Focusing on real estate: Schedule A

If the probate estate contains any real estate or interest in real estate, complete and file Schedule A: Real Estate. Include all real estate the decedent owned in his or her individual name or as a tenant in common. When title is held as tenants in common, each tenant’s interest in the property is separate from the interests of the other tenants in common and passes to his or her heirs upon death, as opposed to a joint tenancy with right of survivorship or a tenancy by the entirety, where title passes automatically to the surviving joint tenants.

For each piece of real estate, include the following information about the property on Schedule A:

• Land area.
• Any improvements such as house and landscaping.
• Street address.
• The legal description (the description on the deed).
• Any accrued rent (rent earned prior to the decedent’s death but not paid until after the date of death).
• The appraisal or other basis for valuing the property. Describe the appraisal on Schedule A and attach a copy as an exhibit at the end of the return. If the assessed value reflects the market value in the area, the IRS may accept the assessed value in lieu of an appraisal. Attach a copy of the tax assessment closest to the decedent’s date of death as an exhibit. If the property is sold shortly after the decedent’s death, the selling price may be used. The IRS doesn’t have to accept a sale price as the fair market value price, especially if the property was purchased by a related party or pursuant to an option to purchase. Attach copies of the sales contract and closing statement as exhibits.

If the decedent owned a fractional interest in real estate that you or your appraiser are discounting, attach as an exhibit a statement explaining the discount taken on the interest (due, for instance, to lack of control or lack of marketability), and be sure that the appraiser can defend the discount if the return is audited.

If the decedent was liable for a mortgage on the property (that is, if the mortgage wasn’t solely chargeable against this property), report the mortgage in the property description but include the full value of the property on this schedule and deduct the mortgage on Schedule K. If a mortgage is solely chargeable against the property, so that the decedent’s estate isn’t liable for it, deduct the mortgage from the amount reportable on this schedule.

Don’t forget to also include all such real estate the decedent had contracted to sell. If the contract is a purchase and sale agreement, you’ll hopefully have cancelled it and re-executed it as executor because of the decedent’s death (as we discuss in Chapter 21) so you can report the real estate at its full value on this schedule and thus receive a step-up in cost basis before the sale. If you haven’t canceled the contract entered into before the decedent’s death, don’t include the property on Schedule A. Instead, report the contract to sell on Schedule C. If the decedent was selling property under a land contract, report the property on Schedule A and refer to the land contract. List all jointly held real estate on Schedule E (not on Schedule A). Real estate held as part of a sole proprietorship belongs on Schedule F (not Schedule A).

Identifying stocks and bonds: Schedule B

If the decedent owned any stocks, bonds, mutual funds, or other securities in his or her name alone at the time of his or her death, report them on Schedule B: Stocks and Bonds, along with any accrued but unpaid dividends or interest.

If the decedent owned any securities subject to foreign death taxes and you paid any estate, inheritance, legacy, or succession tax to a foreign country on those securities, report them on this schedule, grouped together under a heading you add titled “Subjected to Foreign Death Taxes.” The following outlines what to include on this schedule.

Addressing mortgages, notes, and cash: Schedule C

You report mortgages, notes, and cash on Schedule C: Mortgages, Notes, and Cash. Bear in mind that you’re listing assets of the estate here, not debts, so any mortgages or notes listed here are amounts owed to the decedent, not amounts owed by him or her. Report the following items in this exact order:

• Mortgages and notes payable to the decedent, not by the decedent. In describing the mortgage, include the face value, unpaid balance, date of mortgage, name of maker, property mortgaged, date of maturity, interest rate, and interest date.
• Promissory notes. Report and describe them in the same manner as mortgages.
• Contracts by the decedent to sell land. Make sure that you include the following information:
  • Name of the purchaser
  • Contract date
  • Property description
  • Sales price
  • Initial payment
  • Amounts of the installment payments
  • Unpaid balance of the principal
  • Interest rate
• In reporting cash in the decedent’s possession, list it separately from cash in bank accounts. You can aggregate all the actual cash you find; it’s not necessary to list separately the cash in the bureau, the cash under the bed, and the cash hidden behind the fireplace.
• List cash in banks, savings and loan associations, credit unions, and all other financial organizations as follows for each account:
  • Name and address of the financial organization
  • Amount in the account, including accrued interest
  • Serial or account number
  • Kind of account (checking, savings, certificate of deposit)

For checking accounts, be sure to report the amount in the account after you account for all those checks outstanding at the date of death. To obtain the date-of-death balances, including accrued interest, send a letter to each financial institution requesting that information (you can make up a form letter and send a variation of it to each institution). Retain the response from each institution in your files.

Considering life insurance: Schedule D

On Schedule D: Insurance on the Decedent’s Life, list all policies on the life of the decedent, whether or not any policies are includible in the gross estate for estate tax purposes. (Insurance that the decedent owned on someone else’s life is includible on Schedule F.)

Include the following insurance on Schedule D:

• The full amount of the proceeds of insurance on the decedent’s life receivable by the estate or usable for the benefit of the estate: If any legally enforceable obligation on the beneficiary to pay taxes, debts, or other charges of the estate stands, regardless of who the owner and beneficiary of the policy are and who paid the premiums, it’s includible.
• Insurance on the decedent’s life not payable to the estate and not usable for its benefit: If the decedent held any incidents of ownership in the insurance, it goes in the taxable estate. Some examples of incidents of ownership are the following:
  • The right to name and change the beneficiary
  • The right to assign the policy to another or to revoke an assignment
  • The right to surrender or cancel the policy
  • The right to pledge the policy as collateral for a loan or to obtain a loan against the surrender value from the insurance company
• A reversionary interest in the policy if the reversionary interest was more than 5 percent just before the death of the decedent. An interest is reversionary if the decedent gains or regains any of these listed rights (such as the right to name the beneficiary) if the beneficiary predeceases the decedent or some other stated contingency occurs.

All the information you need to complete Schedule D is included on the IRS Form 712, Life Insurance Statement, which you must request from each life insurance company. Ask for Form 712 when you request the proceeds of the policy from the insurance company, as described in Chapter 7. In the description column of Schedule D, refer to the 712 as an exhibit and attach it to the return as such. If a policy on the decedent’s life isn’t includible, list it on this schedule, including the same information as for any other policy, but don’t include a value in the value column. Do, however, include in your description of the policy your reasons why the policy isn’t includible.

Eyeing jointly owned property: Schedule E

Schedules A through D all deal with property the decedent held in his or her name alone. All of this changes in Schedule E: Jointly Owned Property. If the decedent held any property of any kind (including real estate, personal property, and bank accounts) jointly at the time of his or her death, you must file Schedule E, whether or not any of the jointly held property is includible in the decedent’s taxable estate.

Describe the property on Schedule E in the same manner you do on its respective schedule. For instance, describe real estate as set forth in the discussion of Schedule A, bank accounts as set forth in the discussion of Schedule C, and so on. (Refer to the earlier sections in this chapter for details on handling the individual schedules.) The amount of the property includible in the taxable estate depends on the decedent’s interest in the property, as we explain in the following sections.

Considering other property: Schedule F

If the decedent owned it and it doesn’t go on any of the earlier schedules, you place it on Schedule F: Other Miscellaneous Property Not Reportable Under Any Other Schedule. Schedule F is always required to be filed with the return. (The IRS figures you’re always going to have something to report on this schedule, and, if not, they’ll want to know why.) Examples of items that are reported on Schedule F include

• Personal and household articles, including clothing and jewelry: If the decedent owned any works of art or collectible items worth more than $3,000 or any collections whose combined value exceeds $10,000, attach an appraisal by an expert in the field as an exhibit to the return. (Note that your appraiser will need to attach a statement of his or her qualifications.)

  You may ask, “How will I know whether the value of the decedent’s collection of frog figurines is worth over $10,000, or if one of them is worth over $3,000?” If you have any suspicion that an item may have some value, have it appraised. We had a client whose frog collection was worth far more than $10,000. And one of us had a client whose highly touted stamp collection just didn’t get the stamp of approval from the appraiser. So even we don’t always know what we have until we get an expert’s opinion. (We share how to find an appraiser in Chapter 4.)

  If the decedent transferred ownership of an item to his or her revocable living trust during life as part of his or her estate plan, you don’t need to include it on Schedule F. Instead, report the item on Schedule G.

• Automobiles and all other motor vehicles: Book value or a letter from an auto dealer (or whatever other type vehicle) is usually sufficient. If your decedent had a collectible car, get an expert appraisal.
• Debts (other than notes and mortgages reported on Schedule C), judgments, claims, and refunds due the decedent: When the decedent and a surviving spouse receive a tax refund on a jointly filed return, the amount you include on the 706 as the decedent’s portion of the refund is the excess of the amount the decedent paid of the total tax paid over his or her actual tax liability (unless local law says the contrary, in which case you want to consult a local attorney or tax preparer who’s an expert in these matters).
• Checks payable to the decedent, whether received before or after death: These include final paychecks, dividend checks, and any other checks.
• Rights, royalties, and leaseholds: If the decedent held copyrights or other rights, received royalties, or had a leasehold (an extended right to lease property), obtain expert valuations and include them here.
• Farm products, growing crops, livestock, and farm machinery: If the decedent owned a farm, you’ll likely have some or all of these items to report. Fortunately, you can get them valued by a competent farm appraiser.
• Insurance on another person’s life: Be sure to obtain Form 712 for each policy from the insurance company and attach it as an exhibit to the return. Form 712 gives you the value of the policy as of the decedent’s date of death. (For more on Form 712, turn to the earlier “Considering life insurance: Schedule D” section.)
• Interests in partnerships, sole proprietorships, joint ventures, and other unincorporated businesses: Value these interests as described in the Instructions to Form 706 (Rev August 2012) (the Instructions). If you have a sole proprietorship that holds real estate, report the real estate here, as part of the sole proprietorship, rather than on Schedule A.
• Reversionary and remainder interests: You report both reversionary and remainder interests on Schedule F. As we note in Chapter 16, as the executor of the estate, you may elect to postpone the tax on these future interests under IRC Section 6163 until six months after the prior interest terminates, with a further extension of up to three years for reasonable cause.
  • A reversionary interest is any future interest that can come back to the decedent where he or she was the original transferor of the interest. For instance, the decedent has retained a reversionary interest in the trust property if during his or her lifetime the decedent transferred property to a trust for the benefit of his or her mother for her lifetime under the condition that it revert back to the decedent upon the death of the mother.
  • A remainder interest is any future interest that can come to the decedent after a prior interest terminates where the decedent wasn’t the original transferor of the interest. For instance, if the decedent’s father created a trust with the decedent’s mother as the beneficiary during her lifetime, and the decedent or his or her estate is to receive the property upon the death of the mother, the decedent has a remainder interest in the trust.
• Qualified terminable interest property (QTIP): If your decedent was a surviving spouse, he or she may have qualified terminable interest property (QTIP) received from a predeceased spouse. The predeceased spouse received a marital deduction for the trust, either on his or her estate tax return or a gift tax return. If such an election was made, and the surviving spouse (your decedent) still retains an interest in the property at his or her death, the full date-of-death (or alternate) value of the property shows up in his or her estate even though his or her interest terminates at death. If the QTIP property meets the other requirements for the marital or charitable deduction on the surviving spouse’s death, it qualifies for that deduction because it’s treated as having passed from the surviving spouse (your decedent). For further clarification on QTIP trusts, check out Chapter 3.

Report the fact that the decedent had a safe-deposit box on Schedule F, Question 3. If any property in the safe deposit box isn’t includible in the decedent’s estate because the decedent didn’t own it, you must explain fully why that’s the case. So, for example, jewelry or stock certificates owned by the other spouse would be excluded.

Touching on funeral and administration expenses: Schedule J

All the Form 706 schedules up to Schedule J deal with the decedent’s assets. With Schedule J: Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims, you’re finally beginning the portion of the tax return where you take every last deduction you can on behalf of the decedent (except those you may elect to take on the estate’s income tax return; check out the sidebar “Surveying the options for where to take your deductions for more info).

If you’re using Schedule PC for expenses that aren’t currently deductible under IRC Section 2053, report the expense on Schedule J with no value in the last column. For the full scoop on Schedule PC, head to the later section, “Filing a protective claim for refund: Schedule PC.”

On Schedule J, you include funeral expenses and expenses incurred in administering property subject to claims. The phrase property subject to claims refers to property available to pay the decedent’s creditors. The decedent’s local (state) law will determine which property is subject to claims. Include on Schedule J each separate expense, itemizing each with the name and address of the person or entity to whom or to which the expense is payable, as well as the nature of the expense.

Generally speaking, administrative expenses must be deductible under state law and be considered “reasonable and necessary” by the IRS for them to be deductible on the 706. What’s reasonable and necessary? There’s no set standard; rather, it’s more a sense of knowing it when you see it. If the 706 you prepared is audited, though, be prepared to substantiate your expenses with receipts and, where necessary, with a scope of the work that’s been performed. The IRS loves nothing more than slicing off a portion of the executor’s fee as being excessive.

Although the deduction is limited to the amount allowable under local law, it also can’t exceed the total of the value of property subject to claims in the gross estate and the amount of expenses paid out of property included in the gross estate but not subject to claims.

Don’t deduct expenses of property not subject to claims on Schedule J! Those expenses are properly deducted on Schedule K. If you can’t determine the exact amount of certain expenses by the time the Form 706 is due, estimate as accurately as you can.

Recording debts, mortgages, and liens: Schedule K

List your Schedule K items under the following two categories:

Listing net losses and such: Schedule L

Although you certainly try to avoid shipwrecks or other disasters during your term as executor, you may find comfort in the fact that you can at least deduct them if they occur during the settlement of the estate. Also deductible are losses from theft, fire, storm, and other casualties, except to the extent they’re reimbursed by insurance or in some other manner and the loss isn’t reflected in the alternate valuation of the property. You may not take the loss on the 706 if you elect to take it on the applicable income tax return, so take a look at your relative tax rates and make your best choice.

Deduct the expenses you incur in administering property included in the gross estate but not subject to claims on the bottom half of Schedule L: Net losses during administration and expenses incurred in administering property not subject to claims. Here’s where you report the expenses relating to administering a decedent’s revocable trust (funded with assets before death, and, of course, irrevocable after death). You may only deduct those expenses paid within the period of limitations, typically three years after the 706 is filed. The expenses must relate to settling the decedent’s interest in the property or vesting good title in the beneficiaries. Any expenses deducted on an income tax return may not be deducted here. Report the expenses in the same fashion as those on Schedule J.

If you’re using Schedule PC for expenses that aren’t currently deductible under IRC Section 2053, report the expense on Schedule L with no value in the last column. Turn to the later “Filing a protective claim for refund: Schedule PC” section for more information on this particular schedule.

Covering bequests to a surviving spouse: Schedule M

If your decedent left a surviving spouse, you may have a whopper of a deduction available to you, which you report on Schedule M: Bequests, etc. to surviving spouse. All property that passes to the surviving spouse as a result of the decedent’s death qualifies for the unlimited marital deduction, provided that the surviving spouse is a U.S. citizen. Using the unlimited marital deduction causes no tax to be due on the death of the first spouse to die; when the second spouse dies, his or her estate pays whatever tax is due on the remaining assets of both spouses. Therefore, if your decedent left a surviving spouse, that spouse’s estate (not your decedent’s) will be responsible for the tax burden, and you can breathe a sigh of relief. The following sections highlight which property does and doesn’t qualify for the marital deduction.

Recording charitable, public, and similar gifts and bequests: Schedule O

Use Schedule O to claim a charitable deduction if your decedent left a bequest, legacy, devise, or transfer for a qualified charitable purpose to any qualified charitable organization. See the Instructions for Form 706 regarding Schedule O for the five general categories of qualified charitable organizations.

You may take an estate tax charitable deduction for amounts transferred to charitable organizations as a result of a qualified disclaimer. A qualified disclaimer is a refusal to accept an interest in property under certain, very specific circumstances (see Chapter 8). Consult your tax expert to be sure that you’ve crossed all your t’s and dotted all your i’s to qualify for this disclaimer. In addition to disclaimers, the instructions for Schedule O list other types of property that qualify for the charitable deduction.

If you have any questions about a charitable gift made by your decedent, or about how to report the gift, consult that estate tax expert we keep mentioning.

Listing transfers during life: Schedule G

Welcome to Schedule G: Transfers during Life, the land of the look-back, the second glance, the “if only,” the “oops, I really wish the decedent hadn’t retained that power,” and, quite probably, the “I think I’d better check with my tax expert about this schedule…”

If the decedent transferred property during his or her life for less than full payment, sometimes it can be included in his or her taxable estate. Sometimes the decedent knew the property would be included in the estate (when, for instance, he or she funded a revocable trust during life — revocable trusts and the property held in them are always included in the decedent’s estate and are reported on Schedule G). Occasionally a power over a transfer the decedent made during life is retained unintentionally, causing the property transferred to be includible in the decedent’s estate. In either case, or any other that may arise, Schedule G is here, courtesy of the IRS, for your convenience in reporting certain transfers made within three years of death, including gift taxes on gifts made within three years of death (even though the gifts may not be includible in the estate) and transfers with certain retained interests.

Exercising powers of appointment: Schedule H

A power of appointment over property, which can be either general or limited, is the power to decide who will be the ultimate owner (or have the enjoyment) of the property and when. It’s usually created by someone other than the decedent under that person’s will or trust, giving the decedent the authority to direct the use and dispersal of any property controlled by the power. For example, Abe X leaves a trust under his will to his wife, Ida X, and gives her a general power of appointment over all the property contained in the trust. When Ida X dies, her executor must include this power on Schedule H of Ida’s Form 706, listing all the property that was in Abe’s trust on the date of Ida’s death.

Only property controlled by a general power of appointment is included on Schedule H: Powers of Appointment. A general power can be exercised in favor of anyone, including the decedent, his or her estate, his or her creditors, or the creditors of the estate. A limited power of appointment can only be exercised in favor of a limited class of people designated by the grantor (for instance, the grantor’s children and their lineal descendants), never including the power holder, his or her estate, his or her creditors, or the creditors of his or her estate.

Considering annuities: Schedule I

The term annuity, for estate tax purposes, is an agreement to make periodic cash payments to one or more persons over a specific period of time. An annuity is subject to estate tax if payments (or a lump sum payment) continue after the decedent’s death. If the annuity ends with the decedent’s death, it’s not includible in the decedent’s estate. On Schedule I: Annuities, report the value of any annuity that meets the requirements set out in the Instructions.

Claiming a credit for foreign death taxes: Schedule P

You may claim a credit for foreign death taxes paid to a foreign country or any of its political subdivisions on Schedule P: Credit for Foreign Death Taxes if the decedent is a U.S. citizen or a resident alien, on property situated in the foreign country, and subject to estate tax on the 706. To obtain the credit, the foreign tax must be a tax on the transfer of the foreign property at death. You may also claim a credit for foreign death taxes under death tax treaties or conventions with many countries. Check the Instructions for Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return (Estate of nonresident not a citizen of the United States), for a current list of treaties in effect.

Getting a credit for tax on prior transfers: Schedule Q

Whoever said the IRS didn’t have a heart was wrong. In Schedule Q: Credit for Tax on Prior Transfers, you’re allowed a credit for estate taxes paid by a prior estate on property included in this estate, provided the transfer from the first estate to your decedent happened no more than ten years prior to or two years after your decedent’s date of death. The property needn’t exist on your decedent’s date of death. Property qualifies for the credit if it was subject to estate tax on the prior decedent’s (the transferor’s) date of death. You may take the credit so long as your decedent was considered the beneficial owner of the property, even if that ownership ended with your decedent’s death, such as a general power of appointment (which we describe in the earlier “Exercising powers of appointment: Schedule H” section), annuity, life estate, term for years, or remainder interest (whether vested or contingent).

Generation-Skipping Transfer tax: Schedule R

The generation-skipping transfer (GST) tax assesses a tax on property at each generational level as if it had been owned by someone of that generation, even though ownership of the property skipped over one or more of those generations. Its purpose is to prevent grandparents from leaving property to grandchildren, bypassing the children in between to bypass taxation in the children’s estates.

As executor, you want to know enough about the GST tax to recognize whether your decedent’s estate may be subject to it. If you’ve already made that determination, or if you’re fence sitting because you’re not sure, it’s time to call in the experts — be they estate attorneys, accountants, or Enrolled Agents — to prepare Schedules R and R-1 and to help you determine who are the skip beneficiaries, and what property, exactly, those beneficiaries are receiving. Remember, only assets that skip generations (even if the property lands in a trust for the benefit of a skip person) are subject to the GST tax.

Electing a qualified conservation easement exclusion: Schedule U

If your decedent’s gross estate includes land subject to a qualified conservation easement, you may make an election to exclude a portion of the land that’s subject to the easement from the estate. For the purpose of Form 706, a qualified conservation easement is defined as an easement of a qualified real property interest to a qualified organization exclusively for conservation purposes. (Note that an easement allows others to use your land for a specific purpose.) After it’s made, the election can’t be revoked. An easement can also be granted after the decedent’s death.

Filing a protective claim for refund: Schedule PC

A protective claim for refund preserves the estate’s right to a refund of tax paid on any amount included in the gross estate that would be deductible under IRC Section 2053 (funeral and administration expenses, claims against the estate, charitable pledges, taxes and unpaid mortgages; see Schedules J and K above), which hasn’t been paid or otherwise won’t meet the requirements of IRC Section 2053 for deductibility on the 706 until after the limitations period for filing the claim has passed. Schedule PC is also used to inform the IRS when the contingency leading to the protective claim for refund is resolved and the refund due to the estate is finalized.