What is Form 706, and What Is It Used For?

IRS Form 706 is used by an executor of an estate to calculate the estate tax due for a decedent. It is also used for the determination of a generation-skipping transfer tax. Form 706 is required for an estate with a value of more than $11.7 million (rising to $12.06 million for those passing in 2022), including the gross estate, adjusted taxable gifts, and specific exemptions. Note: the threshold for filing form 705 was much lower until the passage of the Tax Cuts and Jobs Act, which is set to expire in 2025. If Congress does not extend the law (or this particular provision), the threshold will revert to the $5.49 million or an amount adjusted for inflation.

The higher threshold has achieved the intended reduction of the percentage of taxpayers who have estates subject to the estate tax when they die. In fact, a recent report from the Center on Budget and Policy priorities indicates a current rate of 0.2 percent.

Also, Form 706-GS is filed to report taxes due on trust distributions subject to the generation-skipping transfer tax.

What Is the Estate Tax?

According to the Internal Revenue Service , the estate tax is a tax on your right (as a taxpayer) to transfer property at your death. Estate taxes are among the most hotly debated revenues the U.S. government imposes, and taxpayers often seek to find ways to avoid or manage these levies.

How Is the Estate Value Calculated?

The gross estate value consists of the following:

  •       The value of all property the decedent had a full or partial interest in, both in and outside of the United States
  •       Annuities
  •       The includable portion of joint estates with rights of survivorship
  •       The includable amount of certain tenancies
  •       Certain life insurance proceeds
  •       Community property which the deceased was a party to
  •       Adjusted taxable gifts made by the decedent after December 31, 1976, if they exceeded the amount allowed to be excluded.
  •       The total amount exempted under Section 2521 for certain gifts made after September 8, 1976.

What Is the Generation-Skipping Transfer Tax?

In 1986, Congress created the generation-skipping tax (GST) to tax gifts and inheritances to “skipped” generations in the same way that gifts or bequests to immediate heirs are taxed. In addition, it adds another level of tax set to the highest bracket in effect at the time of the gift.

A skipped generation gift is a gift to anyone more than the next generation from the person making the gift unless the recipient is an orphan, in which case they move up one generation. If the gift is to an unrelated person, they are considered a skipped generation member if they are more than 37 years younger than the giver.

There are Specific Exceptions to the GST Rules

One exception to the GST rules is money paid for a person’s education or medical care. The second is called a “Crummey” trust exception, and this exception is often used when giving money to minors but can apply to any gift beneficiary. When the giver establishes a Crummey trust, the beneficiary has a specific period to withdraw funds. After that, any money that is not removed stays in the trust according to the terms and timeline you have established. The beneficiary will receive distributions as you have directed.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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