New IRS Form 706 Gift Tax and Estate Tax

The revision of the Form 706 contains several important changes to the form that are the direct result of the new law. These changes can be summarized as three items: one, changes made to page one to allow for a computation of the applicable credit; two, a new page has been added for the portability election and portability election computations; and three, there is a new Schedule PC, which allows for the filing of protective claims. And these are the three areas that we will be focusing on during the presentation. I would encourage you, however, to take a look at the new instructions that are associated with the form. They are also, of course, available on IRS.gov.

 

Biggest Changes to Gift Tax Form 706

The top of page one of the Form 706 really does not, for the most part, look very different than it has over recent years. Of course, there’s always the general information that is required, for example, the name of the decedent and the executor, the addresses and Social Security numbers and so forth. It’s vitally important that this portion of the return be prepared correctly. It’s, sometimes, easy to, kind of, skip over this because it seems to be so simple.

 

Wrong Social Security Number on Gift and Estate Tax Form

But, for example, if you put the wrong Social Security number in your tax form, it’s going to create a lot of problems down the road, not only with the filing of the return, but also with things such as posting information, posting payments and refunds and so forth to the account. Also, it’s important that you include the name, address and information for every executor of the estate on the Form 706.

 

Other Changes to Form 706

But, one thing I do want to point out to you, and it’s highlighted in yellow on the slide there, is there is a new line 11. This line asks the executor to indicate whether or not the executor is estimating the value of assets of the gross estate pursuant to Treasury Regulation 20.2010-2(a)(7). This line is the result of the regulations that were recently issued dealing with the portability election. If the executor is not making a portability election, then this box should not be checked. Likewise, if the executor is electing portability but is not subject to these particular regulations, then this box should not be checked as well.

 

Changes to Form 706

Now, basically, what this regulation provides is it provides a simplified method in certain circumstances for the executor to report the value of certain assets that are subject to the portability election. And, basically, just to, kind of, tell you what this election involves or what these regulations involve; under the new portability law, in order to elect portability, you must file an estate tax return even if you would not normally be required to file an estate tax return. And let me just give you a quick example here.

On page one of Form 706, part two, this is where the executor computes the amount of tax that is due. Of course, one of the major inputs into the computation is the amount of the applicable credit. And, just as a reminder, again, the applicable credit is the amount that is equal to the amount of tax that would be paid on the applicable exclusion amount. This applicable credit, then, is applied against the estate tax calculated on the taxable estate to reduce the estate tax for the applicable exclusion.

Estate Tax Exclusion Amount Form 706

As a result, part two of page one of the Form 706 has been changed, and you can see there highlighted in yellow, the applicable exclusion amount now includes the basic exclusion amount, which is $5,120,000.00 or, rather, I should say the amount of tax or, I’m sorry, the $5,120,000.00 plus line 9(b), any deceased spouse’s unused exclusion amount. You add those two amounts together on line 9(c), and then you are required on line 9(d) to compute the amount of tax that would be owed on this gross amount. And then, this amount of tax is what is eventually going to be subtracted from the overall estate tax in order to give your client their exclusion amount.

Form 706 Estate Tax Exclusions

Now, moving on through the Form 706, we get to page two and we see that page two, part three, allows the executor to make a number of different elections for the estate. For example, if the estate is electing the alternate valuation election, the special use election, or the 6166 election, those elections are made in this portion of the estate tax return. You will notice, however, that at the very top, there’s a little note there that tells the executor or the person preparing the return, that the portability election is found in a different section. The portability election, as we’re going to see in a few minutes, is actually in a different part of the return. It’s on page four, okay? There’s a whole new page that deals with nothing but portability. And so, if you’re looking for the portability election and you’re used to looking for elections in this part of the return, it’s not there.

 

Summary of IRS Form 706

As we move on to page three of the return, page three of the return includes, at the very bottom, the recapitulation, okay? The recapitulation is, basically, the portion of the form where the executor recaps all of the assets and the deductions for the estate. For those of you who may have never prepared a Form 706, the Form 706 consists, primarily, most of the pages consist of different schedules on which assets and deductions are reported.