What is 'IRS Form 706'

IRS Form 706 from the Internal Revenue Service is used by an executor of a decedent's estate to calculate estate tax owed according to Chapter 11 of the Internal Revenue Code. The tax covers the entire estate, not just any share received by a beneficiary. Executors also use Form 706 to calculate the generation-skipping transfer tax imposed by Chapter 13.

BREAKING DOWN 'IRS Form 706'

IRS Form 706 must be filed on behalf of a U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemptions, exceeds $11,180,000 in 2018, which is also known as the exclusion amount. The executor also has to file the form should the executor transfer any amount to the surviving spouse.

Form 706 is the IRS’ way of helping executors determine the overall value of an estate prior to distributing any assets to beneficiaries as outlined in the will. The IRS treats any inheritance on a stepped-up valuation, the cost basis is adjusted to the current fair-market value of the inherited property. The stepped-up valuation is as of date of death or six months after death. For example, any shares someone bought prior to death would be valued at their current level, not the original purchase price.

Using the stepped-up valuation methodology is a way for heirs to minimize capital gains taxes. The method also allows for a cleaner valuation process in terms of limiting the amount of administrative tasks associated with the estate. 

IRS Form 706 and the Generation-Skipping Tax

The generation-skipping transfer tax feature of IRS Form 706 intends to prevent the deceased from lowering a particularly large estate’s tax burden by passing over one generation for the next generation, for example, leaving their estate to their grandchildren instead of their children. If subject to the estate tax, a decedent’s grandchildren may also be subject to the generation-skipping transfer tax. The generation-skipping tax could be as much as 40 percent. 

Notably, if any gift or inheritance is made to a relative, that relative has to be within one generation of the decedent, unless a prior death prevents that from happening. Also, any gifts or inheritances to someone that is not related to the decedent, and who is at least 37 and a half years younger than the deceased, could be subject to the generation-skipping tax. 

As part of the estate planning process, one option for people looking to lower the tax burden on a particularly large estate is to direct a portion of their wealth to a qualified charitable organization.

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