Friday, September 30, 2011

IRS publishes new Estate Tax Return Form (706) and Instructions

The IRS has published a new revision of the estate tax return form (Form 706) to be used for decedents dying in 2011.

For decedents dying in 2011, Form 706 must be filed by the executor for the estate of every U.S. citizen or resident: 

  • Whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $5,000,000; or, 

  • Whose executor wants to make by the election to permit the decedent’s surviving spouse to use the decedent’s unused exclusion amount, regardless of the size of the decedent’s gross estate.

The applicable exclusion for decedent’s dying in 2011 consists of a basic exclusion amount of $5,000,000 and the unused exclusion amount of a predeceased spouse (who died after December 31, 2010). This means that even if you determine filing a return for the estate is not required, you nonetheless should file a return if you intend to elect to allow the decedent’s surviving spouse to use the decedent’s unused exclusion amount for estate and gift tax purposes.  A timely and complete Form 706 filed for the predeceased spouse’s estate is required, even if there is no tax due, to allow the surviving spouse to use the last predeceased spouse’s unused exclusion (DSUE) amount. 

Note that the Form 706 filing due date is 9 months after the date of the decedents death, which means it falls in October 2011 for decedents who died in January 2011.  If you are unable to file Form 706 by the due date, you may file for an extension of the time to file. Use IRS Form 4768 to apply for an extension.

Upon the later death of the survivor spouse, his or her executor will be required to attach a copy of the Form 706 filed in the estate of the predeceased spouse along with a calculation of the DSUE in order to claim the first spouse’s unused exclusion amount. 

The DSUE portability provisions are found at 26 U.S.C. Section 2010 (c)(4). Under the Tax Relief Act of 2010 they apply to decedents dying in 2011 and 2012. They create a significant trap for the unwary executor.  

The IRS has also issued Notice 2011-82 which provides further guidance on electing portability of the DSUE amount. 

According to Notice 2011-82, in order to make the portability election on the Form 706 as straightforward and uncomplicated as possible and to reduce the risk of inadvertently missed elections, “the Treasury Department and the Service have determined that the timely filing of a Form 706, prepared in accordance with the instructions for that form, will constitute the making of a portability election by the estate of a decedent dying after December 31, 2010. Thus, by timely filing a properly-prepared and complete Form 706, an estate will be considered to have made the portability election without the need to make an affirmative statement, check a box, or otherwise affirmatively elect, on the Form 706. Until such time as the IRS revises the Form 706 to expressly contain the computation of the deceased spousal unused exclusion amount, a timely-filed and complete Form 706 that is prepared in accordance with the instructions for that form will be deemed to contain the computation of the deceased spousal unused exclusion amount, thereby satisfying the requirements in section 2010(c)(5)(A) for making an effective election.”

See also my earlier posts for more information on portability:

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Jasmine said...
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