FORM 706

For the most part, the unlimited marital deduction eliminates the possibility of any estate tax at the death of the first spouse. Only where the surviving spouse is a non-U.S. citizen, or where the surviving spouse is not the beneficiary of a substantial portion of the decedent’s estate, will an estate tax be due at the death of a married individual. You should immediately consult an estate tax attorney if you are not a U.S. citizen.

Even though it is unlikely that estate tax is due as a result of your spouse’s death, Form 706 must nonetheless be filed if your late spouse’s gross estate, plus his or her lifetime taxable gifts, exceeds the “Applicable Exclusion Amount”. The Applicable Credit Amount for 2002 is $1,000,000 and is scheduled to increase to $3,500,000 by 2009 before the estate tax is scheduled to be repealed in 2010:

*The repeal of the federal estate tax in 2010 will occur only if Congress votes to ratify the repeal at a future date.

Following is an example of Form 706:

Form 706 is extremely difficult to prepare, and should be prepared by an estate tax attorney, or by CPA familiar with estate and gift taxation. Form 706 is due nine months after death. Although nine months may seem like a long time, the detailed information that must be compiled makes Form 706 a challenge to complete in the allotted time. As your late spouse’s personal representative, you must sign form 706.

If you can demonstrate sufficient cause, a six-month extension of time to file may be granted by filing Form 4768. The six-month extension is only an extension of time to file and not an extension to pay. An estimated tax payment, if applicable, must accompany Form 4768.

To coin a phrase, Form 706 is “where the rubber meets the road” in estate planning. Form 706 is where you tell the IRS your late spouse’s life story. In addition to current asset and liability information, a detailed history of all taxable gifts must be disclosed.

Copies of your late spouse’s Will and trust must be submitted along with Form 706. Although no tax may be due, important elections such as the election to treat the marital trust as a QTIP trust, the election to value assets six months after the date of death (Alternate Valuation Date), the election to qualify the family business as a Qualified Family Owned Business Interest (“QFOBI”), among others, must be made on Form 706.

The starting point in completing Form 706 is to determine your late spouse’s gross estate. Basically, the gross estate consists all assets which your late spouse had an interest during life including life insurance, IRAs, 401ks, real estate, cash, stocks, annuities, promissory notes receivable, bonds, jewelry, personal property, as well as interests in closely held businesses, whether held in individual name or in his or her revocable trust (See Chapter Nine, “Planning to Avoid Estate Tax”).

All assets that make up your late spouse’s “gross estate” must be valued as of the date of death (See Chapter Two for the specific information that needs to be gathered). Various deductions, including debts, are deducted from the gross estate to arrive at the “adjustable gross estate.”

Difficult to value assets such as real estate and interests in closely held businesses must be appraised by a licensed appraiser. The single most audited and litigated issue is the value of assets listed on Form 706.

Having a professional appraiser value difficult to value assets will minimize your chances of audit and enhance your piece of mind. Although appraisals are expensive (other than those for residential real estate), potentially running in the thousands of dollars, they greatly increase the chances of having your 706 accepted “as filed.” All appraisals should be in writing and attached to Form 706 when submitted to the IRS.

If the estate declines in value after death, you may elect to report the value as of the date that is six months after death (i.e. the “Alternate Valuation Date”). Assets sold or distributed during the six-month period are valued as of the date of sale or transfer.

You can expect to receive an initial response from the IRS within six months of filing Form 706. At such time, the IRS may simply issue a closing letter accepting the return as filed, or it may request further information, or audit the return. Returns filed at the death of the first spouse have a low audit profile and are typically accepted as filed.

DISCLAIMER

You may elect to “disclaim” property left to you by your late spouse. Assets disclaimed by you pass to those who would have received you late spouse’s assets had you predeceased him or her. At first blush, disclaiming assets may sound insane. However, disclaiming assets may make excellent tax sense if your spouse left everything to you and consequently failed to use his or her unified credit.

By disclaiming assets you can fully use your late spouse’s unified credit, effectively doubling the amount you can leave to children free of estate tax (See Chapter Nine, “Planning to Avoid Estate Tax”).

To be qualified, the disclaimer must be irrevocable, in writing, and made within 9 months of death. You may not accept possession of disclaimed assets (for example, cashing the proceeds of a life insurance policy would make the policy ineligible for disclaimer), and the disclaimed assets must pass to someone other than you.

STATE INHERITANCE TAX

All 50 states have some form of inheritance tax return. Each state has different forms and rules, but all tend to evolve from federal Law. You should obtain a copy of your state’s forms and instructions. Thirty-three states have adopted a form of “pick-up” tax, where the state collects a portion of the federal estate tax that would have been due the federal government if not for the state death tax credit available on the federal return. The remaining states have a separate tax not limited to the federal state tax credit.