What Form 706 Is For

Form 706 is the federal estate tax return that the executor of a deceased person's estate uses to report the value of everything the person owned at death and calculate any estate taxes owed. Think of it as a final financial accounting to the IRS that captures the decedent's entire net worth—real estate, bank accounts, stocks, life insurance, retirement accounts, and even certain gifts made during their lifetime.

For deaths occurring in 2011, this form also serves another crucial purpose: it allows a surviving spouse to inherit any unused portion of the deceased spouse's $5 million estate tax exemption through an election called "portability." This means even if no estate tax is owed, filing Form 706 can preserve valuable tax benefits for the surviving spouse's future use.

The form also calculates Generation-Skipping Transfer (GST) tax, a separate tax that applies when assets skip a generation (for example, passing from grandparents directly to grandchildren rather than to parents first).

When You’d Use It (Late/Amended Filings)

Standard Filing Timeline

Form 706 must be filed within 9 months after the date of death. For example, if someone died on March 15, 2011, the form would be due by December 15, 2011. You can request an automatic 6-month extension using Form 4768, which must be filed before the original 9-month deadline expires.

Late Filing

If you miss the deadline without requesting an extension, you can still file, but penalties may apply. The IRS charges a late filing penalty of 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. There's also a separate penalty for late payment of taxes. However, these penalties can be waived if you can demonstrate "reasonable cause" for the delay—though you must wait until the IRS assesses penalties before requesting this relief.

Amended Returns

If you discover errors after filing, you must file a supplemental Form 706. Write "Supplemental Information" across the top of page 1 and attach copies of pages 1, 2, and 3 from the original return. Common reasons for amendments include discovering additional assets, correcting property valuations, or changing elections (like choosing alternate valuation). If the IRS has already notified you that your return is under examination, provide corrections directly to the examining office rather than filing a new return.

Key Rules or Details for 2011

Filing Threshold

You must file Form 706 if the gross estate (everything the decedent owned), plus adjusted taxable gifts made after 1976, plus any specific exemptions claimed, exceeds $5,000,000. However, many executors choose to file even when the estate falls below this amount to elect portability for the surviving spouse.

Tax Rate

The maximum estate tax rate for 2011 is 35%, significantly lower than in previous years.

Portability Election

This was a new feature in 2011. If you file a timely and complete Form 706, the surviving spouse can use any unused portion of the deceased spouse's $5 million exemption. For example, if the deceased spouse's estate was worth $3 million, the surviving spouse gains an additional $2 million exemption on top of their own $5 million, totaling $7 million in combined exemptions.

State Death Tax Deduction

Unlike previous years, you cannot take a credit for state death taxes paid. Instead, you deduct state estate or inheritance taxes on line 3b of the Tax Computation section.

Special Valuation Limits

The ceiling on special-use valuation (for family farms and businesses) is $1,020,000 for 2011.

Where to File

All Form 706 returns for 2011 decedents are filed at: Department of the Treasury, Internal Revenue Service Center, Cincinnati, OH 45999.

Step-by-Step (High Level)

Step 1: Gather Documentation

Collect the death certificate, will (if any), all prior gift tax returns (Form 709), appraisals for real estate and valuables, bank and brokerage statements as of the date of death, life insurance policies, business valuations, and records of debts and liabilities.

Step 2: Determine Who is the Executor

The executor must provide documentation proving their authority, such as a certified copy of the will or court appointment papers. If multiple executors are appointed, they can file one joint return, though only one signature is required.

Step 3: Complete Part 1

Enter the decedent's basic information including name, Social Security number, date and place of death, and residence. List all executor contact information.

Step 4: Make Critical Elections (Part 3)

Decide whether to elect alternate valuation (valuing assets 6 months after death instead of on the date of death), whether to elect portability for the surviving spouse, and whether to request installment payment of taxes for closely-held businesses under Section 6166.

Step 5: Complete Asset Schedules

Fill out schedules for all assets: Schedule A (Real Estate), Schedule B (Stocks and Bonds), Schedule C (Cash and Notes), Schedule D (Life Insurance), Schedule E (Jointly Owned Property), Schedule F (Other Property), Schedule G (Lifetime Transfers), Schedule H (Powers of Appointment), and Schedule I (Annuities).

Step 6: Calculate Deductions

Complete schedules for funeral expenses and administration costs (Schedule J), debts and mortgages (Schedule K), losses during administration (Schedule L), marital deduction (Schedule M), and charitable bequests (Schedule O).

Step 7: Complete Tax Computation

Use Part 2 to calculate the tentative tax, apply the unified credit ($1,730,800 for 2011), deduct state death taxes, and figure any credits for foreign death taxes or prior transfers.

Step 8: Submit Payment and Supporting Documents

Attach all required documentation including the death certificate, certified copy of the will, and Forms 712 (Life Insurance Statements). Make checks payable to "United States Treasury" with the decedent's name, Social Security number, and "Form 706" written on the check.

Common Mistakes and How to Avoid Them

Missing the Filing Deadline

Many executors underestimate how long it takes to gather information and complete the 28-page return. Start early and request an extension using Form 4768 before the 9-month deadline if you need more time.

Failing to File for Portability

One of the costliest errors is not filing Form 706 when the estate is under $5 million but a surviving spouse exists. Without filing, the unused exemption is permanently lost. Even if no tax is owed, file to preserve this valuable benefit.

Incomplete Asset Reporting

Every asset the decedent had any interest in must be reported, even if it passes outside the estate (like life insurance to named beneficiaries or jointly-owned property). The IRS has access to financial records and will discover unreported assets.

Valuation Errors

Using incorrect values—whether too high or too low—causes problems. Values more than 35% below the correct amount trigger a 20% penalty (40% if grossly understated). Always obtain professional appraisals for real estate, businesses, and collectibles.

Not Including Prior Gifts

All taxable gifts made after 1976 must be listed, even if no gift tax was paid. Many people forget to report gifts that exceeded the annual exclusion ($13,000 per recipient in 2011) because they fell below the lifetime exemption.

Inadequate Documentation

Attach all required forms and supporting documents with the original filing. Missing items delay processing and may invalidate certain elections. Use the checklist on page 43 of the instructions.

Math Errors in Tax Computation

The Line 4 and Line 7 worksheets for adjusted taxable gifts and prior period credits are complex. Use the provided worksheets carefully and double-check all calculations, as errors here directly affect the tax owed.

What Happens After You File

Initial Processing

The IRS processes your return at their Cincinnati Service Center. They'll check for math errors, missing schedules, and required attachments. If everything is in order, they'll accept the return and send a notice of assessment.

Payment and Closing

If taxes are owed, interest accrues from 9 months after the date of death until payment is received. Once the estate pays all taxes, you can request an estate closing letter by contacting the IRS, though this isn't automatic and typically can't be requested until at least 4 months after filing.

Statute of Limitations

The IRS has 3 years from the filing date to audit the return, provided there's adequate disclosure of all assets. This clock starts when you file a complete and accurate return. For returns with inadequate disclosure or unreported assets, the IRS has unlimited time to examine the return.

Examination/Audit

While most returns are accepted as filed, the IRS may select your return for examination. This typically happens 12-18 months after filing. The IRS will request additional documentation, explanations of valuations, or clarification of deductions. Estate tax audits are more common than individual income tax audits, especially for larger estates or returns with unusual items.

Supplemental Documentation

If the IRS requests additional information, respond promptly and completely. Missing deadlines during an examination can result in adverse determinations. Keep all estate records for at least 4 years after filing.

Refunds and Adjustments

If you later discover you overpaid taxes or overvalued assets, you can file a protective claim for refund, but you generally must do so within 3 years of filing the original return or 2 years from when you paid the tax, whichever is later.

FAQs

Q1: Do I need to file Form 706 if the estate is worth less than $5 million?

Generally, no—but you should strongly consider filing if there's a surviving spouse. Filing preserves the deceased spouse's unused exemption amount through portability, which the surviving spouse can use to reduce their own estate taxes later. Without filing, this benefit is permanently lost, even if the combined estates eventually exceed $10 million.

Q2: What if I can't get all the information within 9 months?

File Form 4768 to request an automatic 6-month extension before the original deadline. This gives you 15 months total to file. The extension is automatic for filing, but not for paying any taxes owed—you must estimate and pay the expected tax by the original 9-month deadline to avoid interest and penalties.

Q3: How do I value assets like family businesses or real estate?

You must use fair market value as of the date of death—the price a willing buyer would pay a willing seller, with both having reasonable knowledge of the facts. For complex assets, hire qualified appraisers. You can alternatively elect to value all assets as of 6 months after death if this would result in a lower estate value and lower estate tax owed.

Q4: What happens if I discover additional assets after filing?

File a supplemental Form 706 showing the additional assets. Write "Supplemental Information" at the top and attach copies of pages 1, 2, and 3 from your original return. You'll owe additional tax plus interest from the original due date. Filing a supplemental return voluntarily typically results in lighter penalties than if the IRS discovers the omission during an audit.

Q5: Can I pay the estate tax in installments?

Yes, if more than 35% of the adjusted gross estate consists of a closely-held business interest. Section 6166 allows you to pay the tax attributable to the business interest in up to 10 annual installments, with interest-only payments for the first 4 years. Check line 3 in Part 3 to make this election and attach the required supporting statement.

Q6: What's the difference between the gross estate and the taxable estate?

The gross estate is everything the decedent owned or had certain interests in—the total value before any deductions. The taxable estate is what remains after subtracting allowable deductions like funeral expenses, debts, administration costs, marital deduction (property passing to the surviving spouse), and charitable bequests. You only pay tax on the taxable estate.

Q7: Do I need a lawyer or CPA to complete Form 706?

While not legally required, Form 706 is one of the most complex tax returns in the IRS system. The form is 28 pages with numerous schedules, complicated valuation rules, and significant penalties for errors. Unless the estate is very simple and small, professional assistance from an estate attorney or CPA specializing in estate tax is strongly recommended. The cost of professional preparation is deductible as an administration expense on Schedule J.

For More Information

Visit IRS.gov/form706 or consult IRS Publication 559 (Survivors, Executors, and Administrators) and IRS Publication 950 (Introduction to Estate and Gift Taxes). Access the 2011 Form 706 and instructions at IRS.gov.

‍