A Comprehensive Guide for Executors and Estate Representatives

What Form 706 Is For

Form 706 is the federal tax return used by the executor of a deceased person's estate to calculate and report estate tax owed to the IRS. When someone dies, their estate—everything they owned—may be subject to federal estate tax if it exceeds certain thresholds. This form serves two primary purposes: first, to figure the estate tax imposed under Chapter 11 of the Internal Revenue Code on the entire taxable estate (not just individual shares), and second, to calculate generation-skipping transfer (GST) tax on direct skips—transfers to grandchildren or other "skip persons" that bypass a generation.

For deaths occurring in 2013, Form 706 also plays a crucial role in the "portability" election, which allows a surviving spouse to inherit any unused portion of the deceased spouse's estate tax exemption (called the Deceased Spousal Unused Exclusion, or DSUE amount). Even if an estate doesn't owe tax, filing Form 706 may be necessary to preserve this valuable benefit for the surviving spouse.

The form is comprehensive, requiring detailed schedules listing all assets including real estate, stocks, bonds, insurance policies, jointly owned property, and property transferred during the decedent's lifetime. It's essentially a complete financial snapshot of what the deceased person owned at death and what they gave away during their life.

When You’d Use It (Filing, Late Filing, and Amended Returns)

Regular Filing Requirements

You must file Form 706 within 9 months after the date of death if the decedent was a U.S. citizen or resident and either:
(a) their gross estate plus adjusted taxable gifts and specific exemptions exceeds $5,250,000 (the 2013 threshold), or
(b) the executor wants to elect portability of the DSUE amount to transfer any unused exemption to the surviving spouse, regardless of estate size.

Extension Requests

If you cannot meet the 9-month deadline, you can request an automatic 6-month extension using Form 4768 (Application for Extension of Time To File). However, this only extends the filing deadline—not the payment deadline. Any estate tax owed is still due within 9 months, and interest will accrue on unpaid amounts. Importantly, to elect portability, you must file within the original 9-month period or within the 6-month extension period; late filings cannot elect portability.

Amended Returns

If you discover errors after filing, you don't file a traditional "amended" return. Instead, you file another complete Form 706 with "Supplemental Information" written across the top of page 1, attaching copies of pages 1-4 from the original return. If the IRS has already notified you of an examination, provide corrections directly to the examining office rather than filing a supplemental return.

Key Rules or Details for 2013

Basic Exclusion Amount

$5,250,000—estates below this threshold (after adding back certain lifetime gifts) generally don't owe federal estate tax.

Applicable Credit Amount

$2,045,800—this credit automatically applies against any calculated estate tax, effectively exempting the first $5.25 million.

Tax Rates

Estate tax applies to amounts exceeding the exclusion at graduated rates starting at 18% and reaching a maximum of 40% on amounts over $1 million.

State Death Tax Change

Unlike prior years, the 2013 return allows a deduction (not a credit) for state estate or inheritance taxes paid. This deduction is claimed on line 3b and reduces the taxable estate.

Portability Election

This was a relatively new feature in 2013. The only action required to elect portability is filing a timely and complete Form 706. The executor can opt out by affirmatively checking a box in Part 6; otherwise, portability is automatically elected. Executors filing solely for portability (when no tax is due) may estimate values for certain marital and charitable deduction assets under a special rule, though these estimates must be included in the gross estate total.

Special-Use Valuation

Qualified real estate (typically farms or closely-held businesses) can sometimes be valued based on actual use rather than highest-and-best-use, with a 2013 ceiling of $1,070,000 in value reduction.

Step-by-Step (High Level)

Step 1 — Gather Documentation

Collect the death certificate, will (certified copy), appraisals of all assets, bank statements, brokerage accounts, life insurance policies (Form 712), deeds, prior gift tax returns (Form 709), and records of debts and expenses. If prior gifts were made, obtain all Forms 709 filed during the decedent's lifetime.

Step 2 — Obtain Identification Numbers

Ensure you have the decedent's Social Security Number. Obtain an Employer Identification Number (EIN) for the estate by filing Form SS-4.

Step 3 — Value All Assets

Determine the fair market value of every asset as of the date of death. Alternatively, you may elect alternate valuation (6 months after death) if it reduces both the estate value and estate tax liability. Hire qualified appraisers for real estate, business interests, artwork, and other hard-to-value items.

Step 4 — Complete Required Schedules

File Schedules A through I listing all assets by category (real estate, stocks, bonds, mortgages, insurance, jointly owned property, other property, transfers during life, annuities). Complete Schedules J through M for deductions (funeral expenses, debts, administrative costs, losses, bequests to surviving spouse). If claiming charitable deductions or credits, complete Schedules O, P, and Q as applicable.

Step 5 — Calculate Tax and Credits

Complete Part 2 (Tax Computation), adding lifetime taxable gifts to the estate, calculating tentative tax, subtracting gift taxes previously paid, and applying the unified credit. If direct skips exist, complete Schedule R for GST tax.

Step 6 — Address Portability

Complete Part 6 to calculate the DSUE amount transferring to the surviving spouse, or opt out of portability if desired.

Step 7 — Sign, Pay, and File

The executor must sign under penalty of perjury. If a paid preparer completed the return, they must also sign. Pay any tax due (by check to "United States Treasury" or electronically via EFTPS). Mail the complete return to: Internal Revenue Service, Cincinnati, OH 45999.

Common Mistakes and How to Avoid Them

Mistake #1 — Missing the Deadline

Late filing triggers penalties of 5% per month (up to 25%) on unpaid tax, plus interest. Avoid this by calendaring the 9-month deadline immediately and requesting an extension well in advance if needed. Remember: late filings forfeit the portability election.

Mistake #2 — Failing to File for Portability

Many executors incorrectly assume no filing is required when estate value falls below the exemption. If there's a surviving spouse, filing preserves potentially millions in exemptions. File Form 706 even when no tax is due if portability might benefit the survivor.

Mistake #3 — Incomplete Gift History

The return requires reporting ALL lifetime taxable gifts exceeding the annual exclusion (in 2013, $14,000 per recipient). Executors often overlook unreported gifts or can't locate Forms 709. Start the search early, contact family members about possible gifts, and check IRS transcripts.

Mistake #4 — Valuation Errors

Undervaluing assets by 35% or more triggers a 20% accuracy penalty; undervaluing by 60% triggers a 40% penalty. Use qualified appraisers, document valuation methods, and be conservative. For publicly traded securities, use the mean between high and low on date of death.

Mistake #5 — Forgetting Includible Assets

Life insurance proceeds (even if paid to beneficiaries) are includible if the decedent owned the policy or held incidents of ownership. Retirement accounts, jointly owned property, and property over which the decedent held a general power of appointment must be included. Review the instructions for each schedule carefully.

Mistake #6 — Missing Required Documentation

Returns without attached death certificates, certified wills, Forms 712 for insurance, or Forms 709 for prior gifts face processing delays. The IRS won't begin review until documentation is complete, extending the entire process by months.

Mistake #7 — Calculation Errors

Double-check all arithmetic, especially in Part 2 (Tax Computation) and the complex gift tax reconciliation worksheets. Errors delay processing and may trigger penalties if they understate tax.

What Happens After You File

Initial Processing (6–8 weeks)

After mailing Form 706, the IRS takes approximately 6–8 weeks to perform initial processing—scanning documents, checking for completeness, and entering data into their system. During this period, the IRS may reject incomplete packages.

Review Period (6–18 months)

Following initial processing, the return enters a review queue. Estate tax returns receive closer scrutiny than typical income tax returns. The IRS focuses on valuation issues, includible assets, deduction substantiation, and prior gift reporting. This review period typically lasts 6–9 months for straightforward estates but can extend to 12–18 months for complex returns.

Estate Tax Closing Letter

If the IRS accepts the return without audit, they issue an estate tax closing letter (officially called Letter 627). This document specifies the final estate tax liability, state death tax deduction, and any GST tax owed. Importantly, it doesn't confirm payment amounts or indicate refund processing—it simply closes the estate tax matter. Many executors mistakenly believe this letter means the estate is fully closed for all tax purposes, but it only addresses Form 706.

Audit Selection

If selected for examination, you'll receive an audit notice (Letter 3172 or similar) typically 12–18 months after filing. Estate tax audits are conducted by specialized IRS revenue agents at estate and gift tax offices. The audit focuses on asset valuations, deductions claimed, and prior gift issues. These audits can last several months to over a year depending on complexity and disputed issues.

Statute of Limitations

Generally, the IRS has 3 years from the filing date to audit and assess additional estate tax. However, this extends to 6 years if the estate substantially underreported values (by 25% or more), and there's no time limit for fraud or failure to file.

Payment Plans

If estate taxes are due but assets are illiquid, executors may request installment payments under section 6166 (for closely-held business interests) or may request general extensions under section 6163 for reversionary interests. These elections are made on the return itself.

FAQs

Q1: Do I need to file Form 706 if the estate is below $5.25 million?

Generally no, unless the executor wants to elect portability for a surviving spouse. Even if no tax is due, filing Form 706 transfers any unused exemption to the surviving spouse, who can use it for future gifts or at their death. This can save hundreds of thousands in future taxes.

Q2: What's the difference between estate tax and inheritance tax?

Federal estate tax is imposed on the estate itself before distribution and is calculated on the total estate value. State inheritance taxes (imposed by some states) are paid by individual beneficiaries based on what they receive. Form 706 addresses federal estate tax only, though state death taxes paid can be deducted on line 3b.

Q3: What is generation-skipping transfer (GST) tax and when does it apply?

GST tax is an additional 40% tax imposed on transfers to grandchildren or others who are two or more generations younger than the decedent (called "skip persons"). It prevents wealthy families from avoiding estate tax across multiple generations. If assets pass directly to grandchildren at death (a "direct skip"), you must complete Schedule R and Schedule R-1 to calculate GST tax.

Q4: Can I use the alternate valuation date, and should I?

You can elect to value assets as of 6 months after death (or date of disposition if earlier) instead of date of death, but only if this election reduces both the total estate value AND the estate tax liability. This election is beneficial when markets decline after death, but it's all-or-nothing—you can't cherry-pick which assets to revalue.

Q5: What if the decedent made gifts in the past but never filed Forms 709?

You must make reasonable efforts to discover lifetime gifts exceeding the annual exclusion and report them on Form 706 even without filed Forms 709. Include these gifts in the gift tax reconciliation worksheets. The IRS may later assess gift tax penalties for unfiled returns, but for Form 706 purposes, report all known taxable gifts to calculate estate tax correctly.

Q6: How is portability different from traditional estate planning with trusts?

Traditional estate planning often uses credit shelter (bypass) trusts to preserve both spouses' exemptions. Portability achieves a similar result more simply by allowing the surviving spouse to use the deceased spouse's unused exemption without creating trusts. However, portability doesn't protect assets from estate tax appreciation in the survivor's estate, doesn't provide asset protection, and is lost if the survivor remarries and their new spouse dies.

Q7: What should I do if I can't pay the estate tax when filing?

File Form 706 on time even if you cannot pay immediately—this avoids late filing penalties. Submit whatever payment you can with the return. Then contact the IRS to request a payment plan or explore section 6166 installment payments if more than 35% of the adjusted gross estate consists of a closely-held business. Interest will accrue on unpaid balances, but the penalties for late filing are much steeper than interest charges.

For More Information

Visit IRS.gov/forms-pubs/about-form-706 for current forms, instructions, and updates. The Instructions for Form 706 (Rev. August 2013) provide complete technical details for all schedules and calculations.

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