Form 706 Estate and GST Tax Filing Overview (2012)

Understanding Form 706 for 2012 Decedents
Form 706, the United States Estate and Generation-Skipping Transfer Tax Return, serves as the
primary document for reporting federal estate tax obligations for deceased U.S. citizens and
residents. The tax year 2012 marked the continuation of the portability provisions introduced in
2011, allowing surviving spouses to utilize the unused exclusion amount of their deceased
spouses through proper filing procedures.

The 2012 Tax Law Environment
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
established the framework governing estate taxation in 2012. This legislation set the basic
exclusion amount at $5,120,000 with a corresponding applicable credit amount of $1,772,800.

The maximum estate tax rate remained at 35 percent for 2012, applying to both estate transfers
and generation-skipping transfers. These provisions represented a continuation of the unified
approach to estate and gift taxation that reunified the credit for lifetime gifts with the credit for
transfers at death.

The portability election remained a defining feature of the 2012 estate tax landscape. Executors
could elect to transfer any deceased spouse's unused exclusion amount to a surviving spouse
by filing a timely and complete Form 706, even when the gross estate fell below the filing
threshold. This portability feature required no special forms or elections beyond the proper
completion of Form 706 itself. However, executors who wished to opt out of portability were
required to indicate their choice affirmatively.

New Provisions for 2012 Form 706
The 2012 revision of Form 706 introduced Part 6, titled Portability of Deceased Spousal Unused
Exclusion. This new section provided a dedicated space for executors to opt out of the
portability election, calculate the DSUE amount to be transferred to a surviving spouse, and
account for any DSUE amounts the decedent received from one or more predeceased spouses.

Part 2 of the form was modified, with lines 9a–9d replacing line 9, allowing for a detailed
calculation of the applicable exclusion amount and applicable credit amount when factoring in
DSUE amounts received from predeceased spouses.

A special reporting rule under Regulations section 20.2010-2T(a)(7)(ii) allowed estates filing
solely to elect portability to use simplified valuation procedures. When the total value of the
gross estate plus adjusted taxable gifts was less than the basic exclusion amount, and the

return was filed only for portability purposes, executors were not required to report specific
values for particular property eligible for the marital or charitable deduction. However, these
assets still needed to be estimated and included in the total gross estate value. This special rule
did not apply to assets requiring specific valuation for eligibility under other Code provisions.

Filing Requirements and Deadlines
For 2012 decedents, Form 706 was required under two distinct circumstances. First, estates
were required to file when the gross estate, plus adjusted taxable gifts and specific exemption
amounts, exceeded $5,120,000. Second, estates of any size were required to file if the executor
chose to transfer the DSUE amount to the decedent’s surviving spouse through the portability
election.

The standard filing deadline remained nine months after the date of the decedent’s death.

Executors could request an automatic six-month extension of time to file by submitting Form
4768. The portability election could only be made if Form 706 was filed timely, meaning within
the initial nine-month period or before the six-month extension period ended. Payment of estate
and generation-skipping transfer taxes followed the same nine-month deadline, with provisions
for extension requests or installment payments under section 6166 for qualifying estates.

10-Step Filing Checklist for Form 706 Tax Year 2012

1. Step 1: Verify Filing Requirements and Portability Decision

   Confirm the decedent’s date of death falls within calendar year 2012 and determine whether the
   estate meets the filing threshold of $5,120,000 or whether the executor intends to make the
   portability election to transfer DSUE to the surviving spouse. Calculate the gross estate by
   adding the value of all property interests at the date of death plus adjusted taxable gifts made
   after December 31, 1976.

   If filing solely for portability when the estate is below the threshold, determine whether to use the
   simplified valuation procedures available under the special rule. Obtain proof that the executor
   has the power to act, such as certified copies of court appointment papers or letters
   testamentary.

2. Step 2: Gather Required Documentation and Supporting Materials

   Collect the death certificate, which must be attached to Form 706. Obtain a certified copy of the
   will if the decedent passed away with a will. Gather Form 712 for every life insurance policy in
   the decedent’s lifetime. Collect copies of all gift tax returns previously filed by the decedent to
   support the computation of adjusted taxable gifts—secure professional appraisals for real
   estate, closely held business interests, and other assets requiring expert valuation.

   Obtain trust instruments if the decedent was a grantor or beneficiary. Collect statements for
   financial accounts, brokerage accounts, retirement plans, and documentation of all debts and
   liabilities. If claiming DSUE from a predeceased spouse, obtain copies of the predeceased
   spouse’s Form 706 showing the DSUE calculation.

3. Step 3: Complete Part 1 General Information

   On the first page, record all identifying information about the deceased person, including their
   full legal name, Social Security number, date of birth, and date of death. Give the address of the
   legal residence and the county of domicile at the time of death, along with the year it was
   established. List the primary executor’s name, address, social security number, and telephone
   contact information.

   If there is more than one executor, select the box on line 6d and include a statement with the
   names, addresses, phone numbers, and social security numbers of all the other executors.

   Identify the probate court where the will was admitted, or estate administration commenced,
   including the case number and jurisdiction. Indicate the decedent’s marital status at death and
   provide complete information about the surviving spouse, if applicable.

4. Step 4: Report Real Estate on Schedule A

   Complete Schedule A for all real property owned by the decedent or in which the decedent held
   any interest at death. Provide detailed property descriptions, including street addresses for
   urban properties or complete legal descriptions with township, range, and section information for
   rural parcels. Report fair market value based on professional appraisals and attach copies of all
   appraisal reports. Include any rental income due or accrued at the date of death as separate
   line items.

   If property is subject to mortgages for which the estate is liable, report the full property value on
   Schedule A and separately deduct the mortgage amount on Schedule K. If electing special-use
   valuation under section 2032A for qualified farm or closely held business real property, complete
   and attach Schedule A-1 with all required supporting documentation, affidavits regarding
   material participation, and the agreement signed by all qualified heirs. The ceiling on
   special-use valuation for 2012 was $1,040,000.

5. Step 5: Report Securities and Financial Assets

   Complete Schedule B for all stocks, bonds, mutual funds, government securities, and other
   investment securities owned by the decedent. Provide the CUSIP number for each publicly
   traded security. For publicly traded securities, determine fair market value using the mean
   between the highest and lowest selling prices on the valuation date. For closely held business
   interests, attach detailed appraisals explaining valuation methodologies, discount rates applied
   for lack of marketability or minority interest, and any other applicable adjustments.

   Complete Schedule C for all cash holdings, bank accounts, mortgages owned by the decedent
   as investments, notes receivable, and similar financial assets. List all bank accounts with
   institution names, account numbers, and exact balances as of the date of death. Report any
   notes receivable with complete details of the debtor’s name, date of the note, principal amount,
   interest rate, payment terms, and current fair market value.

6. Step 6: Report Life Insurance on Schedule D

   Complete Schedule D to report all life insurance on the decedent’s life. Attach Form 712 for
   every policy included in the gross estate. Under section 2042, include insurance receivable by
   or for the benefit of the estate and insurance receivable by beneficiaries other than the estate if
   the decedent possessed any incidents of ownership at death. Incidents of ownership include the
   power to change beneficiaries, surrender the policy, pledge it as collateral for a loan, or exercise
   any other economic rights.

   Under Section 2035, include policies where the decedent transferred ownership within three
   years of death. Report the full death benefit amount for each policy. List all policies on the
   decedent’s life, even if not included in the gross estate, noting the reason for exclusion.

7. Step 7: Report Additional Property and Lifetime Transfers

   Complete Schedule E for jointly owned property, identifying each co-owner and reporting the
   includible portion. For qualified joint interests with a spouse, report one-half of the value in Part
   1. For all other joint interests, report the portion included based on the decedent’s contributions.

   Complete Schedule F for other miscellaneous property, including vehicles, personal effects,
   household goods, jewelry, artwork, collections, digital assets, and business interests. This
   schedule must be filed with every Form 706, regardless of whether the estate has any assets.

   Answer question 1 regarding whether the decedent owned works of art or collections valued at
   more than $3,000, and if yes, attach appraisals.

   Complete Schedule G if the decedent made any transfers during life that remain admissible in
   the gross estate under sections 2035, 2036, 2037, or 2038. Include transfers within three years
   of death, retained life estates, revocable transfers, and transfers with retained powers or
   reversionary interests. Provide detailed descriptions of transferred property, dates of transfer,
   names of transferees, and the specific Code section requiring inclusion. Complete Schedule H if
   the decedent possessed, exercised, or released any general power of appointment, including
   five-and-five lapsing powers. Complete Schedule I if the decedent was receiving an annuity
   immediately before death.

8. Step 8: Calculate and Report All Allowable Deductions

   Complete Schedule J for funeral expenses and expenses incurred in administering property
   subject to claims. Include executor commissions, attorney fees, accountant fees, court costs,
   and appraisal fees that are actually paid or will be paid and are allowable under applicable state

   law. Indicate whether amounts are estimated, agreed upon, or already paid by striking out
   inapplicable words. Complete Schedule K for debts of the decedent existing at death, providing
   creditor names, nature of claims, dates debts were incurred, amounts owed, and verification
   that claims are enforceable. Debts must have been contracted bona fide and for adequate and
   complete consideration in money or money’s worth. Separately report mortgages and liens on
   Schedule K. The combined total of allowable deductions on Schedule J and Schedule K cannot
   exceed the value of property subject to claims plus amounts actually paid from property not
   subject to claims before the return’s due date.

   Complete Schedule L for losses incurred during estate administration from casualties or theft
   and expenses for administering property not subject to claims. Complete Schedule M for the
   marital deduction if property passes to the surviving spouse in a qualifying form. Identify
   whether interests qualify as qualified terminable interest property requiring a QTIP
   election—complete Schedule O for charitable bequests to qualified organizations under section
   2055. Charitable bequests may be made to the United States, states, or political subdivisions,
   religious organizations, scientific institutions, literary organizations, educational institutions, or
   organizations preventing cruelty to children or animals. Attach documentation establishing the
   recipient organization’s tax-exempt status.

9. Step 9: Compute Tax Liability and Complete Part 2 Tax Computation

   Calculate the tentative taxable estate by subtracting total allowable deductions from the gross
   estate value. Add adjusted taxable gifts made after December 31, 1976, to determine the total
   tax base. Apply the unified rate schedule from Table A to compute the tentative tax, then
   subtract gift taxes previously paid on post-1976 gifts recalculated at 2012 rates. Complete lines
   9a through 9d to calculate the applicable credit amount. Line 9a reports the basic exclusion
   amount of $5,120,000.

   Line 9b reports any DSUE amount from predeceased spouses as calculated in Part 6. Line 9c
   totals the applicable exclusion amount. Line 9d calculates the applicable credit amount. Subtract
   any adjustment to the credit required for specific exemptions claimed on gifts made between
   September 8, 1976, and January 1, 1977. Calculate and apply any allowable credits for state
   death taxes paid, foreign death taxes paid, or tax on prior transfers.

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10. Step 10: Complete Elections, Part 6 Portability Section, and Schedule R if

    Applicable
    Complete Part 3 to make any elections available for the estate. The alternate valuation election
    may be made only if it decreases both the value of the gross estate and the total estate and
    generation-skipping transfer taxes payable. Section 6166 of the Internal Revenue Code permits
    installment payments of estate tax attributable to closely held business interests that meet
    specific qualification requirements. The two percent portion of estate tax payable in installments
    for 2012 is computed using the amount of $1,390,000.

    The section 2032A special-use valuation election allows qualified farm or business real property
    to be valued based on actual use rather than highest and best use. Complete Schedule U if
    electing the qualified conservation easement exclusion for land subject to perpetual
    conservation restrictions, with a maximum exclusion of $500,000.

    Complete Part 6 for portability calculations. Section A allows executors to opt out of the
    portability election if desired by checking the box and attaching an explanation. Section B is
    used to calculate the DSUE amount that will be transferred to the surviving spouse. Section C
    applies when a spouse did not survive the decedent. Section D accounts for DSUE amounts the
    decedent received from one or more predeceased spouses, which are then included in the Part
    2 tax computation.

    If the estate includes generation-skipping transfers through direct skips to skip persons, such as
    grandchildren or more remote descendants, you must complete Schedule R to compute the
    GST tax and allocate the decedent’s GST exemption. Schedule R is explicitly used for
    calculating the generation-skipping transfer tax, not the estate tax. Schedule R-1 may be
    required for certain trusts included in the gross estate. Filing Schedule R can prevent automatic
    deemed allocation of GST exemption even when no immediate GST tax is due.

    Essential Considerations for 2012 Estates
    The portability election represented a significant opportunity for married couples. Filing a timely
    and complete Form 706 automatically constituted an election to transfer the DSUE amount to
    the surviving spouse unless the executor affirmatively opted out. Estate filers solely for
    portability purposes could take advantage of simplified valuation procedures for certain marital
    and charitable deduction assets, although the total estate value still needs to be estimated.

    The inflation-adjusted amounts for 2012 reflected modest increases over those for 2011. The
    basic exclusion amount rose from $5,000,000 in 2011 to $5,120,000 in 2012. The ceiling on
    special-use valuation increased from $1,020,000 to $1,040,000. The amount used in computing
    the two percent portion for section 6166 installment payments increased from $1,360,000 to
    $1,390,000.

    Filing Location and Final Steps
    Form 706 for 2012 decedents should be mailed to the Department of the Treasury, Internal
    Revenue Service Center, Cincinnati, Ohio 45999. The return must include the first four pages of
    Form 706 and all required schedules based on the composition of the gross estate. Only
    schedules with reportable items need to be filed, except Schedule F,, which must be filed with
    every return.

    The executor is required to sign the declaration on page one, subject to penalties of perjury.

    When multiple executors are appointed, all are responsible for the return, although only one

    signature is required. Paid preparers must sign in the designated preparer area and complete all
    preparer information. All pages should be stapled together in proper numerical order with
    required supporting documentation attached. The 2012 Form 706 was a well-developed tool for
    utilizing portability rules, providing estate planners and executors with clear steps to preserve
    unused exclusion amounts for the benefit of surviving spouses.

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