Every year, the Internal Revenue Service processes thousands of estate tax returns; even a small error can cost an estate thousands of dollars in penalties and interest. Executors who fail to meet the strict nine-month filing deadline risk a failure-to-file penalty of up to 25 percent of the unpaid tax. Filing the federal Form 706 for the 2020 tax year is not optional for estates over the threshold. It is a legal obligation that demands precision and timeliness.
The process can feel overwhelming for families managing a loved one’s estate. Executors are asked to calculate the total value of the decedent’s gross estate, include adjusted taxable gifts, and ensure that every item is reported at its fair market value. The IRS requires supporting appraisals, detailed schedules, and certified documents to support each figure. Even small mistakes, such as overlooking a retirement account or entering the wrong Social Security Number, can delay acceptance of the return and trigger additional scrutiny from the agency.
The purpose of this guide is to simplify the process and provide executors with a clear step-by-step roadmap. You will see how to determine whether you must file, what information to gather, how to complete each part of the return, and where to submit your documents. Throughout the process, we will highlight the risks of delay and the benefits of accuracy. By following this structured approach, you can avoid costly mistakes, protect beneficiaries, and file confidently knowing that the estate complies with federal law.
Understanding Federal Form 706
Before starting the filing process, it is essential to understand Federal Form 706 for the 2020 tax year, who must file it, and the key terms involved. Executors often find this step confusing, yet clarity here prevents mistakes later.
What is Federal Form 706?
Federal Form 706, officially called the United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed to report the decedent’s estate. The form calculates the federal estate tax and the generation skipping transfer tax, both imposed under the Internal Revenue Code. Executors use it to determine the taxable estate, apply deductions, and calculate the final estate tax owed to the Internal Revenue Service.
The form also allows for essential elections, such as transferring unused exclusion amounts to a surviving spouse. Accuracy is critical because this return involves both estate and generation-skipping transfer reporting. A single error can delay processing, affect beneficiaries, and increase tax liability.
Who Must File?
The filing requirement depends on the size and type of estate. The executor must file if the total value of the decedent’s gross estate, combined with adjusted taxable gifts, exceeds $11.58 million in 2020. This threshold is the basic exclusion amount for the year of death. Executors must carefully total all property, securities, cash accounts, business interests, and life insurance proceeds when calculating whether filing is required.
There is also a second reason to file: electing portability. Even if the estate is smaller than the exclusion amount, the executor may file to transfer the deceased spouse’s unused exclusion (DSUE) to the surviving spouse.
This ensures the spouse can apply their own and the unused exclusion against future transfers. For nonresident aliens, the rules are different. They must generally use Form 706-NA to comply with U.S. estate tax requirements.
Key Terms Executors Must Know
- Taxable estate: This is the total gross estate minus deductions. Executors should understand that it reflects the estate subject to the federal estate tax.
- Gross estate includes the full fair market value of all property the decedent was interested in at the date of death. It encompasses real estate, securities, retirement accounts, and personal property.
- Adjusted taxable gifts: These are gifts made by the decedent during life that exceed the annual gift tax exclusion. They must be added back when determining whether filing is required.
- Fair market value: The IRS defines this as the price at which property would change hands between a willing buyer and a willing seller. It is the standard for valuing estate assets.
Understanding these terms provides the foundation for accurately preparing and filing the return. Executors who master these basics are far less likely to make costly errors or face delays in estate administration.
What Changed in 2020
The estate tax rules evolve regularly, and executors must pay close attention to the specific year of death when preparing a return. For the 2020 tax year, the Internal Revenue Service updated the exclusion amount and certain valuation limits. Missing these updates can result in using the wrong figures, which may create discrepancies in the estate tax return and increase the chance of penalties.
Basic Exclusion Amount and Inflation Adjustments
The most important update for 2020 was the increase in the basic exclusion amount. For decedents who died in 2020, the exclusion was set at $11.58 million, up from $11.4 million in 2019. This figure is adjusted annually for inflation under the Tax Cuts and Jobs Act provisions. Executors should note that the higher exclusion is temporary and is scheduled to expire in 2025, after which it may revert to approximately $5 million, adjusted for inflation.
Special Use Valuation and Tax Rates
In addition to the exclusion amount, the maximum special use valuation adjustment under Internal Revenue Code section 2032A was increased to $1.18 million for 2020. This provision allows qualifying family farms and closely held businesses to be valued based on actual use instead of highest and best use, potentially lowering the taxable estate.
The federal estate tax rate structure itself did not change for 2020. The top rate remains 40 percent, applied to taxable estates above the exclusion amount. Executors should confirm using the correct brackets to ensure accurate tax calculation.
Filing Deadlines and Extensions
Meeting deadlines is one of the most crucial responsibilities for an executor. The Internal Revenue Service enforces strict rules, and delays can lead to penalties, interest, and unnecessary stress for beneficiaries. Executors must calculate the due date based on the decedent’s death and know when an extension is available. Filing on time also protects the estate’s eligibility for essential elections, including portability.
Standard Filing Deadline
The standard deadline for filing federal Form 706 for tax year 2020 is nine months after the decedent’s death. For example, if the decedent passed away on March 10, 2020, the estate tax return would be due by December 10, 2020. The return is due on the next business day if the deadline falls on a weekend or legal holiday. Executors must mark this date carefully, as missing it can cause penalties of up to 25 percent of the unpaid tax.
Automatic Six-Month Extension
If the estate requires more time, the executor may file Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate Taxes. This form provides an automatic six-month extension to file the estate tax return. However, it does not extend the time to pay. Any tax owed remains due within nine months of the decedent’s death. Executors who delay payment will face monthly interest charges and failure-to-pay penalties.
Filing Deadlines vs. Extensions for Estate Tax Returns
Standard Filing
- Form Needed: None
- Due Date: Nine months after the date of death
- Notes: Applies to all estates required to file Form 706
Filing Deadline Falls on a Weekend or Holiday
- Form Needed: None
- Due Date: Next business day
- Notes: The return is due the following Monday or the next business day
Requesting Extra Time to File
- Form Needed: Form 4768
- Due Date: Automatic six-month extension
- Notes: Any estate tax owed must still be paid within nine months of death
Consequences of Missing Deadlines
Missing the filing deadline exposes the estate to significant costs. The failure-to-file penalty is up to 5 percent of the unpaid monthly tax per month, up to 25 percent. The failure-to-pay penalty is 0.5 percent per month, also capped at 25 percent. These penalties can add up quickly, especially for large estates. Executors should treat the nine-month deadline as firm and rely only on an extension when necessary.
Step-by-Step Filing Instructions
Executors often feel overwhelmed by the length of Form 706 and the complexity of estate tax calculations. Breaking the process into clear steps makes the filing manageable. Each step builds on the last, ensuring the final return is complete, accurate, and compliant with Internal Revenue Service requirements.
Step 1: Determine if Filing is Required
Executors must first decide whether the estate needs to file.
- Calculate the gross estate by totaling the fair market value of the decedent's property at death. This includes real estate, securities, retirement accounts, life insurance, and personal property.
- Add adjusted taxable gifts made during the decedent’s lifetime that exceeded annual exclusions. These amounts increase the total value for filing purposes.
- Compare the combined total against the 2020 exclusion of $11.58 million. If the total value exceeds this threshold, filing is mandatory.
- Decide whether to elect portability. Even estates under the threshold may file if the executor wishes to transfer the deceased spouse’s unused exclusion (DSUE) to the surviving spouse.
Step 2: Gather Required Information
Accurate filing depends on having complete records. Executors should:
- Collect the decedent’s Social Security Number, date of death, domicile, and other identifying details. These details are required because the Internal Revenue Service cannot process the return without them.
- Provide a detailed list of assets, including property deeds, account statements, business valuations, and insurance documents. Each record must show the asset's fair market value as of the date of death.
- Make copies of trust agreements, wills, and prior gift tax returns (Form 709). These documents confirm the decedent’s transfers and provide historical tax information for the estate.
- Add professional appraisals for real estate, artwork, or closely held business interests. These valuations are required whenever the property value is not readily available from market records.
Step 3: Complete Each Part of Form 706
Form 706 is divided into sections that capture all necessary data. Executors must complete each part carefully:
- Part 1: This section covers decedent and executor information. It requires names, addresses, tax identification numbers, and the executor’s legal authority.
- Part 2: This section addresses tax computation. Executors must calculate the taxable estate, apply deductions, and determine the estate tax owed under the Internal Revenue Code.
- Part 3: This section focuses on elections by the executor. It is where choices such as an alternate valuation date or a special use valuation must be indicated.
- Part 4: This section contains general information. Executors must provide the estate’s administration details and describe legal matters affecting assets.
- Part 5: This section serves as the recapitulation. It summarizes totals from schedules and deductions into one comprehensive calculation.
- Part 6: This section addresses the portability of DSUE. Executors may elect portability to a surviving spouse by reporting the unused exclusion amount in this part.
Step 4: Attach Required Schedules and Documents
Form 706 cannot be accepted without schedules and attachments. Executors should:
- Include a certified copy of the death certificate, will, and trust agreements. These documents establish proof of the decedent’s death and confirm the estate plan.
- Attach financial statements, appraisals, and Form 712 for life insurance. These supporting documents provide the evidence needed to validate reported values of estate assets.
- Provide copies of all prior Forms 709 filed by the decedent. These copies confirm the decedent’s past taxable gifts and ensure the estate’s total value is correctly calculated.
- Copy documentation for deductions such as funeral expenses, debts, and charitable contributions. These records reduce the taxable estate and must be submitted for deductions to be allowed.
Step 5: Review and Sign Before Filing
Finally, the executor must review all figures and verify that the estate tax return is accurate. Common errors include miscalculating totals, forgetting to sign, or omitting schedules. Executors must sign the return as a legal declaration that the information provided is true and correct. An unsigned return is treated as unfiled, which can trigger penalties and delay the estate’s administration.
Where and How to File
Once the estate tax return is complete, the next step is submission. Executors must understand that the Internal Revenue Service requires paper filing for the federal Form 706 tax year 2020. Electronic filing is unavailable, so preparation and mailing must be handled carefully to avoid processing delays.
Paper Filing Requirement
For the 2020 tax year, Form 706 must be printed and mailed. Executors should use high-quality copies of the completed return and ensure that every required schedule and attachment is included. The return should be organized in the same order as the form and instructions, making it easier for the IRS to review. Missing or disorganized documents can cause processing delays and trigger additional information requests.
Mailing Address for Form 706
All estate tax returns for 2020 must be mailed to the following address:
Department of the Treasury
Internal Revenue Service Center
Kansas City, MO 64999
Executors should use certified mail or a reliable courier service. This provides proof of mailing and helps protect against disputes about whether the return was filed on time. Retaining the receipt and tracking information is an essential part of estate administration.
Amended Returns
If an executor discovers an error or omission after filing, the Internal Revenue Service allows amended returns. To amend, the executor must file a corrected Form 706 with all schedules and attachments included. The revised return should be clearly marked as an amended filing. This process ensures that the estate’s taxable value is reported correctly and avoids further complications during IRS review.
Payment and Penalties
Filing Form 706 is only part of the process. Executors must also ensure that estate tax payments are made on time. The Internal Revenue Service enforces strict payment rules, and delays can create heavy financial consequences for the estate and its beneficiaries.
When and How to Pay Estate Tax
Estate tax is due nine months after the decedent’s death, even if the executor has requested an extension to file. This means the tax payment and the filing deadline do not always align. Executors must plan for timely payment to avoid interest and penalties.
The IRS provides several payment options:
- Electronic Federal Tax Payment System (EFTPS): This method requires prior enrollment but allows payments to be made online 24 hours a day. It is secure, efficient, and highly recommended by the IRS.
- Same-Day Wire Transfer: This option does not require enrollment but may involve bank fees. Executors must initiate the transfer early enough in the day to meet the cutoff time.
- Paper Check: Executors may send a check payable to “United States Treasury.” To ensure proper credit, the check must include the decedent’s name, Social Security Number, and “Form 706” notation.
Interest and Penalties
Late or insufficient payments can be extremely costly. Interest begins accruing immediately after the due date. In addition:
- The failure-to-file penalty equals 5 percent of the unpaid monthly tax, capped at 25 percent.
- The failure-to-pay penalty equals 0.5 percent of the unpaid monthly tax, also capped at 25 percent.
These charges can significantly increase the estate’s financial burden. Executors should take proactive steps to ensure complete and timely payment.
Payment Methods and Processing Times
EFTPS (Electronic Federal Tax Payment System)
- Processing Speed: Immediate once processed
- Cost: No fee
- Notes: Requires prior enrollment before a payment can be made
Same-Day Wire Transfer
- Processing Speed: Same day if submitted before the bank cutoff time
- Cost: Bank fees may apply
- Notes: Useful if EFTPS enrollment is not yet complete
Paper Check
- Processing Speed: Slow; may take several days to weeks
- Cost: No IRS fee
- Notes: Higher risk of delays due to mailing or processing; should be tracked carefully
Common Mistakes to Avoid
Even the most diligent executors can make errors when preparing Form 706. These mistakes often lead to processing delays, penalty assessments, or requests for additional information from the Internal Revenue Service. Recognizing the most frequent issues helps executors avoid them and ensures smoother estate administration.
Errors in Valuation
Asset valuation is one of the most complex areas of the estate tax return. Executors sometimes use incorrect valuation dates, forgetting that assets must be reported at their fair market value on death or the alternate valuation date if elected. Others fail to obtain qualified appraisals for real estate or business interests, which can cause disputes with the IRS.
Missing Attachments and Information
Another common mistake is failing to include required documents. Executors must provide certified copies of the death certificate, trust documents, and prior tax returns where applicable. Leaving out attachments not only delays processing but can also result in penalties. Incomplete personal information for the decedent, such as a missing Social Security Number, can prevent the IRS from accepting the return.
Calculation and Filing Errors
Math errors, misapplied credits, and unsigned returns are frequent problems. Executors must double-check every calculation and confirm that all signatures are in place before filing. Even minor oversights can create additional correspondence with the IRS and add unnecessary time to the estate’s administration.
Special Situations
While many estates follow a standard filing path, certain situations require extra attention. Executors must be aware of these exceptions, as they often involve critical elections or opportunities for relief.
Portability-Only Returns
Some estates are not large enough to owe federal estate tax, but filing Form 706 may still be necessary. Executors often submit a portability-only return to transfer the deceased spouse’s unused exclusion (DSUE) amount to the surviving spouse. Filing in this situation allows the surviving spouse to combine their exclusion with the DSUE in future transfers. For the election to be valid, the return must be complete, accurate, and filed by the deadline or extended due date.
Installment Payment Election (Section 6166)
Large estates with closely held business interests may qualify for the installment payment election. Under Internal Revenue Code section 6166, the executor may pay estate tax in installments for up to 14 years. This provision provides relief by preventing the forced sale of business assets to cover tax liabilities. To qualify, the value of the business must exceed a significant percentage of the gross estate, and the executor must strictly comply with IRS requirements.
Revenue Procedure Guidance
The IRS occasionally issues revenue procedures that offer relief for executors who missed a filing requirement. A recent example is Revenue Procedure 2022-32, which provides a simplified method for making a late portability election within five years of the decedent’s death. This option is valuable for estates that overlooked portability when filing but later realized its importance. Executors considering this relief must carefully follow the procedure and include the necessary statements with their request.
Understanding these extraordinary situations can prevent missed opportunities and reduce the estate’s overall tax burden. Executors should review the estate carefully and seek professional assistance when these circumstances apply.
FAQs
What is an estate tax closing letter, and when will I receive it?
After reviewing and accepting the estate tax return, the Internal Revenue Service issues an estate tax closing letter. This letter confirms that the estate’s filing is complete and no further information is required. Executors should remember that the letter may take several months to issue. While waiting, a person handling international assets may also need federal transfer certificates to settle property outside the United States.
Do all estates need to file an estate tax return?
Not every estate is required to file Form 706. Filing is necessary if the decedent’s gross estate, plus adjusted taxable gifts, exceeds the basic exclusion amount for the year of death. Filing is also required when the executor elects the deceased spouse’s unused exclusion portability. Even if the estate owes no tax, a citizen handling administration may find filing beneficial to preserve rights and avoid issues with beneficiaries.
How does the IRS define fair market value for estate assets?
The Internal Revenue Service defines fair market value as the price a willing buyer would pay a willing seller, with neither under compulsion and both having reasonable knowledge of the facts. Executors must apply this standard when reporting real estate, securities, and personal property. If appraisals are not obtained, mortgages and other obligations may not be valued correctly, which could cause disputes or delays in processing the return.
Can I amend Form 706 after it has been filed?
Yes, executors may file an amended estate tax return if they discover errors or omissions in the original filing. The amended return must include all corrected schedules and attachments and be submitted clearly explaining the changes. This process ensures proper reporting of the taxable estate. An amended return may also trigger a new issuance of correspondence from the IRS to confirm acceptance.
