How to Complete Schedule K and L for Estate Form 706
When filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, use Schedule K to deduct debts that the decedent owed at death and obligations, such as mortgages or liens, which the decedent’s estate is liable for. Schedule L is used to report any net losses that occur during estate administration. Expenses incurred in administering property not subject to claims should also be reported in Schedule L.
Schedule K: Deducting the decedent’s debts and obligations
Report all unsecured debts that existed at the time of the decedent’s death, whether or not mature (currently due), and that relate to property not subject to claims of the decedent’s creditors on Schedule K. Your state law determines which items of property are subject to claims. For each item, include the name of the creditor, the nature of the claim, the amount, and the period of time, if specified.
The following are examples of some deductible debts you might include on Schedule K:
Household expenses accrued before death.
Property taxes accrued before death.
Federal taxes on income received before the decedent’s death. If it’s a joint liability with a surviving spouse, the estate would only be liable for the decedent’s portion under local law.
Unpaid gift taxes on gifts the decedent made.
Certain claims of a former spouse against the estate if they meet the requirements set out in the instructions to Form 706, Schedule K.
Professional fees, such as attorneys’ fees, or accountants’ fees for services rendered during life.
Amounts due on notes, judgments, and accrued interest through date of death.
On the bottom half of Schedule K, report any obligations which are:
Secured by mortgages or other liens for which the decedent was personally liable, and for which the estate is now liable.
On property you included in the gross estate at its full value, unreduced by the mortgage or lien
If the decedent and his or her estate aren’t liable for the mortgage or lien, include in the gross estate only the value of the property net of the debt. You don’t deduct any portion of such debt on this schedule.
Schedule L: Deducting estate losses
Any losses (from theft, fire, storms) that occur during the settlement of the estate should be reported on Schedule L. These losses are deductible unless they’re reimbursed in some way (by insurance, for example). Losses aren’t reflected in the alternate valuation of the property. You cannot take the loss on the 706 and on the applicable income tax return, so consult relative tax rates and choose wisely.
Deduct 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. Report the expenses relating to administering a decedent’s revocable trust here.
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.