How to Complete Schedule O for Estate Form 706
How to Complete Lines 4–8 of Part 4: Estate Form 706
How to Complete Schedule K and L for Estate Form 706

How to Complete Schedule M for Estate Form 706

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 will be responsible for the tax burden, and you can breathe a sigh of relief.

Property qualifying for the marital deduction

Property qualifying for the marital deduction includes assets held either solely in the decedent’s name or jointly with the surviving spouse. The following items also qualify:

  • Trusts qualifying for marital deduction: Property left in trust for a surviving spouse qualifies for the marital deduction if, under the trust agreement, the surviving spouse at a minimum is the sole beneficiary, is entitled to receive all the income for his or her life, can withdraw any or all of the principal at any time, and has a general power of appointment exercisable by will.

  • Life insurance, endowments, and annuity contracts: Proceeds from these assets qualify, if payable to the surviving spouse, provided that they meet all the conditions laid out in the Form 706 instructions.

  • Qualified terminable interest property (QTIPs): Check the will and any trusts carefully for a QTIP trust. If one exists, you may either

    • Elect to claim a marital deduction for qualified terminable interest property by listing the property on Schedule M and deducting it (that’s all it takes to elect it)

    • Elect out of the QTIP, and thus not get a marital deduction

    In either case, list the property on Schedule M. If you’re choosing not to use the QTIP election (to elect out), be sure to specifically identify the trust as being excluded from the election. Remember, any property for which the election is made will be included in the decedent’s spouse’s estate when he or she dies.

    When would you choose to elect out? When the surviving spouse’s estate is much larger than the decedent’s and you don’t want to increase it further and take it to a higher tax bracket. Of course, when you elect out, even though the property is listed on Schedule M, you may not include it in the total and take it as a marital deduction.

    Consult your tax advisor to be sure that 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 doesn’t have to specifically elect to take the marital deduction. If the surviving spouse has the right to receive payments during his or her lifetime after the decedent’s death, that constitutes a QTIP election unless you, as executor, affirmatively opt out of the election on the 706.

  • Charitable remainder trusts: If you have a surviving spouse who receives an interest in a charitable reminder trust, it isn’t treated as a nondeductible terminable interest if the interest passes from your decedent to his or her surviving spouse and that surviving spouse is the only beneficiary of the trust. A charitable remainder trust is either a charitable remainder annuity trust or a charitable remainder unitrust.

  • 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 qualified domestic trust (QDOT) for the benefit of that spouse.

    The terms of the QDOT are quite specific, and you want to consult with a qualified tax advisor if you need to follow this route. If the decedent left a marital trust that doesn’t meet the requirements of a QDOT, you can ask the probate court to reform the trust so that it qualifies for the election.

    If your decedent left assets not in a trust to the surviving spouse, the spouse or you (as executor) may establish a QDOT trust. The surviving spouse can then transfer assets left outright to him or her into this trust.

As an alternative to attempting to meet the QDOT requirements, the surviving spouse may elect to become a U.S. citizen, although chances are the spouse would have done so by now if he or she wanted to.

Property not qualifying for the marital deduction

A terminable interest is an interest that terminates or fails after the passage of time or upon the (non)occurrence of some contingency. In general, terminable interest property received by a surviving spouse is normally nondeductible. It makes sense because the IRS isn’t able to collect estate tax on property when the surviving spouse dies if the interest terminates beforehand. But as usual, a couple exceptions exist:

  • The six-month survival period: If your decedent left a bequest, whether outright or in trust, 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 so will qualify for the marital deduction. Many estate plans contain this condition.

  • Deductions against the marital deduction: If you claim a deduction as executor on Schedules J through L against any property you take as a marital deduction, you must reduce the amount of the marital deduction by that J through L 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 mortgage.

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