How to Complete Schedule M for Estate Form 706
Use Schedule M: Bequests, etc. to surviving spouse, when filing the federal estate tax return (Form 706), to report property passed to the decedent’s surviving spouse. Property passed to the spouse as a result of the decedent’s death qualifies for the unlimited marital deduction. This deduction may not apply if the surviving spouse is not a U.S. citizen, or if the spouse receives terminable interest property.
With the unlimited marital deduction, no tax is due on the death of the first spouse to die. When the second spouse dies, his or her estate pays any tax due on the remaining assets of both spouses.
What qualifies for the marital deduction?
Any assets held solely in the decedent’s name or jointly with the surviving spouse qualify for the marital deduction. The following items also qualify:
Trust qualifying for marital deduction: Property left in trust for a surviving spouse qualifies for the marital deduction if the surviving spouse is the sole beneficiary, is entitled to receive all the income for life, can withdraw any/all of the principal at any time, and has a general power of appointment.
Life insurance, endowments, and annuity contracts: Proceeds from these assets qualify, if they are payable to the spouse, and meet the conditions specified in the Form 706 instructions.
Qualified terminable interest property (QTIPs): If a QTIP trust exists, you can elect to claim a marital deduction for qualified terminable interest property by listing the property on Schedule M and deducting it. If you elect out of the QTIP, you forgo this marital deduction. In either case, list the property on Schedule M.
When choosing to elect out of the QTIP, always identify the trust as being excluded from the election. Remember that any property for which the election is made will be included in the decedent’s spouse’s estate. Consult your tax advisor to be sure you meet all the requirements for making a valid QTIP election.
Joint and survivor annuities: If your decedent has a joint and survivor annuity with his or her surviving spouse, that spouse’s right to receive payments during his or her lifetime after the decedent’s death constitutes a QTIP election; a formal election isn’t necessary. As executor, however, you can affirmatively opt out of the election on Form 706.
Charitable remainder trusts: Interest in a charitable reminder trust is deductable if the interest passes from your decedent to the surviving spouse and that spouse is sole beneficiary of the trust (other than charitable organizations).
Qualified domestic trusts (QDOTs): A surviving spouse who isn’t a U.S. citizen doesn’t automatically qualify for the unlimited marital deduction unless the property is put into a QDOT for the benefit of that spouse.
If the decedent left a marital trust that doesn’t meet QDOT requirements, ask the probate court to reform the trust so that it qualifies. If your decedent left non-trust assets to the surviving spouse, the spouse or executor may establish a QDOT trust. The surviving spouse can then transfer assets left outright to him or her into this trust.
The terms of a QDOT are quite specific. Consult a qualified tax advisor if you need to follow this route.
Terminable interest: When is it deductible?
Terminable interest is an interest that terminates after the passage of time or upon the (non)occurrence of some contingency. Terminable interest property received by a surviving spouse is normally nondeductible because the IRS can’t collect estate tax on property when the spouse dies if the interest terminates beforehand. There are some exceptions:
Six-month survival period: If your decedent left a bequest to the surviving spouse on the condition that the spouse survives for a period not exceeding six months, it’s not considered a terminable interest, and will qualify for the marital deduction.
Deductions against the marital deduction: If you claim a deduction on Schedules J through L against any property you take as a marital deduction, you must reduce the amount of the marital deduction by the other deduction amount. If the marital deduction property has a mortgage or other encumbrance, you may take only the net value of the property after you deduct that encumbrance.