United States Estate (and Generation-Skipping Transfer) Tax Return

Line 3 - Installment Payments

If the gross estate includes an interest in a closely held business, you may be able to elect to pay part of the estate tax in installments.

The maximum amount that can be paid in installments is that part of the estate tax that is attributable to the closely held business. In general, that amount is the amount of tax that bears the same ratio to the total estate tax that the value of the closely held business included in the gross estate bears to the total gross estate.

Percentage requirements. To qualify for installment payments, the value of the interest in the closely held business that is included in the gross estate must be more than 35% of the adjusted gross estate (the gross estate less expenses, indebtedness, taxes, and losses).

Interests in two or more closely held businesses are treated as an interest in a single business if at least 20% of the total value of each business is included in the gross estate. For this purpose, include any interest held by the surviving spouse that represents the surviving spouse's interest in a business held jointly with the decedent as community property or as joint tenants, tenants by the entirety, or tenants in common.

Value. The value used for meeting the percentage requirements is the same value used for determining the gross estate. Therefore, if the estate is valued under alternate valuation or special use valuation, you must use those values to meet the percentage requirements.

Transfers before death. Generally, gifts made before death are not included in the gross estate. However, the estate must meet the 35% requirement by both including and excluding in the gross estate any gifts made by the decedent within 3 years of death.

Passive assets. In determining the value of a closely held business and whether the 35% requirement is met, do not include the value of any passive assets held by the business. A passive asset is any asset not used in carrying on a trade or business. Stock in another corporation is a passive asset unless the stock is treated as held by the decedent because of the election to treat holding company stock as business company stock, as discussed below.

If a corporation owns at least 20% in value of the voting stock of another corporation, or the other corporation had no more than 15 shareholders and at least 80% of the value of the assets of each corporation is attributable to assets used in carrying on a trade or business, then these corporations will be treated as a single corporation, and the stock will not be treated as a passive asset. Stock held in the other corporation is not taken into account in determining the 80% requirement.

Interest in closely held business. For purposes of the installment payment election, an interest in a closely held business means:

• Ownership of a trade or business carried on as a proprietorship.
• An interest as a partner in a partnership carrying on a trade or business if 20% or more of the total capital interest was included in the gross estate of the decedent or the partnership had no more than 15 partners.
• Stock in a corporation carrying on a trade or business if 20% or more in value of the voting stock of the corporation is included in the gross estate of the decedent or the corporation had no more than 15 shareholders.

The partnership or corporation must be carrying on a trade or business at the time of the decedent's death.

In determining the number of partners or shareholders, a partnership or stock interest is treated as owned by one partner or shareholder if it is community property or held by a husband and wife as joint tenants, tenants in common, or as tenants by the entirety.

Property owned directly or indirectly by or for a corporation, partnership, estate, or trust is treated as owned proportionately by or for its shareholders, partners, or beneficiaries. For trusts, only beneficiaries with current interests are considered.

The interest in a closely held farm business includes the interest in the residential buildings and related improvements occupied regularly by the owners, lessees, and employees operating the farm.

Holding company stock. The executor may elect to treat as business company stock the portion of any holding company stock that represents direct ownership (or indirect ownership through one or more other holding companies) in a business company. A holding company is a corporation holding stock in another corporation. A business company is a corporation carrying on a trade or business.

This election applies only to stock that is not readily tradable. For purposes of the 20% voting stock requirement, stock is treated as voting stock to the extent the holding company owns voting stock in the business company.

If the executor makes this election, the first installment payment is due when the estate tax return is filed. The 5-year deferral for payment of the tax, as discussed below under Time for payment, does not apply. In addition, the 2% interest rate, discussed below under Interest computation, will not apply.

Time for payment. Under the installment method, the executor may elect to defer payment of the qualified estate tax, but not interest, for up to 5 years from the original payment due date. After the first installment of tax is paid, you must pay the remaining installments annually by the date 1 year after the due date of the preceding installment. There can be no more than 10 installment payments.

Interest on the unpaid portion of the tax is not deferred and must be paid annually. Interest must be paid at the same time as and as a part of each installment payment of the tax.

For information on the acceleration of payment when an interest in the closely held business is disposed of, see section 6166(g).

Interest computation. A special interest rate applies to installment payments. For decedent's dying in 2001, the interest rate is 2% on the lesser of:

• $441,000, or
• The amount of the estate tax that is attributable to the closely held business and that is payable in installments.

2% portion. The 2% portion is an amount equal to the amount of the tentative estate tax on ($1,000,000 + the applicable exclusion amount in effect) minus the applicable credit amount in effect. However, if the amount of estate tax extended under section 6166 is less than the amount computed above, the 2% portion is the lesser amount.

Inflation adjustment. The $1,000,000 amount used to calculate the 2% portion is indexed for inflation for the estates of decedents dying in a calendar year after 1998. For an estate of a decedent dying in calendar year 2001, the dollar amount used to determine the 2% portion of the estate tax payable in installments under section 6166 is $1,060,000.

Computation. Interest on the portion of the tax in excess of the 2% portion is figured at 45% of the annual rate of interest on underpayments. This rate is based on the Federal short-term rate and is announced quarterly by the IRS in the Internal Revenue Bulletin.

If you elect installment payments and the estate tax due is more than the maximum amount to which the 2% interest rate applies, each installment payment is deemed to comprise both tax subject to the 2% interest rate and tax subject to 45% of the regular underpayment rate. The amount of each installment that is subject to the 2% rate is the same as the percentage of total tax payable in installments that is subject to the 2% rate.

Important: The interest paid on installment payments is not deductible as an administrative expense of the estate.

Making the election. If you check this line to make a protective election, you should attach a notice of protective election as described in Regulations section 20.6166-1(d). If you check this line to make a final election, you should attach the notice of election described in Regulations section 20.6166-1(b).

In computing the adjusted gross estate under section 6166(b)(6) to determine whether an election may be made under section 6166, the net amount of any real estate in a closely held business must be used.

You may also elect to pay GST taxes in installments. See section 6166(i).

Line 4 - Reversionary or Remainder Interests

For details of this election, see section 6163 and the related regulations.

Instructions for Part 4. General Information (Pages 2 and 3 of Form 706)

Authorization

• Completing the authorization on page 2 of Form 706 will authorize one attorney, accountant, or enrolled agent to represent the estate and receive confidential tax information, but will not authorize the representative to enter into closing agreements for the estate.
• If you wish to represent the estate, you must complete and sign the authorization.
• If you wish to authorize persons other than attorneys, accountants, and enrolled agents, or if you wish to authorize more than one person, to receive confidential information or represent the estate, you must complete and attach Form 2848, Power of Attorney and Declaration of Representative.
• You must also complete and attach Form 2848 if you wish to authorize someone to enter into closing agreements for the estate.
• If you wish only to authorize someone to inspect and/or receive confidential tax information (but not to represent you before the IRS), complete and file Form 8821, Tax Information Authorization.

Line 4

Complete line 4 whether or not there is a surviving spouse and whether or not the surviving spouse received any benefits from the estate. If there was no surviving spouse on the date of decedent's death, enter None in line 4a and leave lines 4b and 4c blank. The value entered in line 4c need not be exact. See the instructions for Amount under line 5, below.

Line 5

Name. Enter the name of each individual, trust, or estate who received (or will receive) benefits of $5,000 or more from the estate directly as an heir, next-of-kin, devisee, or legatee; or indirectly (for example, as beneficiary of an annuity or insurance policy, shareholder of a corporation, or partner of a partnership that is an heir, etc.).

Identifying number. Enter the SSN of each individual beneficiary listed. If the number is unknown, or the individual has no number, please indicate unknown or none. For trusts and other estates, enter the EIN.

Relationship. For each individual beneficiary enter the relationship (if known) to the decedent by reason of blood, marriage, or adoption. For trust or estate beneficiaries, indicate TRUST or ESTATE.

Amount. Enter the amount actually distributed (or to be distributed) to each beneficiary including transfers during the decedent's life from Schedule G required to be included in the gross estate. The value to be entered need not be exact. A reasonable estimate is sufficient. For example, where precise values cannot readily be determined, as with certain future interests, a reasonable approximation should be entered. The total of these distributions should approximate the amount of gross estate reduced by funeral and administrative expenses, debts and mortgages, bequests to surviving spouse, charitable bequests, and any Federal and state estate and GST taxes paid (or payable) relating to the benefits received by the beneficiaries listed on lines 4 and 5.

All distributions of less than $5,000 to specific beneficiaries may be included with distributions to unascertainable beneficiaries on the line provided.

Line 6 - Section 2044 Property

If you answered Yes, these assets must be shown on Schedule F.

Section 2044 property is property for which a previous section 2056(b)(7) election (QTIP election) has been made, or for which a similar gift tax election (section 2523) has been made. For more information, see the instructions on the back of Schedule F.

Line 8 - Insurance Not Included in the Gross Estate

If you checked Yes for either 8a or 8b, you must complete and attach Schedule D and attach a Form 712, Life Insurance Statement, for each policy and an explanation of why the policy or its proceeds are not includible in the gross estate.

Line 10 - Partnership Interests and Stock in Close Corporations

If you answered Yes to line 10, you must include full details for partnerships and unincorporated businesses on Schedule F (Schedule E if the partnership interest is jointly owned). You must include full details for the stock of inactive or close corporations on Schedule B.

Value these interests using the rules of Regulations section 20.2031-2 (stocks) or 20.2031-3 (other business interests).

A close corporation is a corporation whose shares are owned by a limited number of shareholders. Often, one family holds the entire stock issue. As a result, little, if any, trading of the stock takes place. There is, therefore, no established market for the stock, and those sales that do occur are at irregular intervals and seldom reflect all the elements of a representative transaction as defined by the term fair market value (FMV).

Line 12 - Trusts

If you answered Yes to either 12a or 12b, you must attach a copy of the trust instrument for each trust.

You must complete Schedule G if you answered Yes to 12a and Schedule F if you answered Yes to 12b.

Line 14 - Transitional Marital Deduction Computation

Check Yes if property passes to the surviving spouse under a maximum marital deduction formula provision that meets the requirements of section 403(e)(3) of the Economic Recovery Tax Act of 1981 (P.L. 97-34; 95 Stat. 305).

If you check Yes to line 14, compute the marital deduction under the rules that were in effect before the Economic Recovery Tax Act of 1981.

For a format for this computation, you should obtain the November 1981 revision of Form 706 and its instructions. The computation is items 19 through 26 of the Recapitulation. You should also apply the rules of Rev. Rul. 80-148, 1980-1 C.B. 207, if there is property that passes to the surviving spouse outside of the maximum marital deduction formula provision.

Instructions for Part 5. Recapitulation (Page 3 of Form 706)

Gross Estate

Items 1 through 10 - You must make an entry in each of items 1 through 9.

If the gross estate does not contain any assets of the type specified by a given item, enter zero for that item. Entering zero for any of items 1 through 9 is a statement by the executor, made under penalties of perjury, that the gross estate does not contain any includible assets covered by that item.

Do not enter any amounts in the Alternate value column unless you elected alternate valuation on line 1 of Elections by the Executor on page 2 of the Form 706.

Which schedules to attach for items 1 through 9. You must attach -

• Schedule F to the return and answer its questions even if you report no assets on it.
• Schedules A, B, and C if the gross estate includes any Real Estate; Stocks and Bonds; or Mortgages, Notes, and Cash, respectively.
• Schedule D if the gross estate includes any Life Insurance or if you answered Yes to question 8a of Part 4, General Information.
• Schedule E if the gross estate contains any Jointly Owned Property or if you answered Yes to question 9 of Part 4.
• Schedule G if the decedent made any of the lifetime transfers to be listed on that schedule or if you answered Yes to question 11 or 12a of Part 4.
• Schedule H if you answered Yes to question 13 of Part 4.
• Schedule I if you answered Yes to question 15 of Part 4.

Exclusion

Item 11 - Conservation easement exclusion. You must complete and attach Schedule U (along with any required attachments) to claim the exclusion on this line.

Deductions

Items 13 through 22 - You must attach the appropriate schedules for the deductions you claim.

Item 17 - If item 16 is less than or equal to the value (at the time of the decedent's death) of the property subject to claims, enter the amount from item 16 on item 17.

If the amount on item 16 is more than the value of the property subject to claims, enter the greater of (a) the value of the property subject to claims, or (b) the amount actually paid at the time the return is filed.

In no event should you enter more on item 17 than the amount on item 16. See section 2053 and the related regulations for more information.

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