement bond described in
section 409(a) (before its repeal by P.L.
98-369).
Exclusion rules for IRAs and
retirement bonds. These plans are
approved plans only if they provide for a
series of substantially equal periodic
payments made to a beneficiary for life, or
over a period of at least 36 months after
the date of the decedent’s death.
Subject to the $100,000 limitation, if
applicable, if an annuity under a “plan”
described in (f) through (h) above is
receivable by a beneficiary other than the
executor, the entire value of the annuity is
excludable from the gross estate even if
the decedent made a contribution under
the plan.
However, if any payment to or for an
account or annuity described in
paragraph (f), (g), or (h) above was not
allowable as an income tax deduction
under section 219 (and was not a rollover
contribution as described in section
2039(e) before its repeal by P.L. 98-369),
include in the gross estate on this
schedule that proportion of the value of
the annuity which the amount not
allowable as a deduction under section
219 and not a rollover contribution bears
to the total amount paid to or for such
account or annuity. For more information,
see Regulations section 20.2039-5.
Rules applicable to all approved plans.
The following rules apply to all approved
plans described in paragraphs (a) through
(h) above.
If any part of an annuity under a “plan”
described in (a) through (h) above is
receivable by the executor, it is generally
includible in the gross estate on this
schedule to the extent that it is receivable
by the executor in that capacity. In
general, the annuity is receivable by the
executor if it is to be paid to the executor
or if there is an agreement (expressed or
implied) that it will be applied by the
beneficiary for the benefit of the estate
(such as in discharge of the estate’s
liability for death taxes or debts of the
decedent, etc.) or that its distribution will
be governed to any extent by the terms of
the decedent’s will or the laws of descent
and distribution.
If data available to you does not
indicate whether the plan satisfies the
requirements of section 401(a), 403(a),
408(a), 408(b), or 409(a), you may obtain
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that information from the IRS where the
employer’s principal place of business is
located.
Line A. Lump Sum Distribution
Election
Note. The following rules have been
repealed and apply only if the decedent:
• On December 31, 1984, was both a
participant in the plan and in pay status
(for example, had received at least one
benefit payment on or before December
31, 1984) and had irrevocably elected the
form of the benefit before July 18, 1984,
or
• Had separated from service before
January 1, 1985, and did not change the
form of benefit before death.
Generally, the entire amount of any
lump sum distribution is included in the
decedent’s gross estate. However, under
this special rule, all or part of a lump sum
distribution from a qualified (approved)
plan will be excluded if the lump sum
distribution is included in the recipient’s
income for income tax purposes.
If the decedent was born before 1936,
the recipient may be eligible to elect
special “10-year averaging” rules (under
repealed section 402(e)) and capital gain
treatment (under repealed section
402(a)(2)) in computing the income tax on
the distribution. For more information, see
Pub. 575, Pension and Annuity Income. If
this option is available, the estate tax
exclusion cannot be claimed unless the
recipient elects to forego the “10-year
averaging” and capital gain treatment in
computing the income tax on the
distribution. The recipient elects to forego
this treatment by treating the distribution
as taxable on his or her income tax return
as described in Regulations section
20.2039-4(d). The election is irrevocable.
The amount excluded from the gross
estate is the portion attributable to the
employer contributions. The portion, if
any, attributable to the employeedecedent’s contributions is always
includible. Also, you may not compute the
gross estate in accordance with this
election unless you check “Yes” to line A
and attach the name, address, and
identifying number of the recipients of the
lump sum distributions. See Regulations
section 20.2039-4.
How To Complete Schedule I
In describing an annuity, give the name
and address of the grantor of the annuity.
Specify if the annuity is under an
approved plan.
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IF . . .
THEN . . .
the annuity is under an
approved plan,
state the ratio of the
decedent’s contribution
to the total purchase
price of the annuity.
the decedent was
employed at the time of
death and an annuity as
described in Definitions,
Annuity, Example 4 on
page 16, became
payable to any
beneficiary because the
beneficiary survived the
decedent,
state the ratio of the
decedent’s contribution
to the total purchase
price of the annuity.
an annuity under an
individual retirement
account or annuity
became payable to any
beneficiary because that
beneficiary survived the
decedent and is payable
to the beneficiary for life
or for at least 36 months
following the decedent’s
death,
state the ratio of the
amount paid for the
individual retirement
account or annuity that
was not allowable as an
income tax deduction
under section 219 (other
than a rollover
contribution) to the total
amount paid for the
account or annuity.
the annuity is payable
out of a trust or other
fund,
the description should
be sufficiently complete
to fully identify it.
the annuity is payable
for a term of years,
include the duration of
the term and the date
on which it began.
the annuity is payable
include the date of birth
for the life of a person
of that person.
other than the decedent,
the annuity is wholly or
partially excluded from
the gross estate,
enter the amount
excluded under
“Description” and
explain how you
computed the exclusion.
Schedule J—Funeral
Expenses and Expenses
Incurred in Administering
Property Subject to Claims
See the reverse side of Schedule J on
Form 706.
Schedule K—Debts of the
Decedent and Mortgages
and Liens
You must complete and attach Schedule
K if you claimed deductions on either item
14 or item 15 of Part 5 — Recapitulation.
Income vs. estate tax deduction.
Taxes, interest, and business expenses
accrued at the date of the decedent’s
death are deductible both on Schedule K
and as deductions in respect of the
decedent on the income tax return of the
estate.
If you choose to deduct medical
expenses of the decedent only on the
estate tax return, they are fully deductible
as claims against the estate. If, however,
they are claimed on the decedent’s final
income tax return under section 213(c),
they may not also be claimed on the
estate tax return. In this case, you also
may not deduct on the estate tax return
any amounts that were not deductible on
the income tax return because of the
percentage limitations.
Debts of the Decedent
List under “Debts of the Decedent” only
valid debts the decedent owed at the time
of death. List any indebtedness secured
by a mortgage or other lien on property of
the gross estate under the heading
“Mortgages and Liens.” If the amount of
the debt is disputed or the subject of
litigation, deduct only the amount the
estate concedes to be a valid claim. Enter
the amount in contest in the column
provided.
Generally, if the claim against the
estate is based on a promise or
agreement, the deduction is limited to the
extent that the liability was contracted
bona fide and for an adequate and full
consideration in money or money’s worth.
However, any enforceable claim based on
a promise or agreement of the decedent
to make a contribution or gift (such as a
pledge or a subscription) to or for the use
of a charitable, public, religious, etc.,
organization is deductible to the extent
that the deduction would be allowed as a
bequest under the statute that applies.
Certain claims of a former spouse
against the estate based on the
relinquishment of marital rights are
deductible on Schedule K. For these
claims to be deductible, all of the
following conditions must be met.
• The decedent and the decedent’s
spouse must have entered into a written
agreement relative to their marital and
property rights.
• The decedent and the spouse must
have been divorced before the decedent’s
death and the divorce must have
occurred within the 3-year period
beginning on the date 1 year before the
agreement was entered into. It is not
required that the agreement be approved
by the divorce decree.
• The property or interest transferred
under the agreement must be transferred
to the decedent’s spouse in settlement of
the spouse’s marital rights.
You may not deduct a claim made
against the estate by a remainderman
relating to section 2044 property. Section
2044 property is described in the
instructions to line 6 of Part 4 — General
Information.
Include in this schedule notes
unsecured by mortgage or other lien and
give full details, including:
• Name of payee,
• Face and unpaid balance,
• Date and term of note,
• Interest rate, and
• Date to which interest was paid before
death.
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Include the exact nature of the claim
as well as the name of the creditor. If the
claim is for services performed over a
period of time, state the period covered
by the claim.
Example. Edison Electric Illuminating
Co., for electric service during December
2005, $150.
If the amount of the claim is the unpaid
balance due on a contract for the
purchase of any property included in the
gross estate, indicate the schedule and
item number where you reported the
property. If the claim represents a joint
and separate liability, give full facts and
explain the financial responsibility of the
co-obligor.
Property and income taxes. The
deduction for property taxes is limited to
the taxes accrued before the date of the
decedent’s death. Federal taxes on
income received during the decedent’s
lifetime are deductible, but taxes on
income received after death are not
deductible.
Keep all vouchers or original records
for inspection by the IRS.
Allowable death taxes. If you elect to
take a deduction under section 2053(d)
rather than a credit under section 2014,
the deduction is subject to the limitations
described in section 2053(d) and its
regulations. If you have difficulty figuring
the deduction, you may request a
computation of it. Send your request
within a reasonable amount of time before
the due date of the return to the
Commissioner of Internal Revenue,
Washington, DC 20224. Attach to your
request a copy of the will and relevant
documents, a statement showing the
distribution of the estate under the
decedent’s will, and a computation of the
state or foreign death tax showing any
amount payable by a charitable
organization.
Mortgages and Liens
List under “Mortgages and Liens” only
obligations secured by mortgages or
other liens on property that you included
in the gross estate at its full value or at a
value that was undiminished by the
amount of the mortgage or lien. If the debt
is enforceable against other property of
the estate not subject to the mortgage or
lien, or if the decedent was personally
liable for the debt, you must include the
full value of the property subject to the
mortgage or lien in the gross estate under
the appropriate schedule and may deduct
the mortgage or lien on the property on
this schedule.
However, if the decedent’s estate is
not liable, include in the gross estate only
the value of the equity of redemption (or
the value of the property less the amount
of the debt), and do not deduct any
portion of the indebtedness on this
schedule.
Notes and other obligations secured
by the deposit of collateral, such as
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stocks, bonds, etc., also should be listed
under “Mortgages and Liens.”
Description
Include under the “Description” column
the particular schedule and item number
where the property subject to the
mortgage or lien is reported in the gross
estate.
Include the name and address of the
mortgagee, payee, or obligee, and the
date and term of the mortgage, note, or
other agreement by which the debt was
established. Also include the face
amount, the unpaid balance, the rate of
interest, and date to which the interest
was paid before the decedent’s death.
Schedule L—Net Losses
During Administration and
Expenses Incurred in
Administering Property
Not Subject to Claims
You must complete Schedule L and
file it with the return if you claim
deductions on either item 18 or item 19 of
Part 5 — Recapitulation.
Net Losses During
Administration
You may deduct only those losses from
thefts, fires, storms, shipwrecks, or other
casualties that occurred during the
settlement of the estate. You may deduct
only the amount not reimbursed by
insurance or otherwise.
Describe in detail the loss sustained
and the cause. If you received insurance
or other compensation for the loss, state
the amount collected. Identify the property
for which you are claiming the loss by
indicating the particular schedule and
item number where the property is
included in the gross estate.
If you elect alternate valuation, do not
deduct the amount by which you reduced
the value of an item to include it in the
gross estate.
Do not deduct losses claimed as a
deduction on a federal income tax return
or depreciation in the value of securities
or other property.
Expenses Incurred in
Administering Property Not
Subject to Claims
You may deduct expenses incurred in
administering property that is included in
the gross estate but that is not subject to
claims. You may only deduct these
expenses if they were paid before the
section 6501 period of limitations for
assessment expired.
The expenses deductible on this
schedule are usually expenses incurred in
the administration of a trust established
by the decedent before death. They may
also be incurred in the collection of other
assets or the transfer or clearance of title
to other property included in the
decedent’s gross estate for estate tax
Instructions for Schedules
purposes, but not included in the
decedent’s probate estate.
The expenses deductible on this
schedule are limited to those that are the
result of settling the decedent’s interest in
the property or of vesting good title to the
property in the beneficiaries. Expenses
incurred on behalf of the transferees
(except those described above) are not
deductible. Examples of deductible and
nondeductible expenses are provided in
Regulations section 20.2053-8.
List the names and addresses of the
persons to whom each expense was
payable and the nature of the expense.
Identify the property for which the
expense was incurred by indicating the
schedule and item number where the
property is included in the gross estate. If
you do not know the exact amount of the
expense, you may deduct an estimate,
provided that the amount may be verified
with reasonable certainty and will be paid
before the period of limitations for
assessment (referred to above) expires.
Keep all vouchers and receipts for
inspection by the Internal Revenue
Service.
Schedule M—Bequests,
etc., to Surviving Spouse
(Marital Deduction)
See the Form 706 itself for these
instructions.
Schedule O—Charitable,
Public, and Similar Gifts
and Bequests
General
You must complete Schedule O and file it
with the return if you claim a deduction on
item 21 of Part 5 — Recapitulation.
You can claim the charitable deduction
allowed under section 2055 for the value
of property in the decedent’s gross estate
that was transferred by the decedent
during life or by will to or for the use of
any of the following:
• The United States, a state, a political
subdivision of a state, or the District of
Columbia, for exclusively public purposes;
• Any corporation or association
organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes, including the
encouragement of art, or to foster national
or international amateur sports
competition (but only if none of its
activities involve providing athletic
facilities or equipment, unless the
organization is a qualified amateur sports
organization) and the prevention of
cruelty to children and animals, as long as
no part of the net earnings benefits any
private individual and no substantial
activity is undertaken to carry on
propaganda, or otherwise attempt to
influence legislation or participate in any
political campaign on behalf of any
candidate for public office;
-19-
• A trustee or a fraternal society, order or
association operating under the lodge
system, if the transferred property is to be
used exclusively for religious, charitable,
scientific, literary, or educational
purposes, or for the prevention of cruelty
to children or animals, and no substantial
activity is undertaken to carry on
propaganda or otherwise attempt to
influence legislation, or participate in any
political campaign on behalf of any
candidate for public office;
• Any veterans organization incorporated
by an Act of Congress or any of its
departments, local chapters, or posts, for
which none of the net earnings benefits
any private individual; or
• A foreign government or its political
subdivision when the use of such property
is limited exclusively to charitable
purposes.
For this purpose, certain Indian tribal
governments are treated as states and
transfers to them qualify as deductible
charitable contributions. See Rev. Proc.
2002-64, 2002-42 I.R.B. 717, as modified
and supplemented by subsequent
Revenue Procedures, for a list of
qualifying Indian tribal governments.
You may also claim a charitable
contribution deduction for a qualifying
conservation easement granted after the
decedent’s death under the provisions of
section 2031(c)(9).
The charitable deduction is allowed for
amounts that are transferred to charitable
organizations as a result of either a
qualified disclaimer (see Line 2. Qualified
Disclaimer on page 20) or the complete
termination of a power to consume,
invade, or appropriate property for the
benefit of an individual. It does not matter
whether termination occurs because of
the death of the individual or in any other
way. The termination must occur within
the period of time (including extensions)
for filing the decedent’s estate tax return
and before the power has been
exercised.
The deduction is limited to the amount
actually available for charitable uses.
Therefore, if under the terms of a will or
the provisions of local law, or for any
other reason, the federal estate tax, the
federal GST tax, or any other estate,
GST, succession, legacy, or inheritance
tax is payable in whole or in part out of
any bequest, legacy, or devise that would
otherwise be allowed as a charitable
deduction, the amount you may deduct is
the amount of the bequest, legacy, or
devise reduced by the total amount of the
taxes.
If you elected to make installment
payments of the estate tax, and the
interest is payable out of property
transferred to charity, you must reduce
the charitable deduction by an estimate of
the maximum amount of interest that will
be paid on the deferred tax.
For split-interest trusts (or pooled
income funds) enter in the “Amount”
column the amount treated as passing to
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the charity. Do not enter the entire
amount that passes to the trust (fund).
If you are deducting the value of the
residue or a part of the residue passing to
charity under the decedent’s will, attach a
copy of the computation showing how you
determined the value, including any
reduction for the taxes described above.
Also include:
• A statement that shows the values of
all specific and general legacies or
devises for both charitable and
noncharitable uses. For each legacy or
devise, indicate the paragraph or section
of the decedent’s will or codicil that
applies. If legacies are made to each
member of a class (for example, $1,000
to each of the decedent’s employees),
show only the number of each class and
the total value of property they received;
• The date of birth of all life tenants or
annuitants, the length of whose lives may
affect the value of the interest passing to
charity under the decedent’s will;
• A statement showing the value of all
property that is included in the decedent’s
gross estate but does not pass under the
will, such as transfers, jointly owned
property that passed to the survivor on
decedent’s death, and insurance payable
to specific beneficiaries; and
• Any other important information such
as that relating to any claim, not arising
under the will, to any part of the estate
(that is, a spouse claiming dower or
curtesy, or similar rights).
Line 2. Qualified Disclaimer
The charitable deduction is allowed for
amounts that are transferred to charitable
organizations as a result of a qualified
disclaimer. To be a qualified disclaimer, a
refusal to accept an interest in property
must meet the conditions of section 2518.
These are explained in Regulations
sections 25.2518-1 through 25.2518-3. If
property passes to a charitable
beneficiary as the result of a qualified
disclaimer, check the “Yes” box on line 2
and attach a copy of the written
disclaimer required by section 2518(b).
Attachments
If the charitable transfer was made by will,
attach a certified copy of the order
admitting the will to probate, in addition to
the copy of the will. If the charitable
transfer was made by any other written
instrument, attach a copy. If the
instrument is of record, the copy should
be certified; if not, the copy should be
verified.
Schedule P and file it with the return. You
must attach Form(s) 706-CE, Certificate
of Payment of Foreign Death Tax, to
support any credit you claim.
If the foreign government refuses to
certify Form 706-CE, you must file it
directly with the Internal Revenue Service
as instructed on the Form 706-CE. See
Form 706-CE for instructions on how to
complete the form and for a description of
the items that must be attached to the
form when the foreign government
refuses to certify it.
The credit for foreign death taxes is
allowable only if the decedent was a
citizen or resident of the United States.
However, see section 2053(d) and the
related regulations for exceptions and
limitations if the executor has elected, in
certain cases, to deduct these taxes from
the value of the gross estate. For a
resident, not a citizen, who was a citizen
or subject of a foreign country for which
the President has issued a proclamation
under section 2014(h), the credit is
allowable only if the country of which the
decedent was a national allows a similar
credit to decedents who were U.S.
citizens residing in that country.
The credit is authorized either by
statute or by treaty. If a credit is
authorized by a treaty, whichever of the
following is the most beneficial to the
estate is allowed:
• The credit computed under the treaty;
• The credit computed under the statute;
or
• The credit computed under the treaty,
plus the credit computed under the
statute for death taxes paid to each
political subdivision or possession of the
treaty country that are not directly or
indirectly creditable under the treaty.
Under the statute, the credit is
authorized for all death taxes (national
and local) imposed in the foreign country.
Whether local taxes are the basis for a
credit under a treaty depends upon the
provisions of the particular treaty.
If a credit for death taxes paid in more
than one foreign country is allowable, a
separate computation of the credit must
be made for each foreign country. The
copies of Schedule P on which the
additional computations are made should
be attached to the copy of Schedule P
provided in the return.
General
The total credit allowable in respect to
any property, whether subjected to tax by
one or more than one foreign country, is
limited to the amount of the federal estate
tax attributable to the property. The
anticipated amount of the credit may be
computed on the return, but the credit
cannot finally be allowed until the foreign
tax has been paid and a Form 706-CE
evidencing payment is filed. Section
2014(g) provides that for credits for
foreign death taxes, each U.S.
possession is deemed a foreign country.
If you claim a credit on line 13 of Part 2 —
Tax Computation, you must complete
Convert death taxes paid to the foreign
country into U.S. dollars by using the rate
Value
The valuation dates used in determining
the value of the gross estate apply also
on Schedule O.
Schedule P—Credit for
Foreign Death Taxes
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of exchange in effect at the time each
payment of foreign tax is made.
If a credit is claimed for any foreign
death tax that is later recovered, see
Regulations section 20.2016-1 for the
notice required within 30 days.
Limitation Period
The credit for foreign death taxes is
limited to those taxes that were actually
paid and for which a credit was claimed
within the later of the 4 years after the
filing of the estate tax return, or before the
date of expiration of any extension of time
for payment of the federal estate tax, or
60 days after a final decision of the Tax
Court on a timely filed petition for a
redetermination of a deficiency.
Credit Under the Statute
For the credit allowed by the statute, the
question of whether particular property is
situated in the foreign country imposing
the tax is determined by the same
principles that would apply in determining
whether similar property of a nonresident
not a U.S. citizen is situated within the
United States for purposes of the federal
estate tax. See the instructions for Form
706-NA.
Computation of Credit Under
the Statute
Item 1. Enter the amount of the estate,
inheritance, legacy, and succession taxes
paid to the foreign country and its
possessions or political subdivisions,
attributable to property that is:
• Situated in that country,
• Subjected to these taxes, and
• Included in the gross estate.
The amount entered at item 1 should not
include any tax paid to the foreign country
with respect to property not situated in
that country and should not include any
tax paid to the foreign country with
respect to property not included in the
gross estate. If only a part of the property
subjected to foreign taxes is both situated
in the foreign country and included in the
gross estate, it will be necessary to
determine the portion of the taxes
attributable to that part of the property.
Also attach the computation of the
amount entered at item 1.
Item 2. Enter the value of the gross
estate, less the total of the deductions
on items 20 and 21 of Part 5 —
Recapitulation.
Item 3. Enter the value of the property
situated in the foreign country that is
subjected to the foreign taxes and
included in the gross estate, less those
portions of the deductions taken on
Schedules M and O that are attributable
to the property.
Item 4. Subtract any credit claimed on
line 15 for federal gift taxes on pre-1977
gifts (section 2012) from line 12 of Part
2 — Tax Computation, and enter the
balance at item 4 of Schedule P.
Instructions for Schedules
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Credit Under Treaties
If you are reporting any items on this
return based on the provisions of a death
tax treaty, you may have to attach a
statement to this return disclosing the
return position that is treaty based. See
Regulations section 301.6114-1 for
details.
In general. If the provisions of a treaty
apply to the estate of a U.S. citizen or
resident, a credit is authorized for
payment of the foreign death tax or taxes
specified in the treaty. Treaties with death
tax conventions are in effect with the
following countries: Australia, Austria,
Canada, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Japan,
Netherlands, Norway, South Africa,
Sweden, Switzerland, and the United
Kingdom.
A credit claimed under a treaty is in
general computed on Schedule P in the
same manner as the credit is computed
under the statute with the following
principal exceptions:
• The situs rules contained in the treaty
apply in determining whether property
was situated in the foreign country;
• The credit may be allowed only for
payment of the death tax or taxes
specified in the treaty (but see the
instructions above for credit under the
statute for death taxes paid to each
political subdivision or possession of the
treaty country that are not directly or
indirectly creditable under the treaty);
• If specifically provided, the credit is
proportionately shared for the tax
applicable to property situated outside
both countries, or that was deemed in
some instances situated within both
countries; and
• The amount entered at item 4 of
Schedule P is the amount shown on line
12 of Part 2 — Tax Computation, less the
total of the credits claimed for federal gift
taxes on pre-1977 gifts (section 2012)
and for tax on prior transfers (line 14 of
Part 2 — Tax Computation). (If a credit is
claimed for tax on prior transfers, it will be
necessary to complete Schedule Q before
completing Schedule P.) For examples of
computation of credits under the treaties,
see the applicable regulations.
Computation of credit in cases where
property is situated outside both
countries or deemed situated within
both countries. See the appropriate
treaty for details.
part of the federal estate tax paid by the
transferor’s estate with respect to the
transfer. There is no requirement that the
property be identified in the estate of the
transferee or that it exist on the date of
the transferee’s death. It is sufficient for
the allowance of the credit that the
transfer of the property was subjected to
federal estate tax in the estate of the
transferor and that the specified period of
time has not elapsed. A credit may be
allowed with respect to property received
as the result of the exercise or
nonexercise of a power of appointment
when the property is included in the gross
estate of the donee of the power.
If the transferee was the transferor’s
surviving spouse, no credit is allowed for
property received from the transferor to
the extent that a marital deduction was
allowed to the transferor’s estate for the
property. There is no credit for tax on
prior transfers for federal gift taxes paid in
connection with the transfer of the
property to the transferee.
If you are claiming a credit for tax on
prior transfers on Form 706-NA, you
should first complete and attach Part 5 —
Recapitulation from Form 706 before
computing the credit on Schedule Q from
Form 706.
Section 2056(d)(3) contains specific
rules for allowing a credit for certain
transfers to a spouse who was not a U.S.
citizen where the property passed outright
to the spouse, or to a “qualified domestic
trust.”
Property
Schedule Q—Credit for
Tax on Prior Transfers
The term “property” includes any interest
(legal or equitable) of which the
transferee received the beneficial
ownership. The transferee is considered
the beneficial owner of property over
which the transferee received a general
power of appointment. Property does not
include interests to which the transferee
received only a bare legal title, such as
that of a trustee. Neither does it include
an interest in property over which the
transferee received a power of
appointment that is not a general power
of appointment. In addition to interests in
which the transferee received the
complete ownership, the credit may be
allowed for annuities, life estates, terms
for years, remainder interests (whether
contingent or vested), and any other
interest that is less than the complete
ownership of the property, to the extent
that the transferee became the beneficial
owner of the interest.
General
Maximum Amount of the Credit
You must complete Schedule Q and file it
with the return if you claim a credit on
Part 2 — Tax Computation, line 14.
The term “transferee” means the
decedent for whose estate this return is
filed. If the transferee received property
from a transferor who died within 10 years
before, or 2 years after, the transferee, a
credit is allowable on this return for all or
The maximum amount of the credit is the
smaller of:
1. The amount of the estate tax of the
transferor’s estate attributable to the
transferred property or
2. The amount by which:
a. An estate tax on the transferee’s
estate determined without the credit for
tax on prior transfers, exceeds
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b. An estate tax on the transferee’s
estate determined by excluding from the
gross estate the net value of the transfer.
If credit for a particular foreign death tax
may be taken under either the statute or a
death duty convention, and on this return
the credit actually is taken under the
convention, then no credit for that foreign
death tax may be taken into consideration
in computing estate tax (a) or estate tax
(b), above.
Percent Allowable
Where transferee predeceased the
transferor. If not more than 2 years
elapsed between the dates of death, the
credit allowed is 100% of the maximum
amount. If more than 2 years elapsed
between the dates of death, no credit is
allowed.
Where transferor predeceased the
transferee. The percent of the maximum
amount that is allowed as a credit
depends on the number of years that
elapsed between dates of death. It is
determined using the following table:
Period of
Time
Exceeding
----2 years
4 years
6 years
8 years
10 years
Not
Exceeding
2 years
4 years
6 years
8 years
10 years
-----
Percent
Allowable
100
80
60
40
20
none
How To Compute the Credit
A worksheet for Schedule Q is provided
on page 29 of these instructions to allow
you to compute the limits before
completing Schedule Q. Transfer the
appropriate amounts from the worksheet
to Schedule Q as indicated on the
schedule. You do not need to file the
worksheet with your Form 706, but should
keep it for your records.
Cases involving transfers from two or
more transferors. Part I of the
worksheet and Schedule Q enable you to
compute the credit for as many as three
transferors. The number of transferors is
irrelevant to Part II of the worksheet. If
you are computing the credit for more
than three transferors, use more than one
worksheet and Schedule Q, Part I, and
combine the totals for the appropriate
lines.
Section 2032A additional tax. If the
transferor’s estate elected special-use
valuation and the additional estate tax of
section 2032A(c) was imposed at any
time up to 2 years after the death of the
decedent for whom you are filing this
return, check the box on Schedule Q. On
lines 1 and 9 of the worksheet, include
the property subject to the additional
estate tax at its FMV rather than its
special-use value. On line 10 of the
worksheet, include the additional estate
tax paid as a federal estate tax paid.
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How To Complete the Schedule
Q Worksheet
Most of the information to complete Part I
of the worksheet should be obtained from
the transferor’s Form 706.
Line 5. Enter on line 5 the applicable
marital deduction claimed for the
transferor’s estate (from the transferor’s
Form 706).
Lines 10 through 18. Enter on these
lines the appropriate taxes paid by the
transferor’s estate.
If the transferor’s estate elected to pay
the federal estate tax in installments,
enter on line 10 only the total of the
installments that have actually been paid
at the time you file this Form 706. See
Rev. Rul. 83-15, 1983-1 C.B. 224, for
more details. Do not include as estate tax
any tax attributable to section 4980A,
before its repeal by the Taxpayer Relief
Act of 1997.
Line 21. Add lines 11 (allowable unified
credit) and 13 (foreign death taxes credit)
of Part 2 — Tax Computation to the
amount of any credit taken (on line 15) for
federal gift taxes on pre-1977 gifts
(section 2012). Subtract this total from
Part 2 — Tax Computation, line 8. Enter
the result on line 21 of the worksheet.
Line 26. If you computed the marital
deduction on this Form 706 using the
rules that were in effect before the
Economic Recovery Tax Act of 1981 (as
described in the instructions to line 14 of
Part 4 — General Information), enter on
line 26 the lesser of:
• The marital deduction you claimed on
line 20 of Part 5 — Recapitulation or
• Fifty percent of the “reduced adjusted
gross estate.”
If you computed the marital deduction
using the unlimited marital deduction in
effect for decedents dying after 1981, for
purposes of determining the marital
deduction for the reduced gross estate,
see Rev. Rul. 90-2, 1990-1 C.B. 169. To
determine the “reduced adjusted gross
estate,” subtract the amount on line 25 of
the Schedule Q Worksheet from the
amount on line 24 of the worksheet. If
community property is included in the
amount on line 24 of the worksheet,
compute the reduced adjusted gross
estate using the rules of Regulations
section 20.2056(c)-2 and Rev. Rul.
76-311, 1976-2 C.B. 261.
Schedules R and R-1—
Generation-Skipping
Transfer Tax
Introduction and Overview
Schedule R is used to compute the
generation-skipping transfer (GST) tax
that is payable by the estate. Schedule
R-1 (Form 706) is used to compute the
GST tax that is payable by certain trusts
that are includible in the gross estate.
The GST tax that is to be reported on
Form 706 is imposed only on “direct skips
occurring at death.” Unlike the estate tax,
which is imposed on the value of the
entire taxable estate regardless of who
receives it, the GST tax is imposed only
on the value of interests in property,
wherever located, that actually pass to
certain transferees, who are referred to as
“skip persons.”
For purposes of Form 706, the
property interests transferred must be
includible in the gross estate before they
are subject to the GST tax. Therefore, the
first step in computing the GST tax liability
is to determine the property interests
includible in the gross estate by
completing Schedules A through I of
Form 706.
The second step is to determine who
the skip persons are. To do this, assign
each transferee to a generation and
determine whether each transferee is a
“natural person” or a “trust” for GST
purposes.
The third step is to determine which
skip persons are transferees of “interests
in property.” If the skip person is a natural
person, anything transferred is an interest
in property. If the skip person is a trust,
make this determination using the rules
under Interest in property below. These
first three steps are described in detail
under the main heading, Determining
Which Transfers Are Direct Skips below.
The fourth step is to determine
whether to enter the transfer on Schedule
R or on Schedule R-1. See the rules
under the main heading, Dividing Direct
Skips Between Schedules R and R-1 on
page 24.
The fifth step is to complete Schedules
R and R-1 using the How To Complete
instructions on page 24, for each
schedule.
Determining Which Transfers
Are Direct Skips
Effective dates. The rules below apply
only for the purpose of determining if a
transfer is a direct skip that should be
reported on Schedule R or R-1 of Form
706.
In general. The GST tax is effective
for the estates of decedents dying after
October 22, 1986.
Irrevocable trusts. The GST tax will
not apply to any transfer under a trust that
was irrevocable on September 25, 1985,
but only to the extent that the transfer was
not made out of corpus added to the trust
after September 25, 1985. An addition to
the corpus after that date will cause a
proportionate part of future income and
appreciation to be subject to the GST tax.
For more information, see Regulations
section 26.2601-1(b)(1)(ii).
Mental disability. If, on October 22,
1986, the decedent was under a mental
disability to change the disposition of his
or her property and did not regain the
competence to dispose of property before
death, the GST tax will not apply to any
property included in the gross estate
(other than property transferred on behalf
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of the decedent during life and after
October 21, 1986). The GST tax will also
not apply to any transfer under a trust to
the extent that the trust consists of
property included in the gross estate
(other than property transferred on behalf
of the decedent during life and after
October 21, 1986).
The term “mental disability” means the
decedent’s mental incompetence to
execute an instrument governing the
disposition of his or her property, whether
or not there has been an adjudication of
incompetence and whether or not there
has been an appointment of any other
person charged with the care of the
person or property of the transferor.
If the decedent had been adjudged
mentally incompetent, a copy of the
judgment or decree must be filed with this
return.
If the decedent had not been adjudged
mentally incompetent, the executor must
file with the return a certification from a
qualified physician stating that in his
opinion the decedent had been mentally
incompetent at all times on and after
October 22, 1986, and that the decedent
had not regained the competence to
modify or revoke the terms of the trust or
will prior to his death or a statement as to
why no such certification may be obtained
from a physician.
Direct skip. The GST tax reported on
Form 706 and Schedule R-1 (Form 706)
is imposed only on direct skips. For
purposes of Form 706, a direct skip is a
transfer that is:
• Subject to the estate tax,
• Of an interest in property, and
• To a skip person.
All three requirements must be met
before the transfer is subject to the GST
tax. A transfer is subject to the estate tax
if you are required to list it on any of
Schedules A through I of Form 706. To
determine if a transfer is of an interest in
property and to a skip person, you must
first determine if the transferee is a
natural person or a trust as defined
below.
Trust. For purposes of the GST tax, a
trust includes not only an explicit trust (as
defined in Special rule for trusts other
than explicit trusts on page 24), but also
any other arrangement (other than an
estate) which, although not explicitly a
trust, has substantially the same effect as
a trust. For example, a trust includes life
estates with remainders, terms for years,
and insurance and annuity contracts.
Substantially separate and
independent shares of different
beneficiaries in a trust are treated as
separate trusts.
Interest in property. If a transfer is
made to a natural person, it is always
considered a transfer of an interest in
property for purposes of the GST tax.
If a transfer is made to a trust, a
person will have an interest in the
property transferred to the trust if that
person either has a present right to
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receive income or corpus from the trust
(such as an income interest for life) or is a
permissible current recipient of income or
corpus from the trust (that is, may receive
income or corpus at the discretion of the
trustee).
Skip person. A transferee who is a
natural person is a skip person if that
transferee is assigned to a generation
that is two or more generations below the
generation assignment of the decedent.
See Determining the generation of a
transferee below.
A transferee who is a trust is a skip
person if all the interests in the property
(as defined above) transferred to the trust
are held by skip persons. Thus, whenever
a non-skip person has an interest in a
trust, the trust will not be a skip person
even though a skip person also has an
interest in the trust.
A trust will also be a skip person if
there are no interests in the property
transferred to the trust held by any
person, and future distributions or
terminations from the trust can be made
only to skip persons.
Non-skip person. A non-skip person is
any transferee who is not a skip person.
Determining the generation of a
transferee. Generally, a generation is
determined along family lines as follows.
1. Where the beneficiary is a lineal
descendant of a grandparent of the
decedent (that is, the decedent’s cousin,
niece, nephew, etc.), the number of
generations between the decedent and
the beneficiary is determined by
subtracting the number of generations
between the grandparent and the
decedent from the number of generations
between the grandparent and the
beneficiary.
2. Where the beneficiary is a lineal
descendant of a grandparent of a spouse
(or former spouse) of the decedent, the
number of generations between the
decedent and the beneficiary is
determined by subtracting the number of
generations between the grandparent and
the spouse (or former spouse) from the
number of generations between the
grandparent and the beneficiary.
3. A person who at any time was
married to a person described in (1) or (2)
above is assigned to the generation of
that person. A person who at any time
was married to the decedent is assigned
to the decedent’s generation.
4. A relationship by adoption or
half-blood is treated as a relationship by
whole-blood.
5. A person who is not assigned to a
generation according to (1), (2), (3), or (4)
above is assigned to a generation based
on his or her birth date, as follows:
a. A person who was born not more
than 121/2 years after the decedent is in
the decedent’s generation.
b. A person born more than 121/2
years, but not more than 371/2 years, after
Instructions for Schedules
the decedent is in the first generation
younger than the decedent.
c. A similar rule applies for a new
generation every 25 years.
If more than one of the rules for
assigning generations applies to a
transferee, that transferee is generally
assigned to the youngest of the
generations that would apply.
If an estate, trust, partnership,
corporation, or other entity (other than
certain charitable organizations and trusts
described in sections 511(a)(2) and
511(b)(2)) is a transferee, then each
person who indirectly receives the
property interests through the entity is
treated as a transferee and is assigned to
a generation as explained in the above
rules. However, this look-through rule
does not apply for the purpose of
determining whether a transfer to a trust
is a direct skip.
Generation assignment where
intervening parent is deceased. A
special rule may apply in the case of the
death of a parent of the transferee. For
terminations, distributions, and transfers
after December 31, 1997, the existing rule
that applied to grandchildren of the
decedent has been extended to apply to
other lineal descendants.
If property is transferred to an
individual who is a descendant of a parent
of the transferor, and that individual’s
parent (who is a lineal descendant of the
parent of the transferor) is deceased at
the time the transfer is subject to gift or
estate tax, then for purposes of
generation assignment, the individual is
treated as if he or she is a member of the
generation that is one generation below
the lower of:
• The transferor’s generation or
• The generation assignment of the
youngest living ancestor of the individual,
who is also a descendant of the parent of
the transferor.
The same rules apply to the
generation assignment of any descendant
of the individual.
This rule does not apply to a transfer
to an individual who is not a lineal
descendant of the transferor if the
transferor has any living lineal
descendants.
If any transfer of property to a trust
would have been a direct skip except for
this generation assignment rule, then the
rule also applies to transfers from the
trust attributable to such property.
Ninety-day rule. For purposes of
determining if an individual’s parent is
deceased at the time of a testamentary
transfer, an individual’s parent who dies
no later than ninety days after a transfer
occurring by reason of the death of the
transferor is treated as having
predeceased the transferor. The
ninety-day rule applies to transfers
occurring on or after July 18, 2005. See
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Regulations section 26.2651-1, for more
information.
Charitable organizations. Charitable
organizations and trusts described in
sections 511(a)(2) and 511(b)(2) are
assigned to the decedent’s generation.
Transfers to such organizations are
therefore not subject to the GST tax.
Charitable remainder trusts.
Transfers to or in the form of charitable
remainder annuity trusts, charitable
remainder unitrusts, and pooled income
funds are not considered made to skip
persons and, therefore, are not direct
skips even if all of the life beneficiaries
are skip persons.
Estate tax value. Estate tax value is the
value shown on Schedules A through I of
this Form 706.
Examples. The rules above can be
illustrated by the following examples:
1. Under the will, the decedent’s
house is transferred to the decedent’s
daughter for her life with the remainder
passing to her children. This transfer is
made to a “trust” even though there is no
explicit trust instrument. The interest in
the property transferred (the present right
to use the house) is transferred to a
non-skip person (the decedent’s
daughter). Therefore, the trust is not a
skip person because there is an interest
in the transferred property that is held by
a non-skip person. The transfer is not a
direct skip.
2. The will bequeaths $100,000 to the
decedent’s grandchild. This transfer is a
direct skip that is not made in trust and
should be shown on Schedule R.
3. The will establishes a trust that is
required to accumulate income for 10
years and then pay its income to the
decedent’s grandchildren for the rest of
their lives and, upon their deaths,
distribute the corpus to the decedent’s
great-grandchildren. Because the trust
has no current beneficiaries, there are no
present interests in the property
transferred to the trust. All of the persons
to whom the trust can make future
distributions (including distributions upon
the termination of interests in property
held in trust) are skip persons (for
example, the decedent’s grandchildren
and great-grandchildren). Therefore, the
trust itself is a skip person and you should
show the transfer on Schedule R.
4. The will establishes a trust that is to
pay all of its income to the decedent’s
grandchildren for 10 years. At the end of
10 years, the corpus is to be distributed to
the decedent’s children. All of the present
interests in this trust are held by skip
persons. Therefore, the trust is a skip
person and you should show this transfer
on Schedule R. You should show the
estate tax value of all the property
transferred to the trust even though the
trust has some ultimate beneficiaries who
are non-skip persons.
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Dividing Direct Skips Between
Schedules R and R-1
Report all generation-skipping
TIP transfers on Schedule R unless
the rules below specifically
provide that they are to be reported on
Schedule R-1.
Under section 2603(a)(2), the GST tax
on direct skips from a trust (as defined for
GST tax purposes on page 22) is to be
paid by the trustee and not by the estate.
Schedule R-1 serves as a notification
from the executor to the trustee that a
GST tax is due.
For a direct skip to be reportable on
Schedule R-1, the trust must be includible
in the decedent’s gross estate.
If the decedent was the surviving
spouse life beneficiary of a marital
deduction power of appointment (or
QTIP) trust created by the decedent’s
spouse, then transfers caused by reason
of the decedent’s death from that trust to
skip persons are direct skips required to
be reported on Schedule R-1.
If a direct skip is made “from a trust”
under these rules, it is reportable on
Schedule R-1 even if it is also made “to a
trust” rather than to an individual.
Similarly, if property in a trust (as
defined for GST tax purposes on page
22) is included in the decedent’s gross
estate under section 2035, 2036, 2037,
2038, 2039, 2041, or 2042 and such
property is, by reason of the decedent’s
death, transferred to skip persons, the
transfers are direct skips required to be
reported on Schedule R-1.
Special rule for trusts other than
explicit trusts. An explicit trust is a trust
as defined in Regulations section
301.7701-4(a) as “an arrangement
created by a will or by an inter vivos
declaration whereby trustees take title to
property for the purpose of protecting or
conserving it for the beneficiaries under
the ordinary rules applied in chancery or
probate courts.” Direct skips from explicit
trusts are required to be reported on
Schedule R-1 regardless of their size
unless the executor is also a trustee (see
Executor as trustee below).
Direct skips from trusts that are trusts
for GST tax purposes but are not explicit
trusts are to be shown on Schedule R-1
only if the total of all tentative maximum
direct skips from the entity is $250,000 or
more. If this total is less than $250,000,
the skips should be shown on Schedule
R. For purposes of the $250,000 limit,
“tentative maximum direct skips” is the
amount you would enter on line 5 of
Schedule R-1 if you were to file that
schedule.
A liquidating trust (such as a
bankruptcy trust) under Regulations
section 301.7701-4(d) is not treated as an
explicit trust for the purposes of this
special rule.
If the proceeds of a life insurance
policy are includible in the gross estate
and are payable to a beneficiary who is a
skip person, the transfer is a direct skip
from a trust that is not an explicit trust. It
should be reported on Schedule R-1 if the
total of all the tentative maximum direct
skips from the company is $250,000 or
more. Otherwise, it should be reported on
Schedule R.
Similarly, if an annuity is includible on
Schedule I and its survivor benefits are
payable to a beneficiary who is a skip
person, then the estate tax value of the
annuity should be reported as a direct
skip on Schedule R-1 if the total tentative
maximum direct skips from the entity
paying the annuity is $250,000 or more.
Executor as trustee. If any of the
executors of the decedent’s estate are
trustees of the trust, then all direct skips
with respect to that trust must be shown
on Schedule R and not on Schedule R-1
even if they would otherwise have been
required to be shown on Schedule R-1.
This rule applies even if the trust has
other trustees who are not executors of
the decedent’s estate.
How To Complete Schedules R
and R-1
Valuation. Enter on Schedules R and
R-1 the estate tax value of the property
interests subject to the direct skips. If you
elected alternate valuation (section 2032)
and/or special-use valuation (section
2032A), you must use the alternate and/
or special-use values on Schedules R
and R-1.
How To Complete Schedule R
Part 1. GST exemption
reconciliation
Part 1, line 6 of both Parts 2 and 3, and
line 4 of Schedule R-1 are used to
allocate the decedent’s GST exemption.
This allocation is made by filing Form
706. Once made, the allocation is
irrevocable. You are not required to
allocate all of the decedent’s GST
exemption. However, the portion of the
exemption that you do not allocate will be
allocated by the IRS under the deemed
allocation at death rules of section
2632(e).
Beginning with transfers made in 2004,
the GST exemption is equal to the
amount of the estate tax applicable
exclusion. For 2006, the exemption is $2
million.
The previous GST exemption amounts
were as follows:
Year of transfer
GST exemption
Through 1998
1999
2000
2001
2002
2003
2004 – 2005
$1,000,000
1,010,000
1,030,000
1,060,000
1,100,000
1,120,000
1,500,000
The amount of each increase can only be
allocated to transfers made (or
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appreciation that occurred) during or after
the year of the increase. The following
example shows the application of this
rule:
Example. In 2002, G made a direct
skip of $1,100,000 and applied her full
$1,100,000 of GST exemption to the
transfer. G made a $100,000 taxable
direct skip in 2003 and another of
$30,000 in 2004. For 2003, G can only
apply $20,000 of exemption ($20,000
inflation adjustment from 2003) to the
$100,000 transfer in 2003. For 2004, G
can apply $30,000 of exemption to the
2004 transfer, but nothing to the transfer
made in 2003. At the end of 2004, G
would have $350,000 of unused
exemption that she can apply to future
transfers (or appreciation) starting in
2005.
Special QTIP election. In the case of
property for which a marital deduction is
allowed to the decedent’s estate under
section 2056(b)(7) (QTIP election),
section 2652(a)(3) allows you to treat
such property for purposes of the GST tax
as if the election to be treated as qualified
terminable interest property had not been
made.
The 2652(a)(3) election must include
the value of all property in the trust for
which a QTIP election was allowed under
section 2056(b)(7).
If a section 2652(a)(3) election is
made, then the decedent will for GST tax
purposes be treated as the transferor of
all the property in the trust for which a
marital deduction was allowed to the
decedent’s estate under section
2056(b)(7). In this case, the executor of
the decedent’s estate may allocate part or
all of the decedent’s GST exemption to
the property.
You make the election simply by listing
qualifying property on line 9 of Part 1.
Line 2. These allocations will have been
made either on Forms 709 filed by the
decedent or on Notices of Allocation
made by the decedent for inter vivos
transfers that were not direct skips but to
which the decedent allocated the GST
exemption. These allocations by the
decedent are irrevocable.
Also include on this line allocations
deemed to have been made by the
decedent under the rules of section 2632.
Unless the decedent elected out of the
deemed allocation rules, allocations are
deemed to have been made in the
following order:
1. To inter vivos direct skips and
2. Beginning with transfers made after
December 31, 2000, to lifetime transfers
to certain trusts, by the decedent, that
constituted indirect skips that were
subject to the gift tax.
For more information, see section
2632.
Line 3. Make an entry on this line if you
are filing Form(s) 709 for the decedent
and wish to allocate any exemption.
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Lines 4, 5, and 6. These lines represent
your allocation of the GST exemption to
direct skips made by reason of the
decedent’s death. Complete Parts 2 and
3 and Schedule R-1 before completing
these lines.
Line 9. Line 9 is used to allocate the
remaining unused GST exemption (from
line 8) and to help you compute the trust’s
inclusion ratio. Line 9 is a Notice of
Allocation for allocating the GST
exemption to trusts as to which the
decedent is the transferor and from which
a generation-skipping transfer could occur
after the decedent’s death.
If line 9 is not completed, the deemed
allocation at death rules will apply to
allocate the decedent’s remaining unused
GST exemption, first to property that is
the subject of a direct skip occurring at
the decedent’s death, and then to trusts
as to which the decedent is the transferor.
If you wish to avoid the application of the
deemed allocation rules, you should enter
on line 9 every trust (except certain trusts
entered on Schedule R-1, as described
below) to which you wish to allocate any
part of the decedent’s GST exemption.
Unless you enter a trust on line 9, the
unused GST exemption will be allocated
to it under the deemed allocation rules.
If a trust is entered on Schedule R-1,
the amount you entered on line 4 of
Schedule R-1 serves as a Notice of
Allocation and you need not enter the
trust on line 9 unless you wish to allocate
more than the Schedule R-1, line 4
amount to the trust. However, you must
enter the trust on line 9 if you wish to
allocate any of the unused GST
exemption amount to it. Such an
additional allocation would not ordinarily
be appropriate in the case of a trust
entered on Schedule R-1 when the trust
property passes outright (rather than to
another trust) at the decedent’s death.
However, where section 2032A property
is involved, it may be appropriate to
allocate additional exemption amounts to
the property. See the instructions for line
10.
To avoid application of the
deemed allocation rules, Form
CAUTION 706 and Schedule R should be
filed to allocate the exemption to trusts
that may later have taxable terminations
or distributions under section 2612 even if
the form is not required to be filed to
report estate or GST tax.
Line 9, column C. Enter the GST
exemption included on lines 2 through 6
of Part 1 of Schedule R, and discussed
above, that was allocated to the trust.
Line 9, column D. Allocate the
amount on line 8 of Part 1 of Schedule R
in line 9, column D. This amount may be
allocated to transfers into trusts that are
not otherwise reported on Form 706. For
example, the line 8 amount may be
allocated to an inter vivos trust
established by the decedent during his or
her lifetime and not included in the gross
estate. This allocation is made by
!
Instructions for Schedules
identifying the trust on line 9 and making
an allocation to it using column D. If the
trust is not included in the gross estate,
value the trust as of the date of death.
You should inform the trustee of each
trust listed on line 9 of the total GST
exemption you allocated to the trust. The
trustee will need this information to
compute the GST tax on future
distributions and terminations.
Line 9, column E. Trust’s inclusion
ratio. The trustee must know the trust’s
inclusion ratio to figure the trust’s GST tax
for future distributions and terminations.
You are not required to inform the trustee
of the inclusion ratio and may not have
enough information to compute it.
Therefore, you are not required to make
an entry in column E. However, column E
and the worksheet below are provided to
assist you in computing the inclusion ratio
for the trustee if you wish to do so.
You should inform the trustee of the
amount of the GST exemption you
allocated to the trust. Line 9, columns C
and D may be used to compute this
amount for each trust.
This worksheet will compute an
accurate inclusion ratio only if the
decedent was the only settlor of the trust.
You should use a separate worksheet for
each trust (or separate share of a trust
that is treated as a separate trust).
WORKSHEET (inclusion ratio for
trust):
1 Total estate and gift tax value of all of
the property interests that passed to
the trust . . . . . . . . . . . . . . . . . . . .
2 Estate taxes, state death taxes, and
other charges actually recovered from
the trust . . . . . . . . . . . . . . . . . . . .
3 GST taxes imposed on direct skips to
skip persons other than this trust and
borne by the property transferred to
this trust . . . . . . . . . . . . . . . . . . . .
4 GST taxes actually recovered from
this trust (from Schedule R, Part 2,
line 8 or Schedule R-1, line 6) . . . . .
5 Add lines 2 through 4 . . . . . . . . . . .
6 Subtract line 5 from line 1 . . . . . . . .
7 Add columns C and D of line 9 . . . . .
8 Divide line 7 by line 6 . . . . . . . . . . .
9 Trust’s inclusion ratio. Subtract line 8
from 1.000 . . . . . . . . . . . . . . . . . .
Line 10. Special-use allocation. For
skip persons who receive an interest in
section 2032A special-use property, you
may allocate more GST exemption than
the direct skip amount to reduce the
additional GST tax that would be due
when the interest is later disposed of or
qualified use ceases. See Schedule A-1
of this Form 706 for more details about
this additional GST tax.
Enter on line 10 the total additional
GST exemption available to allocate to all
skip persons who received any interest in
section 2032A property. Attach a
special-use allocation schedule listing
each such skip person and the amount of
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the GST exemption allocated to that
person.
If you do not allocate the GST
exemption, it will be automatically
allocated under the deemed allocation at
death rules. To the extent any amount is
not so allocated it will be automatically
allocated to the earliest disposition or
cessation that is subject to the GST tax.
Under certain circumstances, post-death
events may cause the decedent to be
treated as a transferor for purposes of
Chapter 13.
Line 10 may be used to set aside an
exemption amount for such an event. You
must attach a schedule listing each such
event and the amount of exemption
allocated to that event.
Parts 2 and 3
Use Part 2 to compute the GST tax on
transfers in which the property interests
transferred are to bear the GST tax on the
transfers. Use Part 3 to report the GST
tax on transfers in which the property
interests transferred do not bear the GST
tax on the transfers.
Section 2603(b) requires that unless
the governing instrument provides
otherwise, the GST tax is to be charged
to the property constituting the transfer.
Therefore, you will usually enter all of the
direct skips on Part 2.
You may enter a transfer on Part 3
only if the will or trust instrument directs,
by specific reference, that the GST tax is
not to be paid from the transferred
property interests.
Part 2, Line 3. Enter zero on this line
unless the will or trust instrument
specifies that the GST taxes will be paid
by property other than that constituting
the transfer (as described above). Enter
on line 3 the total of the GST taxes shown
on Part 3 and Schedule(s) R-1 that are
payable out of the property interests
shown on Part 2, line 1.
Part 2, Line 6. Do not enter more than
the amount on line 5. Additional
allocations may be made using Part 1.
Part 3, Line 3. See the instructions to
Part 2, line 3 above. Enter only the total of
the GST taxes shown on Schedule(s) R-1
that are payable out of the property
interests shown on Part 3, line 1.
Part 3, Line 6. See the instructions to
Part 2, line 6 above.
How To Complete Schedule R-1
Filing due date. Enter the due date of
Schedule R, Form 706. You must send
the copies of Schedule R-1 to the
fiduciary by this date.
Line 4. Do not enter more than the
amount on line 3. If you wish to allocate
an additional GST exemption, you must
use Schedule R, Part 1. Making an entry
on line 4 constitutes a Notice of Allocation
of the decedent’s GST exemption to the
trust.
Line 6. If the property interests entered
on line 1 will not bear the GST tax,
multiply line 6 by 46% (.46).
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Signature. The executor(s) must sign
Schedule R-1 in the same manner as
Form 706. See Signature and Verification,
on page 2.
Filing Schedule R-1. Attach to Form 706
one copy of each Schedule R-1 that you
prepare. Send two copies of each
Schedule R-1 to the fiduciary.
Schedule U—Qualified
Conservation Easement
Exclusion
If at the time of the contribution of
the conservation easement, the
CAUTION value of the easement, the value
of the land subject to the easement, or
the value of any retained development
right, was different than the estate tax
value, you must complete a separate
computation in addition to completing
Schedule U.
!
Use a copy of Schedule U as a
worksheet for this separate computation.
Complete lines 4 through 14 of the
worksheet Schedule U. However, the
value you use on lines 4, 5, 7, and 10, of
the worksheet is the value for these items
as of the date of the contribution of the
easement, not the estate tax value. If the
date of contribution and the estate tax
values are the same, you do not need to
do a separate computation.
After completing the worksheet, enter
the amount from line 14 of the worksheet
on line 14 of Schedule U. Finish
completing Schedule U by entering
amounts on lines 4, 7, and 15 through 20,
following the instructions below for those
lines. At the top of Schedule U, enter
‘‘worksheet attached.’’ Attach the
worksheet to the return.
Under section 2031(c), you may elect
to exclude a portion of the value of land
that is subject to a qualified conservation
easement. You make the election by filing
Schedule U with all of the required
information and excluding the applicable
value of the land that is subject to the
easement on Part 5 — Recapitulation,
page 3, at item 11. To elect the exclusion,
you must include on Schedule A, B, E, F,
G, or H, as appropriate, the decedent’s
interest in the land that is subject to the
exclusion. You must make the election on
a timely filed Form 706, including
extensions.
The exclusion is the lesser of:
• The applicable percentage of the value
of land (after certain reductions) subject
to a qualified conservation easement or
• $500,000.
Once made, the election is irrevocable.
General Requirements
Qualified Land
Land may qualify for the exclusion if all of
the following requirements are met.
• The decedent or a member of the
decedent’s family must have owned the
land for the 3-year period ending on the
date of the decedent’s death.
• No later than the date the election is
made, a qualified conservation easement
on the land has been made by the
decedent, a member of the decedent’s
family, the executor of the decedent’s
estate, or the trustee of a trust that holds
the land.
• The land is located in the United States
or one of its possessions.
Member of Family
Members of the decedent’s family include
the decedent’s spouse; ancestors; lineal
descendants of the decedent, of the
decedent’s spouse, and of the parents of
the decedent; and the spouse of any
lineal descendant. A legally adopted child
of an individual is considered a child of
the individual by blood.
Indirect Ownership of Land
The qualified conservation easement
exclusion applies if the land is owned
indirectly through a partnership,
corporation, or trust, if the decedent
owned (directly or indirectly) at least 30%
of the entity. For the rules on determining
ownership of an entity, see Ownership
rules below.
Ownership rules. An interest in property
owned, directly or indirectly, by or for a
corporation, partnership, or trust is
considered proportionately owned by or
for the entity’s shareholders, partners, or
beneficiaries. A person is the beneficiary
of a trust only if he or she has a present
interest in the trust. For additional
information, see the ownership rules in
section 2057(e)(3) (before its repeal by
P.L. 107-16).
Qualified Conservation Easement
A qualified conservation easement is one
that would qualify as a qualified
conservation contribution under section
170(h). It must be a contribution:
• Of a qualified real property interest,
• To a qualified organization, and
• Exclusively for conservation purposes.
Qualified real property interest. The
term “qualified real property interest”
means any of the following:
• The entire interest of the donor, other
than a qualified mineral interest;
• A remainder interest; or
• A restriction granted in perpetuity on
the use that may be made of the real
property. The restriction must include a
prohibition on more than a de minimis use
for commercial recreational activity.
Qualified organization. Qualified
organizations include:
• The United States, a possession of the
United States, a state (or the District of
Columbia), or a political subdivision of
them, as long as the gift is for exclusively
public purposes;
• A domestic entity that meets the
general requirements for qualifying as a
charity under section 170(c)(2) and that
generally receives a substantial amount
of its support from a government unit or
from the general public; or
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• Any entity that qualifies under section
170(h)(3)(B).
Conservation purpose. The term
“conservation purpose” means:
• The preservation of land areas for
outdoor recreation by, or the education of,
the public;
• The protection of a relatively natural
habitat of fish, wildlife, or plants, or a
similar ecosystem; or
• The preservation of open space
(including farmland and forest land)
where such preservation is for the scenic
enjoyment of the general public, or under
a clearly delineated federal, state, or local
conservation policy and will yield a
significant public benefit.
Specific Instructions
Line 1
If the land is reported as one or more item
numbers on a Form 706 schedule, simply
list the schedule and item numbers. If the
land subject to the easement comprises
only part of an item, however, list the
schedule and item number and describe
the part subject to the easement. See the
Instructions for Schedule A — Real Estate,
in the Form 706 itself, for information on
how to describe the land.
Line 3
Using the general rules for describing real
estate, provide enough information so the
IRS can value the easement. Give the
date the easement was granted and by
whom it was granted.
Line 4
Enter on this line the gross value at which
the land was reported on the applicable
asset schedule on this Form 706. Do not
reduce the value by the amount of any
mortgage outstanding. Report the estate
tax value even if the easement was
granted by the decedent (or someone
other than the decedent) prior to the
decedent’s death.
Note. If the value of the land reported on
line 4 was different at the time the
easement was contributed than that
reported on Form 706, see the Caution
at the beginning of the Schedule U
Instructions.
Line 5
The amount on line 5 should be the date
of death value of any qualifying
conservation easements granted prior to
the decedent’s death, whether granted by
the decedent or someone other than the
decedent, for which the exclusion is being
elected.
Note. If the value of the easement
reported on line 5 was different at the
time the easement was contributed than
at the date of death, see the Caution at
the beginning of the Schedule U
Instructions.
Line 7
You must reduce the land value by the
value of any development rights retained
by the donor in the conveyance of the
Instructions for Schedules
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easement. A development right is any
right to use the land for any commercial
purpose that is not subordinate to and
directly supportive of the use of the land
as a farm for farming purposes.
Note. If the value of the retained
development rights reported on line 7 was
different at the time the easement was
contributed than at the date of death, see
the Caution at the beginning of the
Schedule U Instructions.
You do not have to make this
reduction if everyone with an interest in
the land (regardless of whether in
possession) agrees to permanently
extinguish the retained development right.
The agreement must be filed with this
return and must include the following
information and terms:
1. A statement that the agreement is
made under section 2031(c)(5);
2. A list of all persons in being holding
an interest in the land that is subject to
the qualified conservation easement.
Include each person’s name, address, tax
identifying number, relationship to the
decedent, and a description of their
interest;
3. The items of real property shown
on the estate tax return that are subject to
the qualified conservation easement
(identified by schedule and item number);
4. A description of the retained
development right that is to be
extinguished;
5. A clear statement of consent that is
binding on all parties under applicable
local law:
a. To take whatever action is
necessary to permanently extinguish the
retained development rights listed in the
agreement and
b. To be personally liable for
additional taxes under section
2031(c)(5)(C) if this agreement is not
implemented by the earlier of:
• The date that is 2 years after the date
of the decedent’s death or
• The date of sale of the land subject
to the qualified conservation
easement,
Instructions for Schedules
6. A statement that in the event this
agreement is not timely implemented, that
they will report the additional tax on
whatever return is required by the IRS
and will file the return and pay the
additional tax by the last day of the 6th
month following the applicable date
described above.
All parties to the agreement must sign
the agreement.
For an example of an agreement
containing some of the same terms, see
Schedule A-1 (Form 706).
Line 10
Enter the total value of the qualified
conservation easements on which the
exclusion is based. This could include
easements granted by the decedent (or
someone other than the decedent) prior
to the decedent’s death, easements
granted by the decedent that take effect
at death, easements granted by the
executor after the decedent’s death, or
some combination of these.
Use the value of the easement as
of the date of death, even if the
CAUTION easement was granted prior to the
date of death. But, if the value of the
easement was different at the time the
easement was contributed than at the
date of death, see the Caution at the
beginning of the Schedule U Instructions.
!
Explain how this value was determined
and attach copies of any appraisals.
Normally, the appropriate way to value a
conservation easement is to determine
the FMV of the land both before and after
the granting of the easement, with the
difference being the value of the
easement.
You must reduce the reported value of
the easement by the amount of any
consideration received for the easement.
If the date of death value of the easement
is different from the value at the time the
consideration was received, you must
reduce the value of the easement by the
same proportion that the consideration
-27-
received bears to the value of the
easement at the time it was granted. For
example, assume the value of the
easement at the time it was granted was
$100,000 and $10,000 was received in
consideration for the easement. If the
easement was worth $150,000 at the date
of death, you must reduce the value of
the easement by $15,000 ($10,000/
$100,000 × $150,000) and report the
value of the easement on line 10 as
$135,000.
Line 15
If a charitable contribution deduction for
this land has been taken on Schedule O,
enter the amount of the deduction here. If
the easement was granted after the
decedent’s death, a contribution
deduction may be taken on Schedule O, if
it otherwise qualifies, as long as no
income tax deduction was or will be
claimed for the contribution by any person
or entity.
Line 16
You must reduce the value of the land by
the amount of any acquisition
indebtedness on the land at the date of
the decedent’s death. Acquisition
indebtedness includes the unpaid amount
of:
• Any indebtedness incurred by the
donor in acquiring the property;
• Any indebtedness incurred before the
acquisition if the indebtedness would not
have been incurred but for the acquisition;
• Any indebtedness incurred after the
acquisition if the indebtedness would not
have been incurred but for the acquisition
and the incurrence of the indebtedness
was reasonably foreseeable at the time of
the acquisition; and
• The extension, renewal, or refinancing
of acquisition indebtedness.
Continuation Schedule
See instructions for Continuation
Schedule on Form 706 itself.
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Privacy Act and Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws
of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to
allow us to figure and collect the right amount of tax. Section 6109 requires return preparers to provide their identifying numbers on
the return.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the
form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their
contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are
confidential as required by section 6103. However, section 6103 allows or requires the Internal Revenue Service to disclose or give
such information shown on your Form 706 to the Department of Justice to enforce the tax laws, both civil and criminal, and to cities,
states, the District of Columbia, U.S. commonwealths or possessions, and certain foreign governments for use in administering their
tax laws. We may also disclose this information to other countries under a tax treaty, to federal and state agencies to enforce federal
nontax criminal laws, or to federal law enforcement and intelligence agencies to combat terrorism.
The time needed to complete and file this form and related schedules will vary depending on individual circumstances. The
estimated average times are:
Form
706
Schedule A
Schedule A-1
Schedule B
Schedule C
Schedule D
Schedule E
Schedule F
Schedule G
Schedule H
Schedule I
Schedule J
Schedule K
Schedule L
Schedule M
Schedule O
Schedule P
Schedule Q
Worksheet for Schedule Q
Schedule R
Schedule R-1
Schedule U
Continuation Schedule
Recordkeeping
1 hr., 25 min.
---33 min.
19 min.
19 min.
6 min.
39 min.
26 min.
26 min.
26 min.
13 min.
26 min.
13 min.
13 min.
13 min.
19 min.
6 min.
---6 min.
19 min.
6 min.
19 min.
19 min.
Learning about the law
or the form
1 hr., 50 min.
15 min.
31 min.
9 min.
1 min.
6 min.
6 min.
8 min.
21 min.
6 min.
30 min.
6 min.
9 min.
4 min.
34 min.
12 min.
15 min.
12 min.
6 min.
45 min.
46 min.
26 min.
1 min.
Preparing the form
3 hr., 42min.
12 min.
1 hr., 15 min.
16 min.
13 min.
13 min.
36 min.
18 min.
12 min.
12 min.
15 min.
16 min.
18 min.
15 min.
25 min.
21 min.
18 min.
15 min.
58 min.
1 hr., 10 min.
35 min.
29 min.
13 min.
Copying, assembling, and
sending the form to the IRS
48 min.
20 min.
1 hr., 3 min.
20 min.
20 min.
20 min.
20 min.
20 min.
13 min.
13 min.
20 min.
20 min.
20 min.
20 min.
20 min.
20 min.
13 min.
13 min.
20 min.
48 min.
20 min.
20 min.
20 min.
If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be
happy to hear from you. You can write to the Internal Revenue Service, Tax Products Coordinating Committee,
SE:W:CAR:MP:T:T:SP, 1111 Constitution Ave. NW, IR-6406, Washington, DC 20224. Do not send the tax form to this address.
Instead, see Where To File on page 2.
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Worksheet for Schedule Q—Credit for Tax on Prior Transfers
Part I Transferor’s tax on prior transfers
Item
1.
Gross value of prior transfer to this transferee
2.
3.
4.
Death taxes payable from prior transfer
Encumbrances allocable to prior transfer
Obligations allocable to prior transfer
5.
Marital deduction applicable to line 1 above,
as shown on transferor’s Form 706
6.
TOTAL. Add lines 2, 3, 4, and 5
7.
Net value of
line 6 from line 1
8.
Net value of transfers. Add columns
A, B, and C of line 7
Transferor’s taxable estate
9.
A
Transferor (From Schedule Q)
B
C
Total for all transfers
(line 8 only)
transfers. Subtract
10.
Federal estate tax paid
11.
State death taxes paid
12.
13.
Foreign death taxes paid
Other death taxes paid
14.
TOTAL taxes paid. Add lines 10, 11, 12, and 13
15.
Value of transferor’s estate. Subtract
line 14 from line 9
16.
Net federal estate tax paid on transferor’s
estate
17.
Credit for gift tax paid on transferor’s estate
with respect to pre-1977 gifts (section 2012)
18.
Credit allowed transferor’s estate for tax on
prior transfers from prior transferor(s) who died
within 10 years before death of decedent
19.
Tax on transferor’s estate. Add lines 16, 17, and 18
20.
Transferor’s tax on prior transfers ((line 7
line 15) line 19 of respective estates)
Part II Transferee’s tax on prior transfers
Item
Amount
21.
Transferee’s actual tax before allowance of credit for prior transfers (see instructions)
21
22.
23.
24.
Total gross estate of transferee from line 1 of the Tax Computation, page 1, Form 706
Net value of all transfers from line 8 of this worksheet
Transferee’s reduced gross estate. Subtract line 23 from line 22
22
25.
Total debts and deductions (not including marital and charitable deductions)
(line 3b of Part 2—Tax Computation, page 1 and items 17, 18, and 19 of
the Recapitulation, page 3, Form 706)
25
26.
Marital deduction from item 20, Recapitulation, page 3, Form 706
(see instructions)
26
27.
Charitable bequests from item 21, Recapitulation, page 3, Form 706
27
28.
29.
Charitable deduction proportion ( [ line 23 (line 22 – line 25) ] line 27 )
Reduced charitable deduction. Subtract line 28 from line 27
28
30.
31.
Transferee’s deduction as adjusted. Add lines 25, 26, and 29
(a) Transferee’s reduced taxable estate. Subtract line 30 from line 24
(b) Adjusted taxable gifts
32.
33.
(c) Section 2012 gift tax credit
24
29
30
31(a)
31(b)
31(c)
(c) Total reduced taxable estate. Add lines 31(a) and 31(b)
Tentative tax on reduced taxable estate
33(a)
(a) Post-1976 gift taxes paid
(b) Unified credit (applicable credit amount)
23
32
33(b)
33(c)
33(d)
34.
35.
(d) Section 2014 foreign death tax credit
(e) Total credits. Add lines 33(a) through 33(d)
Net tax on reduced taxable estate. Subtract line 33(e) from line 32
Transferee’s tax on prior transfers. Subtract line 34 from line 21
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33(e)
34
35
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Index
A
Address, executor . . . . . . . . . . . . . 4
Alternate valuation . . . . . . . . . . . . . 6
Amending Form 706 . . . . . . . . . . . 2
Annuities . . . . . . . . . . . . . . . . . . . . . 16
Applicable credit amount . . . . . . . 6
Authorization . . . . . . . . . . . . . . . . . 11
B
Bequests . . . . . . . . . . . . . . . . . . . . 19
Bonds . . . . . . . . . . . . . . . . . . . . . . . 12
C
Canadian marital credit . . . . . . . . 6
Close corporations . . . . . . . . . . . 11
Conservation purpose . . . . . . . . 26
Continuation Schedule (See
Continuation Schedule on Form
706)
Credit for foreign death
taxes . . . . . . . . . . . . . . . . . . . . . . 20
Credit for tax on prior
transfers . . . . . . . . . . . . . . . . . . . 21
D
Death certificate . . . . . . . . . . . . . . . 3
Debts of the decedent . . . . . . . . 18
Debts, mortgages and
liens . . . . . . . . . . . . . . . . . . . . . . . 18
Deductions . . . . . . . . . . . . . . . . . . . 12
Direct skips . . . . . . . . . . . . . . . . . . 22
Disclaimer, qualified . . . . . . . . . . 20
Documents, supplemental . . . . . . 3
E
Election . . . . . . . . . . . . . . . . . . . . 9, 10
Election, lump sum
distribution . . . . . . . . . . . . . . . . . 17
Exclusion . . . . . . . . . . . . . . . . . . . . 12
Executor . . . . . . . . . . . . . . . . . . . . 2, 4
Expenses, losses . . . . . . . . . . . . . 19
F
Forms and publications,
obtaining . . . . . . . . . . . . . . . . . . . . 3
G
General Information . . . . . . . . . . 11
General Instructions . . . . . . . . . . . 1
Generation-skipping transfer
tax . . . . . . . . . . . . . . . . . . . . . . . . 22
Gifts and bequests . . . . . . . . . . . 19
Gross estate . . . . . . . . . . . . . . . 2, 12
I
Inclusion ratio for trust . . . . . . . . 25
Installment payments . . . . . . . . . . 9
Insurance . . . . . . . . . . . . . . . . . . . . 11
Interests, reversionary or
remainder . . . . . . . . . . . . . . . . . . 11
L
Liens . . . . . . . . . . . . . . . . . . . . . . . . 18
Losses, expenses . . . . . . . . . . . . 19
Lump sum distribution
election . . . . . . . . . . . . . . . . . . . . 17
M
Marital deduction computation,
transitional . . . . . . . . . . . . . . . . . 12
Material participation . . . . . . . . . . . 8
Member of family . . . . . . . . . . . 8, 26
Mortgages and liens . . . . . . . . . . 18
N
Nonresident Noncitizens . . . . . . . 2
P
Part 1, Decedent and
Executor . . . . . . . . . . . . . . . . . . . . 3
Part 2. Tax Computation . . . . . . . 4
Part 3. Elections by the
Executor . . . . . . . . . . . . . . . . . . . . 6
Part 4. General
Information . . . . . . . . . . . . . . . . 11
Part 5. Recapitulation . . . . . . . . . 12
Paying the Tax . . . . . . . . . . . . . . . . 2
Payments, installment . . . . . . . . . 9
Penalties . . . . . . . . . . . . . . . . . . . . . . 3
Powers of appointment . . . . . . . 15
Privacy Act and Paperwork
Reduction Act Notice . . . . . . . 28
Private delivery services . . . . . . . 2
Property, section 2044 . . . . . . . . 11
Publications, obtaining . . . . . . . . . 3
Purpose of Form . . . . . . . . . . . . . . 1
Q
Qualified conservation easement
exclusion . . . . . . . . . . . . . . . . . . 26
Qualified heir . . . . . . . . . . . . . . . . . . 8
Qualified real property . . . . . . . . . 7
R
Real property interest,
qualified . . . . . . . . . . . . . . . . . . . 26
Real property, qualified . . . . . . . . 7
Recapitulation . . . . . . . . . . . . . . . . 12
Residents of U. S.
Possessions . . . . . . . . . . . . . . . . 2
Rounding off to whole
dollars . . . . . . . . . . . . . . . . . . . . . . 3
S
Schedule A Real Estate (See
reverse side of Sch. A on Form
706)
Schedule A-1 Section 2032A
Valuation (See Sch. A-1 on
Form 706)
Schedule B Stocks and
Bonds . . . . . . . . . . . . . . . . . . . . . 12
Schedule C Mortgages, notes,
and cash (See reverse side of
Sch. C on Form 706)
Schedule D Insurance (See
reverse side of Sch. D on Form
706)
Schedule E Jointly owned
property (See reverse side of
Sch. E on Form 706)
Schedule F. Other miscellaneous
property (See reverse side of
Sch. F on Form 706)
Schedule G Transfers during
decedent’s life . . . . . . . . . . . . . 13
Schedule G, how to
complete . . . . . . . . . . . . . . . . . . . 15
Schedule H Powers of
appointment . . . . . . . . . . . . . . . 15
Schedule I Annuities . . . . . . . . . . 16
Schedule I, how to
complete . . . . . . . . . . . . . . . . . . . 17
Schedule J Expenses (See
reverse side of Sch. J on Form
706)
Schedule K Debts . . . . . . . . . . . . 18
Schedule L Losses, expenses
during administration . . . . . . . 19
Schedule M (Marital deduction)
(See instructions in the Form
706, itself)
Schedule O Gifts and
bequests . . . . . . . . . . . . . . . . . . . 19
Schedule P Foreign death
taxes . . . . . . . . . . . . . . . . . . . . . . 20
Schedule Q Prior transfers, credit
for . . . . . . . . . . . . . . . . . . . . . . . . . 21
Schedule R and R-1
Generation-skipping transfer
tax . . . . . . . . . . . . . . . . . . . . . . . . 22
Schedule R, how to
complete . . . . . . . . . . . . . . . . . . . 24
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Schedule R-1, how to
complete . . . . . . . . . . . . . . . 24, 25
Schedule U Qualified conservation
easement exclusion . . . . . . . . 26
Schedules R and R-1, direct
skips . . . . . . . . . . . . . . . . . . . . . . 24
Section 2032A . . . . . . . . . . . . . 7, 12
Section 2035(a) transfers . . . . . 14
Section 2036 transfers . . . . . . . . 14
Section 2037 transfers . . . . . . . . 14
Section 2038 transfers . . . . . . . . 14
Signature and verification . . . . . . 2
Social security number . . . . . . . 3, 4
special-use valuation of Section
2032A . . . . . . . . . . . . . . . . . . . . . . 7
Specific Instructions . . . . . . . . . . . 3
Stocks . . . . . . . . . . . . . . . . . . . . . . . 12
T
Table A, Unified Rate
Schedule . . . . . . . . . . . . . . . . . . . 4
Tax Computation . . . . . . . . . . . . . . 4
Taxes, foreign death . . . . . . . . . . 20
Total Credits . . . . . . . . . . . . . . . . . . 6
Transfers, direct skips . . . . . . . . 22
Transfers, valuation rules . . . . . 15
Trusts . . . . . . . . . . . . . . . . . . . . . . . 12
U
U. S. Citizens or Residents . . . . . 2
Unified Credit (applicable credit
amount) . . . . . . . . . . . . . . . . . . . . 6
Unified credit adjustment . . . . . . . 6
V
Valuation methods . . . . . . . . . . . . . 8
Valuation rules, transfers . . . . . . 15
W
What’s New . . . . . . . . . . . . . . . . . . . 1
When To File . . . . . . . . . . . . . . . . . . 2
Which Estates Must File . . . . . . . 2
Worksheet for Schedule Q . . . . 21
Worksheet TG-Taxable Gifts
Reconciliation . . . . . . . . . . . . . . . 5
Worksheet, inclusion ratio for
trust . . . . . . . . . . . . . . . . . . . . . . . 25
■
Page 31 of 31
Instructions for Form 706
12:11 - 2-OCT-2006
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Checklist for Completing Form 706
To ensure a complete return, review the following checklist before filing Form 706.
Attachments . . .
Death certificate —you must attach.
Certified copy of the will —if decedent died testate, you must attach. If not certified, explain why.
Appraisals —attach any appraisals used to value property included on the return.
Copies of all trust documents where the decedent was a grantor or a beneficiary.
Form 2848 or 8821, if applicable.
Copy of any Form(s) 709 filed by the decedent.
Form 712, if filing Schedule D.
Form 706-CE, if claiming a foreign death tax credit.
Explanation of reasonable cause for late filing, if applicable.
Have you . . .
Signed the return at the bottom of page 1?
Had the preparer sign, if applicable?
Obtained the signature of your authorized representative on Part 4, page 2?
Entered a Total on all schedules filed?
Made an entry on every line of the Recapitulation, even if it is a zero?
Included the CUSIP number for all stocks and bonds?
Included the EIN of trusts, partnerships, or closely held entities and the EIN of the estate?
Included the first 3 pages of the return and all required schedules?
Completed Schedule F? It must be filed with all returns.
Completed Part 4, line 4, on page 2, if there is a surviving spouse?
Completed and attached Schedule D to report insurance on the life of the decedent, even if its value is not
included in the estate?
Included any QTIP property received from a pre-deceased spouse?
Entered the decedent’s name, SSN, and “Form 706” on your check or money order?
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| File Type | application/pdf |
| File Title | Instruction 706 (Rev. October 2006) |
| Subject | Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return |
| Author | W:CAR:MP:FP |
| File Modified | 2006-10-05 |
| File Created | 2006-10-05 |