What Form 706 (2012) Is For
Form 706 is the federal estate tax return used to report the total value of a deceased person’s estate and calculate any estate tax owed. It covers assets such as real estate, life insurance proceeds, investments, and business interests. The form also helps determine the generation-skipping transfer tax for property passed to grandchildren or other beneficiaries. Executors use it to calculate fair market value, claim deductions, and apply the federal estate tax exemption provided under the Internal Revenue Code.
When You’d Use Form 706 (2012)
Executors must file Form 706 if the decedent’s gross estate plus adjusted taxable gifts exceeded the $5.12 million exemption amount for the 2012 tax year. Filing is also required when electing portability to transfer a deceased spouse’s unused exemption to a surviving spouse. The filing deadline is nine months after the decedent’s death, with an automatic six-month extension available by filing Form 4768. Large estates, estates of non-resident aliens, and estates choosing special elections should file promptly with the Internal Revenue Service.
Key Rules or Details for 2012
- Estate Tax Exemption Amount: For the 2012 tax year, the federal estate tax exemption was $5.12 million, shielding smaller estates from taxation under the United States estate system.
- Estate Tax Rates: Estates exceeding the exemption were taxed at a top rate of 35 percent, calculated on the taxable estate after deductions and credits.
- Fair Market Value Requirements: Executors must use the fair market value of each asset as of the decedent’s date of death or six months later under the alternate valuation election.
- Deceased Spousal Unused Exclusion: Filing Form 706 elects portability, allowing a surviving spouse to use the deceased spouse’s unused exemption amount in later tax years.
- Generation-Skipping Transfer Tax: The generation-skipping transfer provision applied to direct transfers to grandchildren or lower generations using the same $5.12 million exemption.
- Unlimited Marital Deduction: Estates could deduct property passing to a surviving spouse, reducing the taxable estate.
- State Death Tax Deduction: State inheritance taxes paid could be deducted on the federal estate tax return to reduce total liability.
- Filing Requirement: Executors must include documentation of lifetime gifts, prior gift tax returns, and accurate asset valuations to support the tax return.
- Payment of Tax: Executors must pay estate taxes by check payable to the United States Treasury or through electronic transfer before the due date.
- Private Delivery Service Option: Returns filed pursuant to a private delivery service meet the federal filing deadline if postmarked on time.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Gather Estate Information
Collect the death certificate, wills or trusts, and documentation showing the fair market value of the decedent’s assets, including life insurance proceeds, business interests, and real estate. Include records of adjusted taxable gifts and gift tax returns.
Step 2: Identify the Executor and Beneficiaries
The executor must be officially appointed and responsible for reporting all the decedent’s assets and liabilities. Executors work with attorneys or financial advisors to ensure accuracy and compliance with the Internal Revenue Service rules.
Step 3: Complete Required Schedules
Complete all relevant schedules for real property, securities, cash, insurance, debts, and deductions. Use the simplified method for assets of clearly determinable value and accurately list charitable donations, medical expenses, and other deductions.
Step 4: Calculate and Pay the Tax
Use the instructions to calculate estate taxes based on the gross estate, deductions, taxable gifts, and credits. Subtract the federal estate tax exemption, apply the current estate tax rates, and pay the remaining balance by the filing deadline.
Step 5: Make Elections and File
Executors may elect portability to transfer the deceased spouse’s unused exclusion to a surviving spouse or make a special-use valuation election for closely held businesses. Mail the completed filing form to the Internal Revenue Service with payment or use an approved electronic option.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Missing the Filing Deadline: Executors sometimes overlook the nine-month due date. Always file on time or request an automatic six-month extension to protect portability rights and avoid penalties.
- Incorrect Fair Market Value Reporting: Understating asset values can lead to penalties. Hire qualified appraisers to verify the total value of the decedent’s estate.
- Failing to Report Lifetime Gifts: Executors occasionally omit prior annual gifts or adjusted taxable gifts. Review past gift tax returns carefully to calculate estate taxes correctly.
- Not Claiming Available Deductions: Many tax returns fail to claim deductions for medical expenses, charitable donations, or estate administration costs. Include all allowable items to minimize your tax liability.
- Overlooking Portability Election: Estates of married couples risk losing millions in exemption if they fail to elect portability. Always file Form 706 to preserve the deceased spouse's unused exclusion.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
The Treasury Internal Revenue Service reviews each estate tax return for accuracy and compliance with the Internal Revenue Code. Processing typically takes six to nine months. If the IRS accepts the return, it issues an estate tax closing letter confirming completion. Refunds or tax bills are sent based on the final computation. Executors must also file the income tax return for the estate if income is generated during estate administration or while distributing assets.
FAQs
Do I need to file Form 706 (2012) if my estate is exempt from federal estate tax?
You must file if you elect portability or if the gross estate plus adjusted taxable gifts exceed the $5.12 million exemption amount. Filing ensures the surviving spouse can claim the deceased spouse’s unused exemption in future years.
How does fair market value affect my estate tax return?
Fair market value determines the taxable estate and the amount subject to estate tax. Executors must provide appraisals or supporting documents for real estate, securities, and other assets.
What are the estate tax rates for large estates in 2012?
For the 2012 tax year, the estate tax rate was 35 percent for the portion exceeding the $5.12 million exemption amount. This applied after deducting all allowable expenses and credits.
How does the generation-skipping transfer tax apply to estates?
The generation-skipping transfer tax applies when assets pass directly to grandchildren or others two generations below the decedent. Estates calculate this tax separately under the same exemption limits.
What is the deceased spouse's unused exclusion, and how do I elect portability?
The deceased spousal unused exclusion lets a surviving spouse use the unused portion of the deceased spouse’s exemption. Executors elect portability by filing Form 706 within nine months or during an approved extension period.
What happens if I miss the Form 706 (2012) filing deadline?
Late filing may result in penalties and loss of portability election. Executors should request an automatic six-month extension using Form 4768 to maintain compliance and avoid unnecessary tax costs.
How do estate and gift taxes interact for the same decedent’s estate?
The federal estate tax and gift tax are unified under the Internal Revenue Code. Lifetime gifts reduce the remaining exemption amount used to calculate estate taxes at the decedent’s death.
For more resources on filing or understanding prior-year IRS forms, visit our guide on Business Income Tax Forms.
