What Form 706 Is For

Form 706 is the federal tax return used to report the value of a deceased person's estate and calculate any estate taxes owed to the federal government. Think of it as the final tax accounting for everything someone owned at death—real estate, bank accounts, investments, life insurance, business interests, and more. The form serves two primary purposes: computing the estate tax under Chapter 11 of the Internal Revenue Code and calculating generation-skipping transfer (GST) tax on "direct skips" (when property passes directly to grandchildren or others at least two generations younger than the deceased). IRS.gov

Starting in 2012, Form 706 gained a crucial third function: preserving unused estate tax exemption for a surviving spouse through "portability." This groundbreaking feature allows a surviving spouse to inherit any portion of the deceased spouse's $5.12 million exemption that wasn't used, potentially doubling the couple's combined estate tax protection. The form doesn't just report assets—it also documents deductions for debts, funeral expenses, administration costs, charitable gifts, and property passing to a surviving spouse. IRS.gov

When You’d Use This Form (Including Late or Amended Returns)

Required Filing Situations

You must file Form 706 if the deceased person died in 2012 and any of these apply:

• The gross estate plus adjusted taxable gifts exceeds $5.12 million
• The executor wants to elect portability to transfer unused exemption to a surviving spouse (regardless of estate size)

Timeline for Filing

The return is due nine months after the date of death. For example, if someone died on March 15, 2012, Form 706 would be due December 15, 2012. You can request an automatic six-month extension using Form 4768, but this only extends the filing deadline—not the payment deadline. Tax is still due within nine months. IRS.gov

Important Portability Note

To elect portability and transfer unused exemption to a surviving spouse, you must file Form 706 on time—within the original nine-month deadline or the extended 15-month deadline if you obtained an extension. Late filing forfeits the portability election, potentially costing a surviving spouse millions in future estate tax savings.

Amended Returns

If you discover errors after filing, prepare a new Form 706, write "Supplemental Information" across the top of page 1, and attach copies of pages 1, 2, and 3 from the original return. Mail it to the IRS Cincinnati Service Center (address: Cincinnati, OH 45999). If your return is already under IRS examination, provide corrections directly to the examining office instead. IRS.gov

Key Rules or Details for 2012

The $5.12 Million Exemption

For deaths in 2012, the basic exclusion amount was $5.12 million—the highest in U.S. history at that time. This amount is indexed for inflation, and Congress had recently made it "permanent" (though Congress can always change tax law). The corresponding applicable credit amount was $1,772,800, representing the tax on $5.12 million at estate tax rates. IRS.gov

Tax Rate

Estates exceeding $5.12 million pay tax at a flat 35% rate on the excess amount—the lowest top rate in decades.

Portability Revolution

2012 was the first full year portability was available. When the first spouse dies, filing Form 706 preserves their unused exemption as "Deceased Spousal Unused Exclusion" (DSUE). The surviving spouse can then use this DSUE amount in addition to their own exemption, potentially shielding up to $10.24 million from estate tax as a couple. Portability applies automatically unless the executor actively opts out on Part 6 of Form 706. IRS.gov

Other 2012 Inflation-Adjusted Amounts

• Special-use valuation ceiling: $1,040,000
• Section 6166 installment payment threshold: $1,390,000

State Death Tax Deduction

Unlike earlier years, 2012 returns could deduct (not credit) state estate taxes paid. Since the federal credit for state death taxes was repealed in 2005, estates now claim state taxes as an itemized deduction on Schedule L or M, reducing the taxable estate dollar-for-dollar.

Step-by-Step (High-Level Steps)

Step 1: Gather Documentation

Collect the death certificate (required attachment), will or trust documents, asset statements (bank accounts, brokerage statements, real estate appraisals), life insurance policies, prior gift tax returns (Forms 709), business valuations, and debt records. You'll need fair market values as of the date of death for all assets.

Step 2: Identify the Executor

The executor must be formally appointed (provide court documentation), and all executors must sign the return under penalties of perjury. If multiple executors exist, list them all on an attached statement.

Step 3: Complete the Required Schedules

File the first four pages plus all applicable schedules:

• Schedule A: Real estate
• Schedule B: Stocks and bonds
• Schedule C: Mortgages, notes, and cash
• Schedule D: Life insurance on the decedent's life
• Schedule E: Jointly owned property
• Schedule F: Other miscellaneous property
• Schedule G: Lifetime transfers (gifts and certain transfers with retained interests)
• Schedule H: Powers of appointment
• Schedule I: Annuities
• Schedule J: Funeral expenses and administration costs
• Schedule K: Debts and mortgages
• Schedule L: Net losses during administration
• Schedule M: Marital deduction (property passing to surviving spouse)
• Schedule O: Charitable deduction
• Schedule R/R-1: Generation-skipping transfer tax

Step 4: Calculate the Tax

Use Part 2—Tax Computation to:

• Total the gross estate from Part 5—Recapitulation
• Add post-1976 taxable gifts
• Apply the unified rate schedule
• Subtract gift taxes previously paid
• Subtract the applicable credit amount ($1,772,800 plus any DSUE)
• Calculate GST tax on direct skips if applicable

Step 5: Make Elections

Part 3 allows critical elections including alternate valuation (valuing assets six months after death), special-use valuation for farms/businesses, installment payment under Section 6166, and portability (or opting out of portability).

Step 6: Complete Part 6—Portability

If married, Section A indicates whether you're electing portability (default) or opting out. Section B calculates the DSUE amount being transferred. Section C accounts for any DSUE the decedent received from a previously deceased spouse.

Step 7: File and Pay

Mail Form 706 to Department of the Treasury, Internal Revenue Service Center, Cincinnati, OH 45999. Include payment by check payable to "United States Treasury" or pay electronically through EFTPS. Write the decedent's name, Social Security number, and "Form 706" on the check. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Missing the Portability Deadline

Many executors don't realize portability requires timely filing (within 9-15 months). Even if an estate owes no tax, failing to file Form 706 forfeits potentially millions in DSUE for the surviving spouse.
Fix: Always file Form 706 for married decedents when substantial unused exemption exists, even if the estate is under $5.12 million.

Mistake #2: Incomplete Valuation When Electing Portability

The 2012 instructions introduced a "special rule" allowing estates filing solely for portability to estimate values for marital and charitable deduction property without detailed appraisals. However, this rule doesn't apply to property needing valuation for other elections (alternate valuation, special-use valuation, Section 6166).
Fix: Understand which assets require exact valuation versus estimation, and clearly indicate estimated values on schedules.

Mistake #3: Forgetting to Report Lifetime Gifts

The gross estate includes adjusted taxable gifts made after 1976. Executors sometimes overlook gifts reported on old Forms 709, causing incorrect tax calculations.
Fix: Obtain copies of all lifetime gift tax returns and complete Worksheet TG—Taxable Gifts Reconciliation carefully.

Mistake #4: Valuation Understatements

Section 6662 imposes a 20% penalty when reported values are 65% or less of actual values (40% penalty if values are 40% or less of actual). This often happens with business interests, real estate, or artwork.
Fix: Hire qualified appraisers for hard-to-value assets and retain documentation supporting all valuations.

Mistake #5: Failing to Claim Available Deductions

Estates routinely underpay by missing deductible expenses: funeral costs, executor fees, attorney fees, appraisal costs, debts, mortgages, and state death taxes.
Fix: Keep meticulous records of all estate administration expenses and consult the instructions for Schedules J, K, and L.

Mistake #6: Not Requesting Extensions When Needed

Rushing to meet the nine-month deadline can result in errors or incomplete returns.
Fix: File Form 4768 before the deadline to gain six additional months for thorough preparation. Remember: extensions don't extend payment deadlines, so estimate and pay tax within nine months to avoid interest charges.

What Happens After You File

Processing Timeline

The IRS typically takes six to nine months to process Form 706. During this period, the IRS reviews the return for mathematical accuracy, completeness, and potential audit flags. IRS.gov

Audit Selection

The IRS generally makes audit decisions about six months after filing. Estate tax returns have higher audit rates than individual returns—especially large estates, returns with business interests, or returns claiming special-use valuation or other elections. If selected, you'll receive a letter from an IRS estate tax examiner requesting documentation and scheduling an examination.

Estate Tax Closing Letter

For 2012 returns, the IRS typically issued an automatic closing letter if the return was accepted without examination. This letter confirms IRS acceptance and provides finality, which is often required by banks, brokerages, and courts before distributing assets. You can request a closing letter at least nine months after filing unless the return is under examination. IRS.gov

Refund or Additional Tax

If the estate overpaid, the IRS will issue a refund (typically within 6-12 months). If additional tax is owed after examination, you'll receive a notice with payment instructions. Interest accrues on unpaid balances from the original due date.

Generation-Skipping Transfer Tax

If Schedule R reported GST tax on direct skips, the trustee must pay that tax. If GST tax applies to distributions or terminations later, trustees file Forms 706-GS(D) or 706-GS(T) separately.

Portability Confirmation

When the IRS accepts Form 706 with a portability election, the DSUE amount becomes available to the surviving spouse. The surviving spouse's future estate or gift tax returns will reference this DSUE amount. There's no separate confirmation—the accepted return constitutes the election.

FAQs

1. Do I need to file Form 706 if the estate is under $5.12 million?

Generally no, unless you want to elect portability to transfer unused exemption to a surviving spouse. If the deceased was married and has unused exemption (most estates under $5.12 million do), filing preserves that exemption for the surviving spouse's future use. This can save substantial estate tax when the surviving spouse eventually dies.

2. What is portability and why does it matter?

Portability allows a surviving spouse to inherit their deceased spouse's unused estate tax exemption. For example, if the first spouse's estate used $2 million of the $5.12 million exemption, the surviving spouse can claim the unused $3.12 million as DSUE, giving them $8.24 million in total exemption ($5.12 million of their own plus $3.12 million DSUE). Without filing Form 706 to elect portability, this unused exemption is lost forever.

3. Can I file Form 706 late and still elect portability?

No. Portability elections require timely filing within nine months of death or 15 months if you obtained an extension using Form 4768. The IRS has limited discretion to grant late portability elections in extraordinary circumstances, but relying on this is risky. File on time.

4. What is generation-skipping transfer (GST) tax?

GST tax is an additional 35% tax (in 2012) imposed when property passes to grandchildren or more remote descendants ("skip persons") who are two or more generations below the decedent. It prevents wealthy families from avoiding estate tax by skipping a generation. Form 706 computes GST tax on "direct skips" included in the estate. Each person has a $5.12 million GST exemption in 2012, separate from but equal to the estate tax exemption.

5. What happens if I make an error on Form 706?

File an amended return by preparing a new Form 706 marked "Supplemental Information" and attaching copies of the original return's first three pages. The IRS will process the correction. If you discover the error after receiving an IRS examination notice, work directly with the examining agent. Reasonable cause for errors may eliminate penalties, but you'll owe interest on any additional tax from the original due date.

6. Can I pay estate tax in installments?

Yes, if the estate includes a closely held business representing more than 35% of the adjusted gross estate. Section 6166 allows deferring tax and paying it over 10-14 years with favorable interest rates on the first $1.39 million (2012 threshold). Make this election by checking line 3 of Part 3 and attaching the required statement. This is valuable for estates with illiquid business assets but significant tax liability.

7. How is property valued for estate tax purposes?

Generally, property is valued at fair market value (what a willing buyer would pay a willing seller) as of the date of death. Alternatively, you can elect alternate valuation on line 1 of Part 3, using values six months after death (or date of distribution if earlier). This election is irrevocable and can only be made if it reduces both the gross estate and the estate tax liability. Special-use valuation under Section 2032A allows qualifying farms and businesses to be valued based on actual use rather than highest-best-use, potentially saving up to $1,040,000 in 2012.

For More Information

For more information and to download Form 706 and its instructions, visit IRS.gov/form706.

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