Instructions for 706 (Rev. July 1999)

Instructions for Form 706(Revised July 1999)United States Estate (and Generation-SkippingTransfer) Tax Return(For decedents dying after December 31, 1998.)Section references are to the Internal Revenue Code unless otherwise noted.

Department of the TreasuryInternal Revenue Service

Paperwork Reduction Act Notice. We ask for the information on this form to carry out theInternal Revenue laws of the United States. You are required to give us the information. We needit to ensure that you are complying with these laws and to allow us to figure and collect the rightamount of tax.

You are not required to provide the information requested on a form that is subject to thePaperwork Reduction Act unless the form displays a valid OMB control number. Books or recordsrelating to a form or its instructions must be retained as long as their contents may becomematerial in the administration of any Internal Revenue law. Generally, tax returns and returninformation are confidential as required by section 6103.

The time needed to complete and file this form and related schedules will vary depending onindividual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates or suggestions formaking this form simpler, we would be happy to hear from you. You can write to the Tax FormsCommittee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. DO NOT sendthe tax form to this address. Instead, see Where To File on page 2.

General Instructions

Changes To Note● See the Instructions for Part 2. TaxComputation, line 11, for unified credit(applicable credit amounts) and applicableexclusion amounts for years 1987 through2006 and after.● Various dollar amounts and limitationsrelevant to Form 706 are now indexed forinflation. For decedents dying in 1999, thefollowing amounts have increased:

• the ceiling on special use valuation is$760,000;• the generation-skipping transfer taxexemption is $1,010,000; and• the amount used in computing the 2%portion of estate tax payable in installmentsis $1,010,000.

The IRS will publish amounts for futureyears in an annual revenue procedure.

• Part 1 ................................................ 4

• Part 2 ................................................ 4

• Part 3 ................................................ 5

• Part 4 ................................................ 9

• Part 5 ................................................ 10

•• Schedule A* ...................................... 11

•• Schedule A-1*................................... 11

•• Schedule B ....................................... 11

•• Schedule C*...................................... 11

Form Recordkeeping

Learning aboutthe law or the

formPreparingthe form

Copying,assembling, andsending the form

to the IRS

•• Schedule D*...................................... 11

•• Schedule E* ...................................... 11

•• Schedule F* ...................................... 11706 2 hr., 11 min. 1 hr., 25 min. 3 hr., 35 min. 49 min.Sch. A 20 min. 16 min. 10 min. 20 min. •• Schedule G....................................... 11A-1 46 min. 25 min. 59 min. 49 min.

•• Schedule H ....................................... 14B 20 min. 16 min. 20 min. 20 min.C 13 min. 2 min. 8 min. 20 min. •• Schedule I......................................... 14D 7 min. 6 min. 8 min. 20 min.

•• Schedule J*....................................... 16E 40 min. 7 min. 24 min. 20 min.F 33 min. 8 min. 21 min. 20 min. •• Schedule K ....................................... 16G 26 min. 23 min. 11 min. 14 min. •• Schedule L........................................ 17H 26 min. 7 min. 10 min. 14 min.I 26 min. 27 min. 11 min. 20 min. •• Schedule M* ..................................... 17J 26 min. 7 min. 16 min. 20 min. •• Schedule O....................................... 17K 26 min. 10 min. 10 min. 20 min.

•• Schedule P ....................................... 18L 13 min. 5 min. 10 min. 20 min.M 13 min. 31 min. 24 min. 20 min. •• Schedule Q....................................... 18O 20 min. 11 min. 18 min. 17 min.

•• Schedules R, R-1 ............................. 19P 7 min. 14 min. 18 min. 14 min.Q 7 min. 10 min. 11 min. 14 min. •• Schedule T........................................ 22Q Wksheet 7 min. 10 min. 59 min. 20 min.

•• Schedule U ....................................... 23R 20 min. 34 min. 1 hr., 2 min. 49 min.R-1 7 min. 29 min. 24 min. 20 min. •• Continuation Schedule...................... 24T 1 hr., 12 min. 27 min. 1 hr., 14 min. 1 hr., 3 min.

•• Worksheet for Schedule Q ............... 25U 20 min. 3 min. 29 min. 20 min.Cont. Sch. 20 min. 3 min. 7 min. 20 min. •• Index ................................................. 26

*For Schedules A, A-1, C, D, E, F, J, and M,see instructions in the Form 706 itself.

AfterFor Decedents Dying

and BeforeUse Revision ofForm 706 Dated

........................ January 1, 1982 November 1981December 31, 1981 October 23, 1986 November 1987December 31, 1989 October 9, 1990 October 1988October 8, 1990 January 1, 1998 April 1997December 31, 1997 January 1, 1999 July 1998December 31, 1998 ............................ July 1999

F Paying the Tax.................................. 2Contents PageG Signature and Verification ................ 2• General Instructions.......................... 1H Amending Form 706 ......................... 3• Changes To Note ............................. 1I Supplemental Documents................. 3A Purpose of Form............................... 2J Rounding Off to Whole Dollars......... 3B Which Estates Must File................... 2K Penalties ........................................... 3C Executor ............................................ 2L Obtaining Forms and Publications ... 3D When To File .................................... 2• Specific Instructions.......................... 3E Where To File ................................... 2

Cat. No. 16779E

● See the instructions for Schedule U on page23 for the table showing the exclusion limitationfor the qualified conservation easementexclusion for the years 1999 through 2002 orthereafter.

A. Purpose of FormThe executor of a decedent's estate uses Form706 to figure the estate tax imposed by Chapter11 of the Internal Revenue Code. This tax islevied on the entire taxable estate, not just onthe share received by a particular beneficiary.Form 706 is also used to compute thegeneration-skipping transfer (GST) taximposed by Chapter 13 on direct skips(transfers to skip persons of interests inproperty included in the decedent's grossestate).

B. Which Estates Must File For decedents dying in 1999, Form 706 mustbe filed by the executor for the estate of everyU.S. citizen or resident whose gross estate,plus adjusted taxable gifts and specificexemption, is more than $650,000 in 1999.

To determine whether you must file a returnfor the estate, add:

1. The adjusted taxable gifts (under section2001(b)) made by the decedent afterDecember 31, 1976;

2. The total specific exemption allowedunder section 2521 (as in effect before itsrepeal by the Tax Reform Act of 1976) for giftsmade by the decedent after September 8,1976; and

3. The decedent's gross estate valued atthe date of death.

For dates of death after 1999, the executormust file Form 706 for any estate in which thesum of these items exceeds the applicableexclusion amount for that year. See the tablefor line 11 on page 4 for the applicableexclusion amounts.

Gross EstateThe gross estate includes all property in whichthe decedent had an interest (including realproperty outside the United States). It alsoincludes:● Certain transfers made during the decedent'slife without an adequate and full considerationin money or money's worth;● Annuities;● The includible portion of joint estates withright of survivorship (see the instructions on theback of Schedule E);● The includible portion of tenancies by theentirety (see the instructions on the back ofSchedule E);● Certain life insurance proceeds (even thoughpayable to beneficiaries other than the estate)(see the instructions on the back of ScheduleD);● Property over which the decedent possesseda general power of appointment;● Dower or curtesy (or statutory estate) of thesurviving spouse;● Community property to the extent of thedecedent's interest as defined by applicablelaw.

For more specific information, see theinstructions for Schedules A through I.

U. S. Citizens or Residents;Nonresident NoncitizensFile Form 706 for the estates of decedents whowere either U.S. citizens or U.S. residents atthe time of death. For estate tax purposes, aresident is someone who had a domicile in the

United States at the time of death. A personacquires a domicile by living in a place for evena brief period of time, as long as the personhad no intention of moving from that place.

File Form 706-NA, United States Estate(and Generation-Skipping Transfer) TaxReturn, Estate of nonresident not a citizen ofthe United States, for the estates ofnonresident alien decedents (decedents whowere neither U.S. citizens nor residents at thetime of death).

Residents of U. S. PossessionsAll references to citizens of the United Statesare subject to the provisions of sections 2208and 2209, relating to decedents who were U.S.citizens and residents of a U.S. possession onthe date of death. If such a decedent becamea U.S. citizen only because of his or herconnection with a possession, then thedecedent is considered a nonresident aliendecedent for estate tax purposes, and youshould file Form 706-NA. If such a decedentbecame a U.S. citizen wholly independently ofhis or her connection with a possession, thenthe decedent is considered a U.S. citizen forestate tax purposes, and you should file Form706.

C. ExecutorThe term “executor” means the executor,personal representative, or administrator of thedecedent's estate. If none of these isappointed, qualified, and acting in the UnitedStates, every person in actual or constructivepossession of any property of the decedent isconsidered an executor and must file a return.

D. When To FileYou must file Form 706 to report estate and/orgeneration-skipping transfer tax within 9months after the date of the decedent's deathunless you receive an extension of time to file.Use Form 4768, Application for Extension ofTime To File a Return and/or Pay U.S. Estate(and Generation-Skipping Transfer) Taxes, toapply for an extension of time to file. If youreceived an extension, attach a copy of it toForm 706.Private delivery services. You can usecertain private delivery services designated bythe IRS to meet the “timely mailing as timelyfiling/paying” rule for tax returns and payments.The most recent list of designated privatedelivery services was published by the IRS inSeptember 1998. The list includes only thefollowing:● Airborne Express (Airborne): Overnight AirExpress Service, Next Afternoon Service,Second Day Service.● DHL Worldwide Express (DHL): DHL “SameDay” Service, DHL USA Overnight.● Federal Express (FedEx): FedEx PriorityOvernight, FedEx Standard Overnight, FedEx2Day.● United Parcel Service (UPS): UPS Next DayAir, UPS Next Day Air Saver, UPS 2nd DayAir, UPS 2nd Day Air A.M.

The private delivery service can tell you howto get written proof of the mailing date.

E. Where To FileUnless the return is hand carried to the officeof the District Director, please mail it to theInternal Revenue Service Center indicatedbelow for the state where the decedent wasdomiciled at the time of death. If you are filinga return for the estate of a nonresident U.S.citizen, mail it to the Internal Revenue ServiceCenter, Philadelphia, PA 19255, USA.

F. Paying the TaxThe estate and GST taxes are due within 9months after the date of the decedent's deathunless an extension of time for payment hasbeen granted, or unless you have properlyelected under section 6166 to pay ininstallments, or under section 6163 to postponethe part of the tax attributable to a reversionaryor remainder interest. These elections aremade by checking lines 3 and 4 (respectively)of Part 3, Elections by the Executor, andattaching the required statements.

If the tax paid with the return is different fromthe balance due as figured on the return,explain the difference in an attached statement.If you have made prior payments to IRS orredeemed certain marketable United StatesTreasury bonds to pay the estate tax (see thelast paragraph of the instructions to ScheduleB), attach a statement to Form 706 includingthese facts. If an extension of time to pay hasbeen granted, attach a copy of the approvedForm 4768 to Form 706.Paying by check. Make the check payable tothe United States Treasury. Please write thedecedent's name, social security number, and“Form 706” on the check to assist us in postingit to the proper account.

G. Signature and VerificationIf there is more than one executor, all listedexecutors must verify and sign the return.All executors are responsible for the return asfiled and are liable for penalties provided forerroneous or false returns.

Florida, Georgia, SouthCarolina Atlanta, GA 39901

Illinois, Iowa, Minnesota,Missouri, Wisconsin Kansas City, MO 64999

New Jersey, New York (NewYork City and counties ofNassau, Rockland, Suffolk,and Westchester)

Holtsville, NY 00501

New York (all othercounties), Connecticut,Maine, Massachusetts, NewHampshire, Rhode Island,Vermont

Andover, MA 05501

Delaware, District ofColumbia, Maryland,Pennsylvania, Virginia

Philadelphia, PA 19255

Indiana, Kentucky, Michigan,Ohio, West Virginia Cincinnati, OH 45999

Kansas, New Mexico,Oklahoma, Texas Austin, TX 73301

Alaska, Arizona, California(counties of Alpine, Amador,Butte, Calaveras, Colusa,Contra Costa, Del Norte, ElDorado, Glenn, Humboldt,Lake, Lassen, Marin,Mendocino, Modoc, Napa,Nevada, Placer, Plumas,Sacramento, San Joaquin,Shasta, Sierra, Siskiyou,Solano, Sonoma, Sutter,Tehama, Trinity, Yolo, andYuba), Colorado, Idaho,Montana, Nebraska,Nevada, North Dakota,Oregon, South Dakota,Utah, Washington, Wyoming

Ogden, UT 84201

California (all othercounties), Hawaii Fresno, CA 93888

Alabama, Arkansas,Louisiana, Mississippi, NorthCarolina, Tennessee

Memphis, TN 37501

Page 2 General Instructions

If two or more persons are liable for filing thereturn, they should all join together in filing onecomplete return. However, if they are unableto join in making one complete return, each isrequired to file a return disclosing all theinformation the person has in the case,including the name of every person holding aninterest in the property and a full description ofthe property. If the appointed, qualified, andacting executor is unable to make a completereturn, then every person holding an interest inthe property must, on notice from the IRS,make a return regarding that interest.

The executor who files the return must, inevery case, sign the declaration on page 1under penalties of perjury. If the return isprepared by someone other than the personwho is filing the return, the preparer must alsosign at the bottom of page 1.

H. Amending Form 706If you find that you must change something ona return that has already been filed, you shouldfile another Form 706 and write “SupplementalInformation” across the top of page 1 of theform. If you have already been notified that thereturn has been selected for examination, youshould provide the additional informationdirectly to the office conducting theexamination.

I. Supplemental DocumentsYou must attach the death certificate to thereturn.

If the decedent was a citizen or resident anddied testate, attach a certified copy of the willto the return. If you cannot obtain a certifiedcopy, attach a copy of the will and anexplanation of why it is not certified. Othersupplemental documents may be required asexplained below. Examples include Forms 712,709, 709-A, and 706-CE, trust and power ofappointment instruments, death certificate, andstate certification of payment of death taxes. Ifyou do not file these documents with the return,the processing of the return will be delayed.

If the decedent was a U.S. citizen but not aresident of the United States, you must attachthe following documents to the return:

1. A copy of the inventory of property andthe schedule of liabilities, claims against theestate, and expenses of administration filedwith the foreign court of probate jurisdiction,certified by a proper official of the court;

2. A copy of the return filed under theforeign inheritance, estate, legacy, successiontax, or other death tax act, certified by a properofficial of the foreign tax department, if theestate is subject to such a foreign tax; and

3. If the decedent died testate, a certifiedcopy of the will.

J. Rounding Off to WholeDollarsYou may show the money items on the returnand accompanying schedules as whole-dollaramounts. To do so, drop any amount less than50 cents and increase any amount from 50cents through 99 cents to the next higherdollar.

K. PenaltiesLate filing and late payment. Section 6651provides for penalties for both late filing and forlate payment unless there is reasonable causefor the delay. The law also provides forpenalties for willful attempts to evade paymentof tax. The late filing penalty will not beimposed if the taxpayer can show that thefailure to file a timely return is due toreasonable cause. Executors filing late (afterthe due date, including extensions) shouldattach an explanation to the return to showreasonable cause.Valuation understatement. Section 6662provides a 20% penalty for the underpaymentof estate tax of $5,000 or more when theunderpayment is attributable to valuationunderstatements. A valuation understatementoccurs when the value of property reported onForm 706 is 50% or less of the actual value ofthe property.

This penalty increases to 40% if there is agross valuation understatement. A grossvaluation understatement occurs if anyproperty on the return is valued at 25% or lessof the value determined to be correct.

These penalties also apply to late filing, latepayment, and underpayment of GST taxes.

L. Obtaining Forms andPublications To File or UsePersonal computer. Access the IRS'sInternet web site at www.irs.gov to do thefollowing:● Download forms, instructions, andpublications.● Search publications on-line by topic orkeyword.

You can also reach us using:● Telnet at iris.irs.ustreas.gov● File transfer protocol at ftp.irs.ustreas.gov● Direct dial (by modem) 703-321-8020.CD-ROM. Order Pub. 1796, Federal TaxProducts on CD-ROM, and get:● Current year forms, instructions, andpublications, and● Prior year forms and instructions.

Buy the CD-ROM on the Internet atwww.irs.ustreas.gov/cdorders from theNational Technical Information Service (NTIS),or call 1-877-CDFORMS (1-877-233-6767)toll-free to buy the CD-ROM. (Prices may differat each of these locations.)By phone and in person. You can orderforms and publications 24 hours a day, 7 daysa week, by calling 1-800-TAX-FORM (1-800-829-3676). You can also get most formsand publications at your local IRS office.

Forms and Publications to file or use.● Forms: The title for forms to file or use aregiven within these instructions.● Publications:

Publication 910. Guide to Free TaxServicesPublication 559. Survivors, Executors,and Administrators

Specific Instructions● You must file the first three pages of Form706 and all required schedules.● File Schedules A through I, as appropriate,to support the entries in items 1 through 9 ofthe Recapitulation.

● Form 706 has 44 numbered pages. Thepages are perforated so that you can removethem for copying and filing.● When you complete the return, staple all therequired pages together in the proper order.● Number the items you list on each schedule,beginning with the number 1 each time.● Total the items listed on the schedule and itsattachments, Continuation Schedules, etc.● Enter the total of all attachments,Continuation Schedules, etc., at the bottom ofthe printed schedule, but do not carry the totalsforward from one schedule to the next.● Enter the total, or totals, for each scheduleon the Recapitulation, page 3, Form 706● Do not complete the “Alternate valuationdate” or “Alternate value” columns of anyschedule unless you elected alternate valuationon line 1 of Part 3, Elections by the Executor.

IF . . . THEN . . .

you enter zero on anyitem of the Recapitulation,

you need not file theschedule (except forSchedule F) referred toon that item.

you claim an exclusion onitem 11,

complete and attachSchedule U.

you claim any deductionson items 13 through 23of the Recapitulation,

complete and attach theappropriate schedules tosupport the claimeddeductions.

you claim the credits forforeign death taxes or taxon prior transfers,

complete and attachSchedule P or Q.

there is not enough spaceon a schedule to list allthe items,

attach a ContinuationSchedule (or additionalsheets of the same size)to the back of theschedule;(see the end of the Form706 package for theContinuation Schedule);photocopy the blankschedule beforecompleting it, if you willneed more than one copy.

General and Specific Instructions Page 3

Instructions for Part 1.Decedent and Executor (Page 1of Form 706)

Line 2Enter the social security number assignedspecifically to the decedent. You cannot usethe social security number assigned to thedecedent's spouse. If the decedent did nothave a social security number, the executorshould obtain one for the decedent by filingForm SS-5, Application for Social SecurityCard, with a local Social SecurityAdministration office.

Line 6a—Name of ExecutorIf there is more than one executor, enter thename of the executor to be contacted by theIRS. List the other executors' names,addresses, and SSNs (if applicable) on anattached sheet.

Line 6b—Executor's AddressUse Form 8822, Change of Address, to reporta change of the executor's address.

Line 6c—Executor's Social SecurityNumberOnly individual executors should complete thisline. If there is more than one individualexecutor, all should list their social securitynumbers on an attached sheet.

Instructions for Part 2. TaxComputation (Page 1 of Form706)In general, the estate tax is figured by applyingthe unified rates shown in Table A, on page12, to the total of transfers both during life andat death, and then subtracting the gift taxes.You must complete the Tax Computation.

Line 1If you elected alternate valuation on line 1, Part3, Elections by the Executor, enter the amountyou entered in the “Alternate value” column ofitem 12 of Part 5, Recapitulation. Otherwise,enter the amount from the “Value at date ofdeath” column.

Lines 4 and 9Three worksheets are provided to help youcompute the entries for these lines. You neednot file these worksheets with your return butshould keep them for your records. WorksheetTG—Taxable Gifts Reconciliation, on page5, allows you to reconcile the decedent'slifetime taxable gifts to compute totals that willbe used for the line 4 and line 9 worksheets.

You must get all of the decedent's gift taxreturns (Form 709, United States Gift (andGeneration-Skipping Transfer) Tax Return)before you complete Worksheet TG. Theamounts you will enter on Worksheet TG canusually be derived from these returns as filed.However, if any of the returns were audited bythe IRS, you should use the amounts that werefinally determined as a result of the audits.

In addition, you must include in column b ofWorksheet TG any gifts in excess of the annualexclusion made by the decedent (or on behalfof the decedent under a power of attorney) butfor which no Forms 709 were filed. You mustmake a reasonable inquiry as to the existenceof any such gifts. The annual exclusion for1977 through 1981 was $3,000 per donee peryear and $10,000 for years after 1981.

For tax years beginning after 1998 theannual $10,000 exclusion for gifts is indexedfor inflation. For calendar year 1999, the annualexclusion for gifts remained at $10,000,however. See Rev. Proc. 98-61, 1998-52I.R.B. 23.

Note: In figuring the line 9 amount, do notinclude any tax paid or payable on gifts madebefore 1977. The line 9 amount is ahypothetical figure based only on gifts madeafter 1976 and used to calculate the estate tax.Special treatment of split gifts. Thesespecial rules apply only if:

1. The decedent's spouse predeceased thedecedent;

2. The decedent's spouse made gifts thatwere “split” with the decedent under the rulesof section 2513;

3. The decedent was the “consentingspouse” for those split gifts, as that term isused on Form 709; and

4. The split gifts were included in thedecedent's spouse's gross estate under section2035.

If all four conditions above are met, do notinclude these gifts on line 4 of the TaxComputation and do not include the gift taxespayable on these gifts on line 9 of the TaxComputation. These adjustments areincorporated into the worksheets.

Line 7Lines 7a-c are used to calculate the phaseoutof the graduated rates. The phaseout appliesonly to estates in which the amount thetentative tax is computed on exceeds $10million.

Line 11— Unified Credit (Applicablecredit amount)The Taxpayer Relief Act of 1997 replaced theunified credit amount with an applicable creditamount, effective for the estates of decedentsdying, and gifts made, after December 31,1997. The applicable credit amount willincrease as shown in the table below until2006, when $1 million will be exempted fromtransfer tax. The amount of the credit cannotexceed the amount of estate tax imposed.

The unified credit and exemption equivalent(applicable exclusion amount) for 1987 andlater are as follows:

Important: If the estate is claiming a qualifiedfamily-owned business interest deduction, seeCoordination with unified credit on page 22before completing line 11.

Line 12— Adjustment to Unified credit(applicable credit amount)If the decedent made gifts (including gifts madeby the decedent's spouse and treated as madeby the decedent by reason of gift splitting) afterSeptember 8, 1976, and before January 1,1977, for which the decedent claimed a specificexemption, the unified credit (applicable creditamount) on this estate tax return must be

reduced. The reduction is figured by entering20% of the specific exemption claimed forthese gifts.

Note: (The specific exemption was allowedby section 2521 for gifts made before January1, 1977.)

If the decedent did not make any giftsbetween September 8, 1976, and January 1,1977, or if the decedent made gifts during thatperiod but did not claim the specific exemption,enter zero.

Line 15—Credit for state death taxesYou may take a credit on line 15 for estate,inheritance, legacy, or succession taxes paidas the result of the decedent's death to anystate or the District of Columbia. However, seesection 2053(d) and the related regulations forexceptions and limits if you elected to deductthe taxes from the value of the gross estate.

If you make a section 6166 election to paythe Federal estate tax in installments and makea similar election to pay the state death tax ininstallments, see Rev. Rul. 86-38, 1986-1 C.B.296, for the method of computing the creditallowed with this Form 706.

If you have elected to extend the time to paythe tax on a reversionary or remainder interest,you may take a credit against that portion of theFederal estate tax for state death taxesattributable to the reversionary or remainderinterest. The state death taxes must be paidand claimed before the expiration of theextended time for paying the estate tax.

The credit may not be more than the amountfigured by using Table B, on page 12, basedon the value of the adjusted taxable estate. Theadjusted taxable estate is the amount of theFederal taxable estate (line 3 of the TaxComputation) reduced by $60,000. You mayclaim an anticipated amount of credit and figurethe Federal estate tax on the return before thestate death taxes have been paid. However,the credit cannot be finally allowed unless youpay the state death taxes and claim the creditwithin 4 years after the return is filed (or lateras provided by the Code if a petition is filedwith the Tax Court of the United States, or ifyou have an extension of time to pay) andsubmit evidence that the tax has been paid. Ifyou claim the credit for any state death tax thatis later recovered, see Regulations section20.2016-1 for the notice you are required togive the IRS within 30 days.

If you transfer property other than cash tothe state in payment of state inheritance taxes,the amount you may claim as a credit is thelesser of the state inheritance tax liabilitydischarged or the fair market value of theproperty on the date of the transfer.

For more details, see Rev. Rul. 86-117,1986-2 C.B. 157.

You should send the following evidence tothe IRS:

1. Certificate of the proper officer of thetaxing state, or the District of Columbia,showing the:

a. total amount of tax imposed (beforeadding interest and penalties and beforeallowing discount);

b. amount of discount allowed;c. amount of penalties and interest imposed

or charged;d. total amount actually paid in cash; ande. date of payment.2. Any additional proof the IRS specifically

requests.You should file the evidence requested

above with the return if possible. Otherwise,send it as soon after you file the return aspossible.

Year Applicable Applicablecredit exclusion

amounts amount

1987 through1997 ................... $192,800 $600,000

1998 ................... 202,050 625,000

1999 ................... 211,300 650,000

2000 and 2001... 220,550 675,000

2002 and 2003... 229,800 700,000

2004 ................... 287,300 850,000

2005 ................... 326,300 950,000

2006 and after 345,800 1,000,000

Page 4 Part Instructions

Worksheet TG—Taxable Gifts Reconciliation(To be used for lines 4 and 9 of the Tax Computation)

Calendar year orcalendar quarter

Total taxable gifts forperiod (see Note)

Note: For the definition of a taxable gift see section 2503. Ignore the old specificexemption. Follow Form 709. That is, include only the decedent’s one-half of splitgifts, whether the gifts were made by the decedent or the decedent’s spouse. Inaddition to gifts reported on Form 709, you must include any taxable gifts inexcess of the annual exclusion that were not reported on Form 709.

b.a.

Taxable amountincluded in col. b forgifts that qualify for

“special treatment ofsplit gifts” described

above

Taxable amountincluded in col. bfor gifts included

in the gross estate

Gift tax paid bydecedent on gifts

in col. d

Gift tax paid bydecedent’s spouse on

gifts in col. c

Gift

s m

ade

afte

r Ju

ne 6

,19

32,

and

bef

ore

197

7

Total taxable giftsmade before 1977

1.

f.e.d.c.

Gift

s m

ade

afte

r 19

76

Totals for gifts made after 19762.

Line 4 Worksheet—Adjusted Taxable Gifts Made After 1976

1. Taxable gifts made after 1976. Enter the amount from line 2, column b, Worksheet TGTaxable gifts made after 1976 reportable on Schedule G. Enter the amountfrom line 2, column c, Worksheet TG

2.

Taxable gifts made after 1976 that qualify for “special treatment.” Enter theamount from line 2, column d, Worksheet TG

3.

Add lines 2 and 34.Adjusted taxable gifts. Subtract line 4 from line 1. Enter here and on line 4 of theTax Computation of Form 706

5.

1

2

3

4

5

Line 17— Credit for Federal Gift TaxesYou may take a credit for Federal gift taxesimposed by Chapter 12 of the Code, and thecorresponding provisions of prior laws, oncertain transfers the decedent made beforeJanuary 1, 1977, that are included in the grossestate. The credit cannot be more than theamount figured by the following formula:

For more information, see the regulationsunder section 2012. This computation may bemade using Form 4808, Computation of Creditfor Gift Tax. Attach a copy of a completed Form4808 or the computation of the credit. Alsoattach all available copies of Forms 709 filedby the decedent to help verify the amountsentered on lines 4, 9, and 17.

Line 25— United States TreasuryBondsYou may not use these bonds to pay the GSTtax.

Instructions for Part 3.Elections by the Executor (Page2 of Form 706)

Line 1—Alternate ValuationUnless you elect at the time you file the returnto adopt alternate valuation as authorized bysection 2032, you must value all propertyincluded in the gross estate on the date of the

decedent's death. Alternate valuation cannotbe applied to only a part of the property.

You may elect special use valuation (line 2)in addition to alternate valuation.

You may not elect alternate valuation unlessthe election will decrease both the value of thegross estate and the total net estate and GSTtaxes due after application of all allowablecredits.

You elect alternate valuation by checking“Yes” on line 1 and filing Form 706. Oncemade, the election may not be revoked. Theelection may be made on a late filed Form 706provided it is not filed later than 1 year after thedue date (including extensions).

If you elect alternate valuation, value theproperty that is included in the gross estate asof the applicable dates as follows:

1. Any property distributed, sold,exchanged, or otherwise disposed of orseparated or passed from the gross estate byany method within 6 months after thedecedent's death is valued on the date ofdistribution, sale, exchange, or otherdisposition, whichever occurs first. Value thisproperty on the date it ceases to form a partof the gross estate; i.e., on the date the titlepasses as the result of its sale, exchange, orother disposition.

2. Any property not distributed, sold,exchanged, or otherwise disposed of within the6-month period is valued on the date 6 monthsafter the date of the decedent's death.

3. Any property, interest, or estate that is“affected by mere lapse of time” is valued asof the date of decedent's death or on the dateof its distribution, sale, exchange, or otherdisposition, whichever occurs first. However,you may change the date of death value toaccount for any change in value that is not due

to a “mere lapse of time” on the date of itsdistribution, sale, exchange, or otherdisposition.

The property included in the alternatevaluation and valued as of 6 months after thedate of the decedent's death, or as of someintermediate date (as described above) is theproperty included in the gross estate on thedate of the decedent's death. Therefore, youmust first determine what property constitutedthe gross estate at the decedent's death.

Interest. Interest accrued to the date of thedecedent's death on bonds, notes, and otherinterest-bearing obligations is property of thegross estate on the date of death and isincluded in the alternate valuation.

Rent. Rent accrued to the date of thedecedent's death on leased real or personalproperty is property of the gross estate on thedate of death and is included in the alternatevaluation.

Dividends. Outstanding dividends thatwere declared to stockholders of record on orbefore the date of the decedent's death areconsidered property of the gross estate on thedate of death, and are included in the alternatevaluation. Ordinary dividends declared tostockholders of record after the date of thedecedent's death are not property of the grossestate on the date of death and are notincluded in the alternate valuation. However, ifdividends are declared to stockholders ofrecord after the date of the decedent's deathso that the shares of stock at the later valuationdate do not reasonably represent the sameproperty at the date of the decedent's death,include those dividends (except dividends paidfrom earnings of the corporation after the dateof the decedent's death) in the alternatevaluation.

Gross estate tax minus (the sum of thestate death taxes and unified credit) ×

Value ofincluded gift

Value of gross estate minus (the sumof the deductions for charitable, public,and similar gifts and bequests andmarital deduction)

Part Instructions Page 5

Line 9 Worksheet—Gift Tax on Gifts Made After 1976

Total taxable gifts for priorperiods (from Form 709,Tax Computation, line 2)

Calendar yearor calendar

quarter Unused unified credit(applicable credit amount)

for this period(see below)

Taxable gifts for thisperiod (from Form 709,

Tax Computation, line 1)(see below)

Tax payable for thisperiod (subtract

col. e from col. d)

Tax payable usingTable A (on page 12)

(see below)

b.a.

Total pre-1977taxable gifts. Enterthe amount from

line 1, Worksheet TG

f.e.d.c.

1. Total gift taxes payable on gifts made after 1976 (combine the amounts in column f)Gift taxes paid by the decedent on gifts that qualify for “special treatment.” Enter the amount fromline 2, column e, Worksheet TG on page 5

2.

Subtract line 2 from line 13.

Gift tax paid by decedent’s spouse on split gifts included on Schedule G. Enter the amount fromline 2, column f, Worksheet TG on page 5

4.

Add lines 3 and 4. Enter here and on line 9 of the Tax Computation of Form 7065.

Columns b and c—In addition to gifts reported on Form 709, you must include in these columns any taxable gifts in excess ofthe annual exclusion that were not reported on Form 709.

If the amount in columns b and c combined exceeds $10 million for any given calendar year, then you must calculate the taxin column d for that year using the Form 709 revision in effect for the year of the decedent’s death.

To calculate the tax, enter the amount for the appropriate year from column c of the worksheet on line 1 of the TaxComputation of the Form 709. Enter the amount from column b on line 2 of the Tax Computation. Complete the TaxComputation through the tax due before any reduction for the unified credit (applicable credit amount) and enter that amount incolumn d, above.Column e—To figure the unused unified credit, (applicable credit amount), use the unified credit (applicable credit amount) ineffect for the year the gift was made. This amount should be on line 12 of the Tax Computation of the Form 709 filed for the gift.

Column d—To figure the “tax payable” for this column, you must use Table A in these instructions, as it applies to the year ofthe decedent’s death rather than to the year the gifts were actually made. To compute the entry for col. d, you should figure the“tax payable” on the amount in col. b and subtract it from the “tax payable” on the amounts in cols. b and c added together.Enter the difference in col. d.

“Tax payable” as used here is an hypothetical amount and does not necessarily reflect tax actually paid. Figure “tax payable”only on gifts made after 1976. Do not include any tax paid or payable on gifts made before 1977. Pre-1977 gifts are listed onlyto exclude them from the calculation.

1

2

3

4

5

As part of each Schedule A through I, youmust show:

1. what property is included in the grossestate on the date of the decedent's death;

2. what property was distributed, sold,exchanged, or otherwise disposed of within the6-month period after the decedent's death, andthe dates of these distributions, etc.(These two items should be entered in the“Description” column of each schedule. Brieflyexplain the status or disposition governing thealternate valuation date, such as: “Notdisposed of within 6 months following death,”“Distributed,” “Sold,” “Bond paid on maturity,”etc. In this same column, describe each itemof principal and includible income);

3. the date of death value, entered in theappropriate value column with items of principaland includible income shown separately; and

4. the alternate value, entered in theappropriate value column with items of principaland includible income shown separately.(In the case of any interest or estate, the valueof which is affected by lapse of time, such aspatents, leaseholds, estates for the life ofanother, or remainder interests, the valueshown under the heading “Alternate value”must be the adjusted value; i.e., the value asof the date of death with an adjustmentreflecting any difference in its value as of thelater date not due to lapse of time.)

Distributions, sales, exchanges, and otherdispositions of the property within the 6-monthperiod after the decedent's death must besupported by evidence. If the court issued anorder of distribution during that period, youmust submit a certified copy of the order aspart of the evidence. The District Director mayrequire you to submit additional evidence ifnecessary.

If the alternate valuation method is used, thevalues of life estates, remainders, and similarinterests are figured using the age of the

recipient on the date of the decedent's deathand the value of the property on the alternatevaluation date.

Line 2—Special Use Valuation ofSection 2032AIn general. Under section 2032A, you mayelect to value certain farm and closely heldbusiness real property at its farm or businessuse value rather than its fair market value. Youmay elect both special use valuation andalternate valuation.

To elect this valuation you must check“Yes” to line 2 and complete and attachSchedule A-1 and its required additionalstatements. You must file Schedule A-1 andits required attachments with Form 706 forthis election to be valid. You may make theelection on a late filed return so long as it is thefirst return filed.

The total value of the property valued undersection 2032A may not be decreased fromFMV by more than $760,000 for decedentsdying in 1999 (subject to inflation in lateryears).

Real property may qualify for the section2032A election if:

1. The decedent was a U.S. citizen orresident at the time of death;

2. The real property is located in the UnitedStates;

3. At the decedent's death the real propertywas used by the decedent or a family memberfor farming or in a trade or business, or wasrented for such use by either the survivingspouse or a lineal descendant of the decedentto a family member on a net cash basis;

4. The real property was acquired from orpassed from the decedent to a qualified heirof the decedent;

5. The real property was owned and usedin a qualified manner by the decedent or a

member of the decedent's family during 5 of the8 years before the decedent's death;

6. There was material participation by thedecedent or a member of the decedent's familyduring 5 of the 8 years before the decedent'sdeath; and

7. The qualified property meets thefollowing percentage requirements:

a. At least 50% of the adjusted value of thegross estate must consist of the adjusted valueof real or personal property that was beingused as a farm or in a closely held businessand that was acquired from, or passed from,the decedent to a qualified heir of thedecedent, and

b. At least 25% of the adjusted value of thegross estate must consist of the adjusted valueof qualified farm or closely held business realproperty.

For this purpose, adjusted value is the valueof property determined without regard to itsspecial-use value. The value is reduced forunpaid mortgages on the property or anyindebtedness against the property, if the fullvalue of the decedent's interest in the property(not reduced by such mortgage orindebtedness) is included in the value of thegross estate. The adjusted value of thequalified real and personal property used indifferent businesses may be combined to meetthe 50% and 25% requirements.

Qualified Real PropertyQualified use. The term qualified use meansthe use of the property as a farm for farmingpurposes or the use of property in a trade orbusiness other than farming. Trade or businessapplies only to the active conduct of abusiness. It does not apply to passiveinvestment activities or the mere passive rentalof property to a person other than a memberof the decedent's family. Also, no trade or


business is present in the case of activities notengaged in for profit.Ownership. To qualify as special-useproperty, the decedent or a member of thedecedent's family must have owned and usedthe property in a qualified use for 5 of the last8 years before the decedent's death.Ownership may be direct or indirect through acorporation, a partnership, or a trust.

If the ownership is indirect, the businessmust qualify as a closely held business undersection 6166. The ownership, when combinedwith periods of direct ownership, must meet therequirements of section 6166 on the date of thedecedent's death and for a period of time thatequals at least 5 of the 8 years precedingdeath.

If the property was leased by the decedentto a closely held business, it qualifies as longas the business entity to which it was rentedwas a closely held business with respect to thedecedent on the date of the decedent's deathand for sufficient time to meet the “5 in 8years” test explained above.Structures and other real propertyimprovements. Qualified real propertyincludes residential buildings and otherstructures and real property improvementsregularly occupied or used by the owner orlessee of real property (or by the employeesof the owner or lessee) to operate the farm orbusiness. A farm residence which the decedenthad occupied is considered to have beenoccupied for the purpose of operating the farmeven when a family member and not thedecedent was the person materiallyparticipating in the operation of the farm.

Qualified real property also includes roads,buildings, and other structures andimprovements functionally related to thequalified use.

Elements of value such as mineral rightsthat are not related to the farm or business useare not eligible for special-use valuation.Property acquired from the decedent.Property is considered to have been acquiredfrom or to have passed from the decedent ifone of the following applies:● The property is considered to have beenacquired from or to have passed from thedecedent under section 1014(b) (relating tobasis of property acquired from a decedent).● The property is acquired by any person fromthe estate.● The property is acquired by any person froma trust, to the extent the property is includiblein the gross estate.Qualified heir. A person is a qualified heir ofproperty if he or she is a member of thedecedent's family and acquired or received theproperty from the decedent. If a qualified heirdisposes of any interest in qualified realproperty to any member of his or her family,that person will then be treated as the qualifiedheir with respect to that interest.

The term member of the family includesonly:

1. An ancestor (parent, grandparent, etc.)of the individual;

2. The spouse of the individual;3. The lineal descendant (child, stepchild,

grandchild, etc.) of the individual, theindividual's spouse, or a parent of theindividual; or

4. The spouse, widow, or widower of anylineal descendant described above.A legally adopted child of an individual istreated as a child of that individual by blood.

Material ParticipationTo elect special-use valuation, either thedecedent or a member of his or her family must

have materially participated in the operation ofthe farm or other business for at least 5 of the8 years ending on the date of the decedent'sdeath. The existence of material participationis a factual determination, but passivelycollecting rents, salaries, draws, dividends, orother income from the farm or other businessdoes not constitute material participation.Neither does merely advancing capital andreviewing a crop plan and financial reportseach season or business year.

In determining whether the requiredparticipation has occurred, disregard briefperiods (e.g., 30 days or less) during whichthere was no material participation, as long assuch periods were both preceded and followedby substantial periods (more than 120 days)during which there was uninterrupted materialparticipation.Retirement or disability. If, on the date ofdeath, the time period for material participationcould not be met because the decedent hadretired or was disabled, a substitute period mayapply. The decedent must have retired onSocial Security or been disabled for acontinuous period ending with death. A personis disabled for this purpose if he or she wasmentally or physically unable to materiallyparticipate in the operation of the farm or otherbusiness.

The substitute time period for materialparticipation for these decedents is a periodtotaling at least 5 years out of the 8-year periodthat ended on the earlier of (1) the date thedecedent began receiving social securitybenefits, or (2) the date the decedent becamedisabled.Surviving spouse. A surviving spouse whoreceived qualified real property from thepredeceased spouse is considered to havematerially participated if he or she wasengaged in the active management of the farmor other business. If the surviving spouse diedwithin 8 years of the first spouse's death, youmay add the period of material participation ofthe predeceased spouse to the period of activemanagement by the surviving spouse todetermine if the surviving spouse's estatequalifies for special-use valuation. To qualify forthis, the property must have been eligible forspecial-use valuation in the predeceasedspouse's estate, though it does not have tohave been elected by that estate.

For additional details regarding materialparticipation, see Regulations section20.2032A-3(e).

Valuation MethodsThe primary method of valuing special-usevalue property that is used for farmingpurposes is the annual gross cash rentalmethod. If comparable gross cash rentals arenot available, you can substitute comparableaverage annual net share rentals. If neither ofthese are available, or if you so elect, you canuse the method for valuing real property in aclosely held business.Average annual gross cash rental.Generally, the special-use value of propertythat is used for farming purposes is determinedas follows:

1. Subtract the average annual state andlocal real estate taxes on actual tracts ofcomparable real property from the averageannual gross cash rental for that samecomparable property, and

2. Divide the result in 1 by the averageannual effective interest rate charged for allnew Federal Land Bank loans.

The computation of each average annualamount is based on the 5 most recent calendaryears ending before the date of the decedent'sdeath.

Gross cash rental. Generally, gross cashrental is the total amount of cash received in acalendar year for the use of actual tracts ofcomparable farm real property in the samelocality as the property being specially valued.You may not use appraisals or otherstatements regarding rental value or areawideaverages of rentals. You may not use rents thatare paid wholly or partly in kind, and theamount of rent may not be based onproduction. The rental must have resulted froman arm's-length transaction. Also, the amountof rent is not reduced by the amount of anyexpenses or liabilities associated with the farmoperation or the lease.

Comparable property. Comparableproperty must be situated in the same localityas the specially valued property as determinedby generally accepted real property valuationrules. The determination of comparability isbased on all the facts and circumstances. It isoften necessary to value land in segmentswhere there are different uses or landcharacteristics included in the specially valuedland. The following list contains some of thefactors considered in determiningcomparability.● Similarity of soil.● Whether the crops grown would deplete thesoil in a similar manner.● Types of soil conservation techniques thathave been practiced on the 2 properties.● Whether the 2 properties are subject toflooding.● Slope of the land.● For livestock operations, the carryingcapacity of the land.● For timbered land, whether the timber iscomparable.● Whether the property as a whole is unifiedor segmented; if segmented, the availability ofthe means necessary for movement among thedifferent sections.● Number, types, and conditions of all buildingsand other fixed improvements located on theproperties and their location as it affectsefficient management, use, and value of theproperty.● Availability and type of transportationfacilities in terms of costs and of proximity ofthe properties to local markets.

You must specifically identify on the returnthe property being used as comparableproperty. Use the type of descriptions used tolist real property on Schedule A.

Effective interest rate. To get the effectiveannual interest in effect for the year of deathand the area in which the property is located,contact your IRS District Director.

Net share rental. You may use averageannual net share rental from comparable landonly if there is no comparable land from whichaverage annual gross cash rental can bedetermined. Net share rental is the differencebetween the gross value of produce receivedby the lessor from the comparable land and thecash operating expenses (other than realestate taxes) of growing the produce that,under the lease, are paid by the lessor. Theproduction of the produce must be the businesspurpose of the farming operation. For thispurpose, produce includes livestock.

The gross value of the produce is generallythe gross amount received if the produce wasdisposed of in an arm's-length transactionwithin the period established by theDepartment of Agriculture for its price supportprogram. Otherwise, the value is the weightedaverage price for which the produce sold on theclosest national or regional commoditiesmarket. The value is figured for the date ordates on which the lessor received (orconstructively received) the produce.


Valuing a real property interest in closelyheld business. Use this method to determinethe special-use valuation for qualifying realproperty used in a trade or business other thanfarming. You may also use this method forqualifying farm property if there is nocomparable land or if you elect to use it. Underthis method, the following factors areconsidered:● The capitalization of income that the propertycan be expected to yield for farming or forclosely held business purposes over areasonable period of time with prudentmanagement and traditional cropping patternsfor the area, taking into account soil capacity,terrain configuration, and similar factors.● The capitalization of the fair rental value ofthe land for farming or for closely held businesspurposes.● The assessed land values in a state thatprovides a differential or use value assessmentlaw for farmland or closely held business.● Comparable sales of other farm or closelyheld business land in the same geographicalarea far enough removed from a metropolitanor resort area so that nonagricultural use is nota significant factor in the sales price.● Any other factor that fairly values the farmor closely held business value of the property.

Making the ElectionInclude the words “section 2032A valuation” inthe “Description” column of any Form 706schedule if section 2032A property is includedin the decedent's gross estate.

An election under section 2032A need notinclude all the property in an estate that iseligible for special use valuation, but sufficientproperty to satisfy the threshold requirementsof section 2032A(b)(1)(B) must be speciallyvalued under the election.

If joint or undivided interests (e.g., interestsas joint tenants or tenants in common) in thesame property are received from a decedentby qualified heirs, an election with respect toone heir's joint or undivided interest need notinclude any other heir's interest in the sameproperty if the electing heir's interest plus otherproperty to be specially valued satisfies therequirements of section 2032A(b)(1)(B).

If successive interests (e.g., life estates andremainder interests) are created by a decedentin otherwise qualified property, an electionunder section 2032A is available only withrespect to that property (or part) in whichqualified heirs of the decedent receive all of thesuccessive interests, and such an electionmust include the interests of all of those heirs.

For example, if a surviving spouse receivesa life estate in otherwise qualified property andthe spouse's brother receives a remainderinterest in fee, no part of the property may bevalued pursuant to an election under section2032A.

Where successive interests in speciallyvalued property are created, remainderinterests are treated as being received byqualified heirs only if the remainder interestsare not contingent on surviving a nonfamilymember or are not subject to divestment infavor of a nonfamily member.

Protective ElectionYou may make a protective election to speciallyvalue qualified real property. Under thiselection, whether or not you may ultimately usespecial use valuation depends upon values asfinally determined (or agreed to followingexamination of the return) meeting therequirements of section 2032A.

To make a protective election, check “Yes”to line 2 and complete Schedule A-1 accordingto its instructions for “Protective Election.”

If you make a protective election, you shouldcomplete this Form 706 by valuing all propertyat its fair market value. Do not use special usevaluation. Usually, this will result in higherestate and GST tax liabilities than will beultimately determined if special use valuationis allowed. The protective election does notextend the time to pay the taxes shown onthe return. If you wish to extend the time topay the taxes, you should file Form 4768 inadequate time before the return due date.

If it is found that the estate qualifies forspecial use valuation based on the values asfinally determined (or agreed to followingexamination of the return), you must file anamended Form 706 (with a complete section2032A election) within 60 days after the dateof this determination. Complete the amendedreturn using special use values under the rulesof section 2032A, and complete Schedule A-1and attach all of the required statements.

Additional informationFor definitions and additional information, seesection 2032A and the related regulations.

Line 3—Installment PaymentsIf the gross estate includes an interest in aclosely held business, you may be able to electto pay part of the estate tax in installments.

The maximum amount that can be paid ininstallments is that part of the estate tax that isattributable to the closely held business. Ingeneral, that amount is the amount of tax thatbears the same ratio to the total estate tax thatthe value of the closely held business includedin the gross estate bears to the total grossestate.Percentage requirements. To qualify forinstallment payments, the value of the interestin the closely held business that is included inthe gross estate must be more than 35% of theadjusted gross estate (the gross estate lessexpenses, indebtedness, taxes, and losses).

Interests in two or more closely heldbusinesses are treated as an interest in asingle business if at least 20% of the total valueof each business is included in the grossestate. For this purpose, include any interestheld by the surviving spouse that representsthe surviving spouse's interest in a businessheld jointly with the decedent as communityproperty or as joint tenants, tenants by theentirety, or tenants in common.

Value. The value used for meeting thepercentage requirements is the same valueused for determining the gross estate.Therefore, if the estate is valued underalternate valuation or special use valuation, youmust use those values to meet the percentagerequirements.

Transfers before death. Generally, giftsmade before death are not included in thegross estate. However, the estate must meetthe 35% requirement by both including andexcluding in the gross estate any gifts madeby the decedent within 3 years of death.

Passive assets. In determining the valueof a closely held business and whether the35% requirement is met, do not include thevalue of any passive assets held by thebusiness. A passive asset is any asset notused in carrying on a trade or business. Stockin another corporation is a passive asset unlessthe stock is treated as held by the decedentbecause of the election to treat holdingcompany stock as business company stock, asdiscussed below.

If a corporation owns at least 20% in valueof the voting stock of another corporation, orthe other corporation had no more than 15shareholders and at least 80% of the value ofthe assets of each corporation is attributable toassets used in carrying on a trade or business,

then these corporations will be treated as asingle corporation, and the stock will not betreated as a passive asset. Stock held in theother corporation is not taken into account indetermining the 80% requirement.Interest in closely held business. Forpurposes of the installment payment election,an interest in a closely held business means:● Ownership of a trade or business carried onas a proprietorship.● An interest as a partner in a partnershipcarrying on a trade or business if 20% or moreof the total capital interest was included in thegross estate of the decedent or the partnershiphad no more than 15 partners.● Stock in a corporation carrying on a trade orbusiness if 20% or more in value of the votingstock of the corporation is included in the grossestate of the decedent or the corporation hadno more than 15 shareholders.

The partnership or corporation must becarrying on a trade or business at the time ofthe decedent's death.

In determining the number of partners orshareholders, a partnership or stock interest istreated as owned by one partner orshareholder if it is community property or heldby a husband and wife as joint tenants, tenantsin common, or as tenants by the entirety.

Property owned directly or indirectly by or fora corporation, partnership, estate, or trust istreated as owned proportionately by or for itsshareholders, partners, or beneficiaries. Fortrusts, only beneficiaries with current interestsare considered.

The interest in a closely held farm businessincludes the interest in the residential buildingsand related improvements occupied regularlyby the owners, lessees, and employeesoperating the farm.

Holding company stock. The executormay elect to treat as business company stockthe portion of any holding company stock thatrepresents direct ownership (or indirectownership through one or more other holdingcompanies) in a business company. A holdingcompany is a corporation holding stock inanother corporation. A business company isa corporation carrying on a trade or business.

This election applies only to stock that is notreadily tradable. For purposes of the 20%voting stock requirement, stock is treated asvoting stock to the extent the holding companyowns voting stock in the business company.

If the executor makes this election, the firstinstallment payment is due when the estate taxreturn is filed. The 5-year deferral for paymentof the tax, as discussed below under Time forpayment, does not apply. In addition, the 2%interest rate, discussed below under Interestcomputation, will not apply.Time for payment. Under the installmentmethod, the executor may elect to deferpayment of the qualified estate tax, but notinterest, for up to 5 years from the originalpayment due date. After the first installment oftax is paid, you must pay the remaininginstallments annually by the date 1 year afterthe due date of the preceding installment.There can be no more than 10 installmentpayments.

Interest on the unpaid portion of the tax isnot deferred and must be paid annually.Interest must be paid at the same time as andas a part of each installment payment of thetax.

For information on the acceleration ofpayment when an interest in the closely heldbusiness is disposed of, see section 6166(g).Interest computation. A special interest rateapplies to installment payments. Fordecedent's dying in 1999, the interest rate is2% on the lesser of:


● $416,500 (subject to inflation, see below) OR● The amount of the estate tax that isattributable to the closely held business andthat is payable in installments.

2% portion. The 2% portion is an amountequal to the amount of the tentative estate taxon ($1,000,000 + the applicable exclusionamount in effect) minus the applicable creditamount in effect. However, if the amount ofestate tax extended under section 6166 is lessthan the amount computed above, the 2%portion is the lesser amount.

Inflation adjustment. The $1,000,000amount used to calculate the 2% portion isindexed for inflation for the estates ofdecedents dying in a calendar year after 1998.For an estate of a decedent dying in calendaryear 1999, the dollar amount used to determinethe “2% portion” of the estate tax payable ininstallments under section 6166 is $1,010,000.See Rev. Proc. 98-61.

Interest on the portion of the tax in excessof the 2% portion is figured at 45% of theannual rate of interest on underpayments. Thisrate is based on the Federal short-term rateand is announced quarterly by the IRS in theInternal Revenue Bulletin.

If you elect installment payments and theestate tax due is more than the maximumamount to which the 2% interest rate applies,each installment payment is deemed tocomprise both tax subject to the 2% interestrate and tax subject to 45% of the regularunderpayment rate. The amount of eachinstallment that is subject to the 2% rate is thesame as the percentage of total tax payable ininstallments that is subject to the 2% rate.Important: The interest paid on installmentpayments is not deductible as anadministrative expense of the estate.Making the election. If you check this line tomake a protective election, you should attacha notice of protective election as described inRegulations section 20.6166-1(d). If you checkthis line to make a final election, you shouldattach the notice of election described inRegulations section 20.6166-1(b).

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

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

Line 4—Reversionary or RemainderInterestsFor details of this election, see section 6163and the related regulations.

Instructions for Part 4. GeneralInformation (Pages 2 and 3 ofForm 706)

Authorization● Completing the authorization on page 2 ofForm 706 will authorize one attorney,accountant, or enrolled agent to represent theestate and receive confidential tax information,

but will not authorize the representative to enterinto closing agreements for the estate.● If you wish to represent the estate, youmust complete and sign the authorization. ● If you wish to authorize persons other thanattorneys, accountants, and enrolled agents,or if you wish to authorize more than oneperson, to receive confidential information orrepresent the estate, you must complete andattach Form 2848, Power of Attorney andDeclaration of Representative.● You must also complete and attach Form2848 if you wish to authorize someone to enterinto closing agreements for the estate.● If you wish only to authorize someone toinspect and/or receive confidential taxinformation (but not to represent you before theIRS), complete and file Form 8821, TaxInformation Authorization.

Line 4Complete line 4 whether or not there is asurviving spouse and whether or not thesurviving spouse received any benefits fromthe estate. If there was no surviving spouse onthe date of decedent's death, enter “None” inline 4a and leave lines 4b and 4c blank. Thevalue entered in line 4c need not be exact. Seethe instructions for “Amount” under line 5,below.

Line 5Name. Enter the name of each individual,trust, or estate who received (or will receive)benefits of $5,000 or more from the estatedirectly as an heir, next-of-kin, devisee, orlegatee; or indirectly (for example, asbeneficiary of an annuity or insurance policy,shareholder of a corporation, or partner of apartnership that is an heir, etc.).Identifying number. Enter the SSN of eachindividual beneficiary listed. If the number isunknown, or the individual has no number,please indicate “unknown” or “none.” For trustsand other estates, enter the EIN.Relationship. For each individual beneficiaryenter the relationship (if known) to thedecedent by reason of blood, marriage, oradoption. For trust or estate beneficiaries,indicate TRUST or ESTATE.Amount. Enter the amount actually distributed(or to be distributed) to each beneficiaryincluding transfers during the decedent's lifefrom Schedule G required to be included in thegross estate. The value to be entered need notbe exact. A reasonable estimate is sufficient.For example, where precise values cannotreadily be determined, as with certain futureinterests, a reasonable approximation shouldbe entered. The total of these distributionsshould approximate the amount of gross estatereduced by funeral and administrativeexpenses, debts and mortgages, bequests tosurviving spouse, charitable bequests, and anyFederal and state estate and GST taxes paid(or payable) relating to the benefits receivedby the beneficiaries listed on lines 4 and 5.

All distributions of less than $5,000 tospecific beneficiaries may be included withdistributions to unascertainable beneficiarieson the line provided.

Line 6—Section 2044 PropertyIf you answered “Yes,” these assets must beshown on Schedule F.

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

Line 8—Insurance Not Included in theGross EstateIf you checked “Yes” for either 8a or 8b, youmust complete and attach Schedule D andattach a Form 712, Life Insurance Statement,for each policy and an explanation of why thepolicy or its proceeds are not includible in thegross estate.

Line 10—Partnership Interests andStock in Close CorporationsIf you answered “Yes” to line 10, you mustinclude full details for partnerships andunincorporated businesses on Schedule F(Schedule E if the partnership interest is jointlyowned). You must include full details for thestock of inactive or close corporations onSchedule B.

Value these interests using the rules ofRegulations section 20.2031-2 (stocks) or20.2031-3 (other business interests).

A “close corporation” is a corporation whoseshares are owned by a limited number ofshareholders. Often, one family holds the entirestock issue. As a result, little, if any, trading ofthe stock takes place. There is, therefore, noestablished market for the stock, and thosesales that do occur are at irregular intervalsand seldom reflect all the elements of arepresentative transaction as defined by theterm “fair market value” (FMV).

Line 12—TrustsIf you answered “Yes” to either 12a or 12b,you must attach a copy of the trustinstrument for each trust.

You must complete Schedule G if youanswered “Yes” to 12a and Schedule F if youanswered “Yes” to 12b.

Line 14—Transitional MaritalDeduction ComputationCheck “Yes” if property passes to the survivingspouse under a maximum marital deductionformula provision that meets the requirementsof section 403(e)(3) of the Economic RecoveryTax Act of 1981 (P.L. 97-34; 95 Stat. 305).

If you check “Yes” to line 14, compute themarital deduction under the rules that were ineffect before the Economic Recovery Tax Actof 1981.

For a format for this computation, you shouldobtain the November 1981 revision of Form706 and its instructions. The computation isitems 19 through 26 of the Recapitulation. Youshould also apply the rules of Rev. Rul. 80-148,1980-1 C.B. 207, if there is property thatpasses to the surviving spouse outside of themaximum marital deduction formula provision.


Instructions for Part 5.Recapitulation (Page 3 of Form706)

Gross EstateItems 1 through 10— You must make anentry in each of items 1 through 9.

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

Do not enter any amounts in the “Alternatevalue” column unless you elected alternatevaluation on line 1 of Elections by the Executoron page 2 of the Form 706.

Which schedules to attach for items 1through 9. You must attach—● Schedule F to the return and answer itsquestions even if you report no assets on it.● Schedules A, B, and C if the gross estateincludes any Real Estate; Stocks and Bonds;or Mortgages, Notes, and Cash, respectively.● Schedule D if the gross estate includes anyLife Insurance or if you answered “Yes” toquestion 8a of Part 4, General Information.● Schedule E if the gross estate contains anyJointly Owned Property or if you answered“Yes” to question 9 of Part 4.● Schedule G if the decedent made any of thelifetime transfers to be listed on that scheduleor if you answered “Yes” to question 11 or 12aof Part 4.● Schedule H if you answered “Yes” toquestion 13 of Part 4.● Schedule I if you answered “Yes” to question15 of Part 4.

ExclusionItem 11—Conservation easement exclusion.You must complete and attach Schedule U(along with any required attachments) to claimthe exclusion on this line.

DeductionsItems 13 through 22— You must attach theappropriate schedules for the deductions youclaim.Item 17— If item 16 is less than or equal to thevalue (at the time of the decedent's death) ofthe property subject to claims, enter theamount from item 16 on item 17.

If the amount on item 16 is more than thevalue of the property subject to claims, enterthe greater of (a) the value of the propertysubject to claims, or (b) the amount actuallypaid at the time the return is filed.

In no event should you enter more on item17 than the amount on item 16. See section2053 and the related regulations for moreinformation.


Instructions for Schedule A.Real EstateSee the reverse side of Schedule A on Form706.

Schedule A-1. Section 2032AValuationSee Schedule A-1 on Form 706.

Instructions for Schedule B.Stocks and Bonds

GeneralIf the total gross estate contains any stocks orbonds, you must complete Schedule B and fileit with the return.

On Schedule B list the stocks and bondsincluded in the decedent's gross estate.Number each item in the left-hand column.Bonds that are exempt from Federal incometax are not exempt from estate tax unlessspecifically exempted by an estate taxprovision of the Code. Therefore, you shouldlist these bonds on Schedule B.

Public housing bonds includible in the grossestate must be included at their full value.

If you paid any estate, inheritance, legacy,or succession tax to a foreign country on anystocks or bonds included in this schedule,group those stocks and bonds together andlabel them “Subjected to Foreign DeathTaxes.”

List interest and dividends on each stock orbond separately. Indicate as a separate itemdividends that have not been collected atdeath, but which are payable to the decedentor the estate because the decedent was astockholder of record on the date of death.However, if the stock is being traded on anexchange and is selling ex-dividend on the dateof the decedent's death, do not include theamount of the dividend as a separate item.Instead, add it to the ex-dividend quotation indetermining the fair market value of the stockon the date of the decedent's death. Dividendsdeclared on shares of stock before the deathof the decedent but payable to stockholders ofrecord on a date after the decedent's death arenot includible in the gross estate for Federalestate tax purposes.

DescriptionStocks. For stocks indicate:

● Number of shares● Whether common or preferred● Issue● Par value where needed for identification● Price per share● Exact name of corporation● Principal exchange upon which sold, if listedon an exchange● Nine-digit CUSIP number

Bonds. For bonds indicate:● Quantity and denomination● Name of obligor● Date of maturity● Interest rate● Interest due date● Principal exchange, if listed on an exchange● Nine-digit CUSIP number

If the stock or bond is unlisted, show thecompany's principal business office.

The CUSIP (Committee on Uniform SecurityIdentification Procedure) number is a nine-digitnumber that is assigned to all stocks and bondstraded on major exchanges and many unlisted

securities. Usually, the CUSIP number isprinted on the face of the stock certificate. If theCUSIP number is not printed on the certificate,it may be obtained through the company'stransfer agent.

ValuationList the fair market value (FMV) of the stocksor bonds. The FMV of a stock or bond(whether listed or unlisted) is the meanbetween the highest and lowest selling pricesquoted on the valuation date. If only the closingselling prices are available, then the FMV is themean between the quoted closing selling priceon the valuation date and on the trading daybefore the valuation date.

To figure the FMV if there were no sales onthe valuation date:

1. Find the mean between the highest andlowest selling prices on the nearest tradingdate before and the nearest trading date afterthe valuation date. Both trading dates must bereasonably close to the valuation date.

2. Prorate the difference between the meanprices to the valuation date.

3. Add or subtract (whichever applies) theprorated part of the difference to or from themean price figured for the nearest trading datebefore the valuation date.

If no actual sales were made reasonablyclose to the valuation date, make the samecomputation using the mean between the bonafide bid and asked prices instead of salesprices. If actual sales prices or bona fide bidand asked prices are available within areasonable period of time before the valuationdate but not after the valuation date, or viceversa, use the mean between the highest andlowest sales prices or bid and asked prices asthe FMV.

For example, assume that sales of stocknearest the valuation date (June 15) occurred2 trading days before (June 13) and 3 tradingdays after (June 18). On those days the meansale prices per share were $10 and $15,respectively. Therefore, the price of $12 isconsidered the FMV of a share of stock on thevaluation date. If, however, on June 13 and 18,the mean sale prices per share were $15 and$10, respectively, the FMV of a share of stockon the valuation date is $13.

If only closing prices for bonds are available,see Regulations section 20.2031-2(b).

Apply the rules in the section 2031regulations to determine the value of inactivestock and stock in close corporations. Sendwith the schedule complete financial and otherdata used to determine value, includingbalance sheets (particularly the one nearest tothe valuation date) and statements of the netearnings or operating results and dividendspaid for each of the 5 years immediately beforethe valuation date.

Securities reported as of no value, nominalvalue, or obsolete should be listed last. Includethe address of the company and the state anddate of the incorporation. Attach copies ofcorrespondence or statements used todetermine the “no value.”

If the security was listed on more than onestock exchange, use either the records of theexchange where the security is principallytraded or the composite listing of combinedexchanges, if available, in a publication ofgeneral circulation. In valuing listed stocks andbonds, you should carefully check accuraterecords to obtain values for the applicablevaluation date.

If you get quotations from brokers, orevidence of the sale of securities from theofficers of the issuing companies, attach to theschedule copies of the letters furnishing thesequotations or evidence of sale.

See Rev. Rul. 69-489, 1969-2 C.B. 172, forthe special valuation rules for certainmarketable U.S. Treasury Bonds (issuedbefore March 4, 1971). These bonds,commonly called “flower bonds,” may beredeemed at par plus accrued interest inpayment of the tax at any Federal Reservebank, the office of the Treasurer of the UnitedStates, or the Bureau of the Public Debt, asexplained in Rev. Proc. 69-18, 1969-2 C.B.300.

Instructions for Schedule C.Mortgages, Notes, and CashSee the reverse side of Schedule C on Form706.

Instructions for Schedule D.Insurance on the Decedent'sLifeSee the reverse side of Schedule D on Form706.

Instructions for Schedule E.Jointly Owned PropertySee the reverse side of Schedule E on Form706.

Instructions for Schedule F.Other Miscellaneous PropertySee the reverse side of Schedule F on Form706.

Instructions for Schedule G.Transfers During Decedent'sLifeComplete Schedule G and file it with the returnif the decedent made any of the transfersdescribed in 1 through 5 below, or if youanswered “Yes” on line 11 or 12a of Part 4,General Information.

Report the following types of transfers onthis schedule.

Beginning with the estates of decedentsdying after August 5, 1997:

1. Certain gift taxes (section 2035(b)). Enter at item A of the Schedule the total valueof the gift taxes that were paid by the decedentor the estate on gifts made by the decedent orthe decedent's spouse within 3 years beforedeath.

The date of the gift, not the date of paymentof the gift tax, determines whether a gift taxpaid is included in the gross estate under thisrule. Therefore, you should carefully examinethe Forms 709 filed by the decedent and thedecedent's spouse to determine what part ofthe total gift taxes reported on them wasattributable to gifts made within 3 years beforedeath.

IF. . . AND . . . THEN . . .

the decedentmade a transferfrom a trust,

at the time of thetransfer, thetransfer wasfrom a portion ofthe trust thatwas owned bythe grantorunder section676 (other thanby reason ofsection 672(e))by reason of apower in thegrantor,

for purposes ofsections 2035and 2038, treatthe transfer asmade directly bythe decedent.

Any suchtransfer withinthe annual gifttax exclusion isnot includible inthe gross estate.

Instructions for Schedules Page 11

Table A—Unified Rate Schedule

Column DColumn CColumn BColumn ARate of tax onexcess overamount incolumn A

Tax onamount incolumn A

Taxableamountnot over

Taxableamount

over

(Percent)

$10,0000 0 182020,000$10,000 $1,800

40,00020,000 3,800 222460,00040,000 8,200

Table B Worksheet

80,00060,000 13,000 26

80,000 2818,200100,000

Federal Adjusted Taxable Estate

30100,000 23,800150,0003238,800250,000150,0003470,800500,000250,000

$

37155,800750,000500,000

60,000

1 Federal taxable estate (from TaxComputation, Form 706, line 3)

1,000,000 39750,000 248,3001,250,000 411,000,000 345,800

3 Federal adjusted taxable estate.Subtract line 2 from line 1. Use thisamount to compute maximum creditfor state death taxes in Table B.

1,500,000 431,250,000 448,3002,000,000 451,500,000 555,8002,500,000 492,000,000 780,800

2,500,000 1,025,800 53

Table B

Computation of Maximum Credit for State Death Taxes

(Based on Federal adjusted taxable estate computed using the worksheet above.)

Rate of credit onexcess over amount

in column (1)

Credit on amountin column (1)

Adjusted taxableestate less than—

Adjusted taxableestate equal to or

more than—

Rate of credit onexcess over amount

in column (1)

Credit on amountin column (1)

Adjusted taxableestate less than—

Adjusted taxableestate equal to or

more than—

(4)(3)(4)(3)(2)(1) (2)(1)

(Percent)(Percent)

0 2,540,0002,040,000$40,000 8.0106,800None0$40,000 3,040,0002,540,00090,000 8.8146,8000.80

90,000 3,540,0003,040,000140,000 9.6190,8001.6$400140,000 4,040,0003,540,000240,000 10.4238,8002.41,200240,000 5,040,0004,040,000440,000 11.2290,8003.23,600

440,000 6,040,0005,040,000640,000 12.0402,8004.010,000640,000 7,040,0006,040,000840,000 12.8522,8004.818,000

8,040,0007,040,0001,040,000840,000 13.6650,8005.627,6001,040,000 9,040,0008,040,0001,540,000 14.4786,8006.438,800

10,040,0009,040,0002,040,0001,540,000 15.2930,8007.270,80010,040,000 16.01,082,800

2 Adjustment

Examples showing use of Schedule B

Example where the alternate valuation is not adopted; date of death, January 1, 1999

Alternatevaluation

date

Alternatevalue

Value at dateof death

Description including face amount of bonds or number of shares and par value whereneeded for identification. Give CUSIP number.

Itemnumber

Unit value

$60,000-Arkansas Railroad Co. first mortgage 4%, 20-year bonds,due 2001. Interest payable quarterly on Feb. 1, May 1, Aug. 1 andNov. 1; N.Y. Exchange, CUSIP No. XXXXXXXXX

1

60,000100

Interest coupons attached to bonds, item 1, due and payable onNov. 1, 1998, but not cashed at date of death 600

400Interest accrued on item 1, from Nov. 1, 1998, to Jan. 1, 1999

500 shares Public Service Corp., common; N.Y. Exchange, CUSIP No.XXXXXXXXX

255,000110

Dividend on item 2 of $2 per share declared Dec. 10, 1998, payableon Jan. 10, 1999, to holders of record on Dec. 30, 1998 1,000

3,000,000551,290,8003,000,000

$ $

Page 12 Instructions for Schedules

Example where the alternate valuation is adopted; date of death, January 1, 1999Alternatevaluation

date

Alternatevalue

Value at dateof death

Description including face amount of bonds or number of shares and par value whereneeded for identification. Give CUSIP number.

Itemnumber Unit value

$60,000-Arkansas Railroad Co. first mortgage 4%, 20-year bonds,due 2001. Interest payable quarterly on Feb. 1, May 1, Aug. 1 andNov. 1; N.Y. Exchange, CUSIP No. XXXXXXXXX

1

60,00010029,7004/1/9999$30,000 of item 1 distributed to legatees on Apr. 1, 199929,4005/2/9998$30,000 of item 1 sold by executor on May 2, 1999

Interest coupons attached to bonds, item 1, due and payable onNov. 1, 1998, but not cashed at date of death. Cashed by executoron Feb. 1, 1999 6006002/1/99

Interest accrued on item 1, from Nov. 1, 1998, to Jan. 1, 1999. Cashedby executor on Feb. 1, 1999 4004002/1/99

500 shares of Public Service Corp., common; N.Y. Exchange, CUSIPNo. XXXXXXXXX

255,000110

45,0007/1/9990Not disposed of within 6 months following deathDividend on item 2 of $2 per share declared Dec. 10, 1998, and paidon Jan. 10, 1999, to holders of record on Dec. 30, 1998 1/10/99 1,0001,000

(Continued from page 11)

$ $

For example, if the decedent died on July10, 1999, you should examine gift tax returnsfor 1999, 1998, 1997, and 1996. However, thegift taxes on the 1996 return that areattributable to gifts made before July 10, 1996,are not included in the gross estate.

Attach an explanation of how you computedthe includible gift taxes if you do not include inthe gross estate the entire gift taxes shown onany Form 709 filed for gifts made within 3 yearsof death. Also attach copies of any pertinentgift tax returns filed by the decedent's spousefor gifts made within 3 years of death.

2. Other transfers within 3 years beforedeath (section 2035(a)). These transfersinclude only the following:● Any transfer by the decedent with respect toa life insurance policy within 3 years beforedeath.● Any transfer within 3 years before death ofa retained section 2036 life estate, section2037 reversionary interest, or section 2038power to revoke, etc., if the property subject tothe life estate, interest, or power would havebeen included in the gross estate had thedecedent continued to possess the life estate,interest, or power until death.

These transfers are reported on ScheduleG regardless of whether a gift tax return wasrequired to be filed for them when they weremade. However, the amount includible and theinformation required to be shown for thetransfers are determined:● For insurance on the life of the decedentusing the instructions to Schedule D. (AttachForms 712.)● For insurance on the life of another using theinstructions to Schedule F. (Attach Forms 712.)● For sections 2036, 2037, and 2038 transfers,using paragraphs 3, 4, and 5 of theseinstructions.

3. Transfers with retained life estate(section 2036). These are transfers by thedecedent in which the decedent retained aninterest in the transferred property. The transfercan be in trust or otherwise, but excludes bonafide sales for adequate and full consideration.

Interests or rights. Section 2036 applies tothe following retained interests or rights:● The right to income from the transferredproperty.● The right to the possession or enjoyment ofthe property.

● The right, either alone or with any person, todesignate the persons who shall receive theincome from, or possess or enjoy, the property.

Retained voting rights. Transfers with aretained life estate also include transfers ofstock in a “controlled corporation” after June22, 1976, if the decedent retained or acquiredvoting rights in the stock. If the decedentretained direct or indirect voting rights in acontrolled corporation, the decedent isconsidered to have retained enjoyment of thetransferred property. A corporation is a“controlled corporation” if the decedent owned(actually or constructively) or had the right(either alone or with any other person) to voteat least 20% of the total combined voting powerof all classes of stock. See section 2036(b). Ifthese voting rights ceased or were relinquishedwithin 3 years before the decedent's death, thecorporate interests are included in the grossestate as if the decedent had actually retainedthe voting rights until death.

The amount includible in the gross estate isthe value of the transferred property at the timeof the decedent's death. If the decedent keptor reserved an interest or right to only a partof the transferred property, the amountincludible in the gross estate is a correspondingpart of the entire value of the property.

A retained life estate does not have to belegally enforceable. What matters is that asubstantial economic benefit was retained. Forexample, if a mother transferred title to herhome to her daughter but with the informalunderstanding that she was to continue livingthere until her death, the value of the homewould be includible in the mother's estate evenif the agreement would not have been legallyenforceable.

4. Transfers taking effect at death(section 2037). A transfer that takes effect atthe decedent's death is one under whichpossession or enjoyment can be obtained onlyby surviving the decedent. A transfer is nottreated as one that takes effect at thedecedent's death unless the decedent retaineda reversionary interest (defined below) in theproperty that immediately before thedecedent's death had a value of more than 5%of the value of the transferred property. If thetransfer was made before October 8, 1949, thereversionary interest must have arisen by theexpress terms of the instrument of transfer.

A reversionary interest is generally any rightunder which the transferred property will ormay be returned to the decedent or thedecedent's estate. It also includes thepossibility that the transferred property maybecome subject to a power of disposition by thedecedent. It does not matter if the right arisesby the express terms of the instrument oftransfer or by operation of law. For thispurpose, reversionary interest does notinclude the possibility the income alone fromthe property may return to the decedent orbecome subject to the decedent's power ofdisposition.

5. Revocable transfers (section 2038).The gross estate includes the value oftransferred property in which the enjoyment ofthe transferred property was subject atdecedent's death to any change through theexercise of a power to alter, amend, revoke,or terminate. A decedent's power to change thebeneficiaries and to hasten or increase anybeneficiary's enjoyment of the property areexamples of this.

It does not matter whether the power wasreserved at the time of the transfer, whether itarose by operation of law, or was later createdor conferred. The rule applies regardless of thesource from which the power was acquired,and regardless of whether the power wasexercisable by the decedent alone or with anyperson (and regardless of whether that personhad a substantial adverse interest in thetransferred property).

The capacity in which the decedent coulduse a power has no bearing. If the decedentgave property in trust and was the trustee withthe power to revoke the trust, the propertywould be included in his or her gross estate.For transfers or additions to an irrevocable trustafter October 28, 1979, the transferred propertyis includible if the decedent reserved the powerto remove the trustee at will and appointanother trustee.

If the decedent relinquished within 3 yearsbefore death any of the includible powersdescribed above, figure the gross estate as ifthe decedent had actually retained the powersuntil death.

Only the part of the transferred property thatis subject to the decedent's power is includedin the gross estate.

For more detailed information on whichtransfers are includible in the gross estate, seethe Estate Tax Regulations.


Special Valuation Rules for CertainLifetime TransfersCode sections 2701-2704 provide rules forvaluing certain transfers to family members.

Section 2701 deals with the transfer of aninterest in a corporation or partnership whileretaining certain distribution rights, or aliquidation, put, call, or conversion right.

Section 2702 deals with the transfer of aninterest in a trust while retaining any interestother than a qualified interest. In general, aqualified interest is a right to receive certaindistributions from the trust at least annually, ora noncontingent remainder interest if all of theother interests in the trust are distribution rightsspecified in section 2702.

Section 2703 provides rules for the valuationof property transferred to a family member butsubject to an option, agreement, or other rightto acquire or use the property at less thanFMV. It also applies to transfers subject torestrictions on the right to sell or use theproperty.

Finally, section 2704 provides that in certaincases the lapse of a voting or liquidation rightin a family-owned corporation or partnershipwill result in a deemed transfer.

These rules have potential consequencesfor the valuation of property in an estate. If thedecedent (or any member of his or her family)was involved in any such transactions, seeCode sections 2701 through 2704 and therelated regulations for additional details.

How To Complete Schedule GAll transfers (other than outright transfers notin trust and bona fide sales) made by thedecedent at any time during life must bereported on the Schedule regardless ofwhether you believe the transfers are subjectto tax. If the decedent made any transfers notdescribed in the instructions above, thetransfers should not be shown on Schedule G.Instead, attach a statement describing thesetransfers: list the date of the transfer, theamount or value of the transferred property,and the type of transfer.

Complete the schedule for each transfer thatis included in the gross estate under sections2035(a), 2036, 2037, and 2038 as described inthe Instructions for Schedule G above.

In the “Item number” column, number eachtransfer consecutively beginning with 1. In the“Description” column, list the name of thetransferee, the date of the transfer, and give acomplete description of the property. Transfersincluded in the gross estate should be valuedon the date of the decedent's death or, ifalternate valuation is adopted, according tosection 2032.

If only part of the property transferred meetsthe terms of section 2035(a), 2036, 2037, or2038, then only a corresponding part of thevalue of the property should be included in thevalue of the gross estate. If the transfereemakes additions or improvements to theproperty, the increased value of the propertyat the valuation date should not be included onSchedule G. However, if only a part of thevalue of the property is included, enter thevalue of the whole under the column headed“Description” and explain what part wasincluded.Attachments. If a transfer, by trust orotherwise, was made by a written instrument,attach a copy of the instrument to theSchedule. If of public record, the copy shouldbe certified; if not of record, the copy shouldbe verified.

Instructions for Schedule H.Powers of AppointmentComplete Schedule H and file it with the returnif you answered “Yes” to line 13 of Part 4,General Information.

On Schedule H, include in the gross estate:1. The value of property for which the

decedent possessed a general power ofappointment (defined below) on the date of hisor her death; and

2. The value of property for which thedecedent possessed a general power ofappointment that he or she exercised orreleased before death by disposing of it in sucha way that if it were a transfer of propertyowned by the decedent, the property would beincludible in the decedent's gross estate as atransfer with a retained life estate, a transfertaking effect at death, or a revocable transfer.

With the above exceptions, property subjectto a power of appointment is not includible inthe gross estate if the decedent released thepower completely and the decedent held nointerest in or control over the property.

If the failure to exercise a general power ofappointment results in a lapse of the power, thelapse is treated as a release only to the extentthat the value of the property that could havebeen appointed by the exercise of the lapsedpower is more than the greater of $5,000 or 5%of the total value, at the time of the lapse, of theassets out of which, or the proceeds of which,the exercise of the lapsed power could havebeen satisfied.

Powers of AppointmentA power of appointment determines who willown or enjoy the property subject to the powerand when they will own or enjoy it. The powermust be created by someone other than thedecedent. It does not include a power createdor held on property transferred by thedecedent.

A power of appointment includes all powerswhich are in substance and effect powers ofappointment regardless of how they areidentified and regardless of local property laws.For example, if a settlor transfers property intrust for the life of his wife, with a power in thewife to appropriate or consume the principal ofthe trust, the wife has a power of appointment.

Some powers do not in themselvesconstitute a power of appointment. Forexample, a power to amend only administrativeprovisions of a trust that cannot substantiallyaffect the beneficial enjoyment of the trustproperty or income is not a power ofappointment. A power to manage, invest, orcontrol assets, or to allocate receipts anddisbursements, when exercised only in afiduciary capacity, is not a power ofappointment.General power of appointment. A generalpower of appointment is a power that isexercisable in favor of the decedent, thedecedent's estate, the decedent's creditors, orthe creditors of the decedent's estate, except :

1. A power to consume, invade, orappropriate property for the benefit of thedecedent that is limited by an ascertainablestandard relating to health, education, support,or maintenance of the decedent.

2. A power exercisable by the decedentonly in conjunction with—

a. the creator of the power, orb. a person who has a substantial interest

in the property subject to the power, which isadverse to the exercise of the power in favorof the decedent.

A part of a power is considered a generalpower of appointment if the power:

1. May only be exercised by the decedentin conjunction with another person; and

2. Is also exercisable in favor of the otherperson (in addition to being exercisable in favorof the decedent, the decedent's creditors, thedecedent's estate, or the creditors of thedecedent's estate).

The part to include in the gross estate as ageneral power of appointment is figured bydividing the value of the property by thenumber of persons (including the decedent) infavor of whom the power is exercisable.Date power was created. Generally, a powerof appointment created by will is consideredcreated on the date of the testator's death.

A power of appointment created by an intervivos instrument is considered created on thedate the instrument takes effect. If the holderof a power exercises it by creating a secondpower, the second power is considered ascreated at the time of the exercise of the first.

AttachmentsIf the decedent ever possessed a power ofappointment, attach a certified or verified copyof the instrument granting the power and acertified or verified copy of any instrument bywhich the power was exercised or released.You must file these copies even if you contendthat the power was not a general power ofappointment, and that the property is nototherwise includible in the gross estate.

Instructions for Schedule I.AnnuitiesYou must complete Schedule l and file it withthe return if you answered “Yes” to question15 of Part 4, General Information.

Enter on Schedule I every annuity thatmeets all of the conditions under General,below, and every annuity described inparagraphs a–h of Annuities UnderApproved Plans, even if the annuities arewholly or partially excluded from the grossestate.

See the instructions for line 3 of ScheduleM for a discussion regarding the QTIPtreatment of certain joint and survivor annuities.

GeneralIn general, you must include in the gross estateall or part of the value of any annuity that meetsthe following requirements:● It is receivable by a beneficiary following thedeath of the decedent and by reason ofsurviving the decedent;● The annuity is under a contract or agreemententered into after March 3, 1931;● The annuity was payable to the decedent (orthe decedent possessed the right to receive theannuity) either alone or in conjunction withanother, for the decedent's life or for any periodnot ascertainable without reference to thedecedent's death or for any period that did notin fact end before the decedent's death;● The contract or agreement is not a policy ofinsurance on the life of the decedent.

These rules apply to all types of annuities,including pension plans, individual retirementarrangements, and purchased commercialannuities.

An annuity contract that provides periodicpayments to a person for life and ceases at theperson's death is not includible in the grossestate. Social Security benefits are notincludible in the gross estate even if thesurviving spouse receives benefits.

An annuity or other payment that is notincludible in the decedent's or the survivor'sgross estate as an annuity may still beincludible under some other applicable


provision of the law. For example, see Powersof Appointment above.

If the decedent retired before January 1,1985, see Annuities Under Approved Plansbelow for rules that allow the exclusion of partor all of certain annuities.

Part IncludibleIf the decedent contributed only part of thepurchase price of the contract or agreement,include in the gross estate only that part of thevalue of the annuity receivable by the survivingbeneficiary that the decedent's contribution tothe purchase price of the annuity or agreementbears to the total purchase price.

For example, if the value of the survivor'sannuity was $20,000 and the decedent hadcontributed three-fourths of the purchase priceof the contract, the amount includible is$15,000 (3 / 4 × $20,000).

Except as provided under Annuities UnderApproved Plans, contributions made by thedecedent's employer to the purchase price ofthe contract or agreement are consideredmade by the decedent if they were made by theemployer because of the decedent'semployment. For more information, see section2039.

DefinitionsAnnuity. The term “annuity” includes one ormore payments extending over any period oftime. The payments may be equal or unequal,conditional or unconditional, periodic orsporadic.Examples. The following are examples ofcontracts (but not necessarily the only formsof contracts) for annuities that must be includedin the gross estate.

1. A contract under which the decedentimmediately before death was receiving or wasentitled to receive, for the duration of life, anannuity with payments to continue after deathto a designated beneficiary, if surviving thedecedent.

2. A contract under which the decedentimmediately before death was receiving or wasentitled to receive, together with anotherperson, an annuity payable to the decedentand the other person for their joint lives, withpayments to continue to the survivor followingthe death of either.

3. A contract or agreement entered into bythe decedent and employer under which thedecedent immediately before death andfollowing retirement was receiving, or wasentitled to receive, an annuity payable to thedecedent for life and after the decedent's deathto a designated beneficiary, if surviving thedecedent, whether the payments after thedecedent's death are fixed by the contract orsubject to an option or election exercised orexercisable by the decedent. However, seeAnnuities Under Approved Plans, below.

4. A contract or agreement entered into bythe decedent and the decedent's employerunder which at the decedent's death, beforeretirement, or before the expiration of a statedperiod of time, an annuity was payable to adesignated beneficiary, if surviving thedecedent. However, see Annuities UnderApproved Plans, below.

5. A contract or agreement under which thedecedent immediately before death wasreceiving, or was entitled to receive, an annuityfor a stated period of time, with the annuity tocontinue to a designated beneficiary, survivingthe decedent, upon the decedent's death andbefore the expiration of that period of time.

6. An annuity contract or other arrangementproviding for a series of substantially equal

periodic payments to be made to a beneficiaryfor life or over a period of at least 36 monthsafter the date of the decedent's death under anindividual retirement account, annuity, or bondas described in section 2039(e) (before itsrepeal by P.L. 98-369).Payable to the decedent. An annuity or otherpayment was payable to the decedent if, at thetime of death, the decedent was in factreceiving an annuity or other payment, with orwithout an enforceable right to have thepayments continued.Right to receive an annuity. The decedenthad the right to receive an annuity or otherpayment if, immediately before death, thedecedent had an enforceable right to receivepayments at some time in the future, whetheror not at the time of death the decedent had apresent right to receive payments.

Annuities Under Approved PlansThe following rules relate to whether part or allof an otherwise includible annuity may beexcluded. These rules have been repealed andapply only if the decedent either:

1. On December 31, 1984, was both aparticipant in the plan and in pay status (i.e.,had received at least one benefit payment onor before December 31, 1984), and hadirrevocably elected the form of the benefitbefore July 18, 1984; or

2. Had separated from service beforeJanuary 1, 1985, and did not change the formof benefit before death.

The amount excluded cannot exceed$100,000 unless either of the followingconditions is met:

1. On December 31, 1982, the decedentwas both a participant in the plan and in paystatus (i.e., had received at least one benefitpayment on or before December 31, 1982),and the decedent irrevocably elected the formof the benefit before January 1, 1983; or

2. The decedent separated from servicebefore January 1, 1983, and did not change theform of benefit before death.

Approved PlansApproved plans may be separated into twocategories:● Pension, profit-sharing, stock bonus, andother similar plans, and● Individual retirement arrangements (IRAs),and retirement bonds

Different exclusion rules apply to the twocategories of plans.Pension, etc., plans. The following plans areapproved plans for the exclusion rules:

a. An employees' trust (or under a contractpurchased by an employees' trust) forming partof a pension, stock bonus, or profit-sharing planthat met all the requirements of section 401(a),either at the time of the decedent's separationfrom employment (whether by death orotherwise) or at the time of the termination ofthe plan (if earlier).

b. A retirement annuity contract purchasedby the employer (but not by an employees'trust) under a plan that, at the time of thedecedent's separation from employment (bydeath or otherwise), or at the time of thetermination of the plan (if earlier), was a plandescribed in section 403(a).

c. A retirement annuity contract purchasedfor an employee by an employer that is anorganization referred to in section170(b)(1)(A)(ii) or (vi), or that is a religiousorganization (other than a trust), and that isexempt from tax under section 501(a).

d. Chapter 73 of Title 10 of the United StatesCode.

e. A bond purchase plan described insection 405 (before its repeal by P.L. 98-369,effective for obligations issued after December31, 1983.)Exclusion rules for pension, etc., plans. Ifan annuity under an “approved plan” describedin a–e above is receivable by a beneficiaryother than the executor and the decedent madeno contributions under the plan toward the cost,no part of the value of the annuity, subject tothe $100,000 limitation (if applicable), isincludible in the gross estate.

If the decedent made a contribution under aplan described in a–e above toward the cost,include in the gross estate on this schedule thatproportion of the value of the annuity which theamount of the decedent's contribution underthe plan bears to the total amount of allcontributions under the plan. The remainingvalue of the annuity is excludable from thegross estate subject to the $100,000 limitation(if applicable). For the rules to determinewhether the decedent made contributions tothe plan, see Regulations section 20.2039.IRAs and retirement bonds. The followingplans are approved plans for the exclusionrules:

f. An individual retirement account describedin section 408(a);

g. An individual retirement annuity describedin section 408(b);

h. A retirement bond described in section409(a) (before its repeal by P.L. 98-369).Exclusion rules for IRAs and retirementbonds. These plans are approved plans onlyif they provide for a series of substantially equalperiodic payments made to a beneficiary forlife, or over a period of at least 36 months afterthe date of the decedent's death.

Subject to the $100,000 limitation, ifapplicable, if an annuity under a “plan”described in f–h above is receivable by abeneficiary other than the executor, the entirevalue of the annuity is excludable from thegross estate even if the decedent made acontribution under the plan.

However, if any payment to or for anaccount or annuity described in paragraph f,g, or h above was not allowable as an incometax deduction under section 219 (and was nota rollover contribution as described in section2039(e) before its repeal by P.L. 98-369),include in the gross estate on this schedule thatproportion of the value of the annuity which theamount not allowable as a deduction undersection 219 and not a rollover contributionbears to the total amount paid to or for suchaccount or annuity. For more information, seeRegulations section 20.2039-5.Rules applicable to all approved plans. Thefollowing rules apply to all approved plansdescribed in paragraphs a–h above.

If any part of an annuity under a “plan”described in a–h above is receivable by theexecutor, it is generally includible in the grossestate on this schedule to the extent that it isreceivable by the executor in that capacity. Ingeneral, the annuity is receivable by theexecutor if it is to be paid to the executor or ifthere is an agreement (expressed or implied)that it will be applied by the beneficiary for thebenefit of the estate (such as in discharge ofthe estate's liability for death taxes or debts ofthe decedent, etc.) or that its distribution willbe governed to any extent by the terms of thedecedent's will or the laws of descent anddistribution.

If data available to you does not indicatewhether the plan satisfies the requirements ofsection 401(a), 403(a), 408(a), 408(b), or409(a), you may obtain that information fromthe District Director of Internal Revenue for the


district where the employer's principal place ofbusiness is located.

Line A—Lump Sum DistributionElectionThe election pertaining to the lump sumdistribution from qualified plans (approvedplans) excludes from the gross estate all or partof the lump sum distribution that wouldotherwise be includible. When the recipientmakes the election to take a lump sumdistribution and include it in his or her incometax, the amount excluded from the gross estateis the portion attributable to the employercontributions. The portion, if any, attributableto the employee-decedent's contributions isalways includible. The actual election is madeby the recipient of the distribution by taking thelump sum distribution and by treating it astaxable on his or her income tax return asdescribed in Regulations section 20.2039-4(d).The election is irrevocable. However, you maynot compute the gross estate in accordancewith this election unless you check “Yes” to lineA and attach the name, address, andidentifying number of the recipients of the lumpsum distributions. See Regulations section20.2039-4.

How To Complete Schedule IIn describing an annuity, give the name andaddress of the grantor of the annuity. Specifyif the annuity is under an approved plan.

Instructions for Schedule J.Funeral Expenses andExpenses Incurred inAdministering Property Subjectto ClaimsSee the reverse side of Schedule J on Form706.

Instructions for Schedule K.Debts of the Decedent andMortgages and LiensYou must complete and attach Schedule K ifyou claimed deductions on either item 14 oritem 15 of Part 5, Recapitulation.Income vs. estate tax deduction. Taxes,interest, and business expenses accrued at thedate of the decedent's death are deductibleboth on Schedule K and as deductions inrespect of the decedent on the income taxreturn of the estate.

If you choose to deduct medical expensesof the decedent only on the estate tax return,they are fully deductible as claims against theestate. If, however, they are claimed on thedecedent's final income tax return undersection 213(c), they may not also be claimedon the estate tax return. In this case, you alsomay not deduct on the estate tax return anyamounts that were not deductible on theincome tax return because of the percentagelimitations.

Debts of the DecedentList under “Debts of the Decedent” only validdebts the decedent owed at the time of death.List any indebtedness secured by a mortgageor other lien on property of the gross estateunder the heading “Mortgages and Liens.” Ifthe amount of the debt is disputed or thesubject of litigation, deduct only the amount theestate concedes to be a valid claim. Enter theamount in contest in the column provided.

Generally, if the claim against the estate isbased on a promise or agreement, thededuction is limited to the extent that theliability was contracted bona fide and for anadequate and full consideration in money ormoney's worth. However, any enforceableclaim based on a promise or agreement of thedecedent to make a contribution or gift (suchas a pledge or a subscription) to or for the useof a charitable, public, religious, etc.,organization is deductible to the extent that thededuction would be allowed as a bequestunder the statute that applies.

Certain claims of a former spouse againstthe estate based on the relinquishment ofmarital rights are deductible on Schedule K.For these claims to be deductible, all of thefollowing conditions must be met:● The decedent and the decedent's spousemust have entered into a written agreementrelative to their marital and property rights.● The decedent and the spouse must havebeen divorced before the decedent's death andthe divorce must have occurred within the3-year period beginning on the date 1 yearbefore the agreement was entered into. It is notrequired that the agreement be approved bythe divorce decree.● The property or interest transferred under theagreement must be transferred to thedecedent's spouse in settlement of thespouse's marital rights.

You may not deduct a claim made againstthe estate by a remainderman relating tosection 2044 property. Section 2044 propertyis described in the instructions to line 6 of Part4, General Information.

Include in this schedule notes unsecured bymortgage or other lien and give full details,including name of payee, face and unpaidbalance, date and term of note, interest rate,and date to which interest was paid beforedeath. Include the exact nature of the claim

as well as the name of the creditor. If the claimis for services performed over a period of time,state the period covered by the claim.Example: Edison Electric Illuminating Co., forelectric service during December 1998, $150.

If the amount of the claim is the unpaidbalance due on a contract for the purchase ofany property included in the gross estate,indicate the schedule and item number whereyou reported the property. If the claimrepresents a joint and separate liability, give fullfacts and explain the financial responsibility ofthe co-obligor.Property and income taxes. The deductionfor property taxes is limited to the taxesaccrued before the date of the decedent'sdeath. Federal taxes on income receivedduring the decedent's lifetime are deductible,but taxes on income received after death arenot deductible.

Keep all vouchers or original records forinspection by the IRS.Allowable death taxes. If you elect to take adeduction under section 2053(d) rather than acredit under section 2011 or section 2014, thededuction is subject to the limitations describedin section 2053(d) and its regulations. If youhave difficulty figuring the deduction, you mayrequest a computation of it. Send your requestwithin a reasonable amount of time before thedue date of the return to the Commissioner ofInternal Revenue, Washington, DC 20224.Attach to your request a copy of the will andrelevant documents, a statement showing thedistribution of the estate under the decedent'swill, and a computation of the state or foreigndeath tax showing the amount payable bycharity.

Mortgages and LiensList under “Mortgages and Liens” onlyobligations secured by mortgages or other lienson property that you included in the grossestate at its full value or at a value that wasundiminished by the amount of the mortgageor lien. If the debt is enforceable against otherproperty of the estate not subject to themortgage or lien, or if the decedent waspersonally liable for the debt, you must includethe full value of the property subject to themortgage or lien in the gross estate under theappropriate schedule and may deduct themortgage or lien on the property on thisschedule.

However, if the decedent's estate is notliable, include in the gross estate only the valueof the equity of redemption (or the value of theproperty less the amount of the debt), and donot deduct any portion of the indebtedness onthis schedule.

Notes and other obligations secured by thedeposit of collateral, such as stocks, bonds,etc., also should be listed under “Mortgagesand Liens.”

DescriptionInclude under the “Description” column theparticular schedule and item number where theproperty subject to the mortgage or lien isreported in the gross estate.

Include the name and address of themortgagee, payee, or obligee, and the date andterm of the mortgage, note, or other agreementby which the debt was established. Alsoinclude the face amount, the unpaid balance,the rate of interest, and date to which theinterest was paid before the decedent's death.

IF . . . THEN . . .

the annuity is under anapproved plan,

state the ratio of thedecedent's contribution tothe total purchase priceof the annuity.

the decedent wasemployed at the time ofdeath and an annuity asdescribed in Definitions,Annuity, Example 4, onpage 15, became payableto any beneficiarybecause the beneficiarysurvived the decedent,

state the ratio of thedecedent's contribution tothe total purchase priceof the annuity.

an annuity under anindividual retirementaccount or annuitybecame payable to anybeneficiary because thatbeneficiary survived thedecedent and is payableto the beneficiary for lifeor for at least 36 monthsfollowing the decedent'sdeath,

state the ratio of theamount paid for theindividual retirementaccount or annuity thatwas not allowable as anincome tax deductionunder section 219 (otherthan a rollovercontribution) to the totalamount paid for theaccount or annuity.

the annuity is payable outof a trust or other fund,

the description should besufficiently complete tofully identify it.

the annuity is payable fora term of years,

include the duration of theterm and the date onwhich it began.

the annuity is payable forthe life of a person otherthan the decedent,

include the date of birthof that person.

the annuity is wholly orpartially excluded fromthe gross estate,

enter the amountexcluded under“Description” and explainhow you computed theexclusion.


Instructions for Schedule L. NetLosses During Administrationand Expenses Incurred inAdministering Property NotSubject to ClaimsYou must complete Schedule L and file it withthe return if you claim deductions on either item18 or item 19 of Part 5, Recapitulation.

Net Losses During AdministrationYou may deduct only those losses from thefts,fires, storms, shipwrecks, or other casualtiesthat occurred during the settlement of theestate. You may deduct only the amount notreimbursed by insurance or otherwise.

Describe in detail the loss sustained and thecause. If you received insurance or othercompensation for the loss, state the amountcollected. Identify the property for which youare claiming the loss by indicating the particularschedule and item number where the propertyis included in the gross estate.

If you elect alternate valuation, do notdeduct the amount by which you reduced thevalue of an item to include it in the grossestate.

Do not deduct losses claimed as a deductionon a Federal income tax return or depreciationin the value of securities or other property.

Expenses Incurred in AdministeringProperty Not Subject to ClaimsYou may deduct expenses incurred inadministering property that is included in thegross estate but that is not subject to claims.You may only deduct these expenses if theywere paid before the section 6501 period oflimitations for assessment expired.

The expenses deductible on this scheduleare usually expenses incurred in theadministration of a trust established by thedecedent before death. They may also beincurred in the collection of other assets or thetransfer or clearance of title to other propertyincluded in the decedent's gross estate forestate tax purposes, but not included in thedecedent's probate estate.

The expenses deductible on this scheduleare limited to those that are the result of settlingthe decedent's interest in the property or ofvesting good title to the property in thebeneficiaries. Expenses incurred on behalf ofthe transferees (except those described above)are not deductible. Examples of deductible andnondeductible expenses are provided inRegulations section 20.2053-8.

List the names and addresses of thepersons to whom each expense was payableand the nature of the expense. Identify theproperty for which the expense was incurredby indicating the schedule and item numberwhere the property is included in the grossestate. If you do not know the exact amount ofthe expense, you may deduct an estimate,provided that the amount may be verified withreasonable certainty and will be paid before theperiod of limitations for assessment (referredto above) expires. Keep all vouchers andreceipts for inspection by the Internal RevenueService.

Instructions for Schedule M.Bequests, etc., to SurvivingSpouse (Marital Deduction)See the Form 706 itself for these instructions.

Instructions for Schedule O.Charitable, Public, and SimilarGifts and Bequests

GeneralYou must complete Schedule O and file it withthe return if you claim a deduction on item 21of the Recapitulation.

You can claim the charitable deductionallowed under section 2055 for the value ofproperty in the decedent's gross estate thatwas transferred by the decedent during life orby will to or for the use of any of the following:● The United States, a state, a politicalsubdivision of a state, or the District ofColumbia, for exclusively public purposes;● Any corporation or association organized andoperated exclusively for religious, charitable,scientific, literary, or educational purposes,including the encouragement of art, or to fosternational or international amateur sportscompetition (but only if none of its activitiesinvolve providing athletic facilities orequipment, unless the organization is aqualified amateur sports organization) and theprevention of cruelty to children and animals,as long as no part of the net earnings benefitsany private individual and no substantial activityis undertaken to carry on propaganda, orotherwise attempt to influence legislation orparticipate in any political campaign on behalfof any candidate for public office;● A trustee or a fraternal society, order orassociation operating under the lodge system,if the transferred property is to be usedexclusively for religious, charitable, scientific,literary, or educational purposes, or for theprevention of cruelty to children or animals, andno substantial activity is undertaken to carry onpropaganda or otherwise attempt to influencelegislation, or participate in any politicalcampaign on behalf of any candidate for publicoffice;● Any veterans organization incorporated byan Act of Congress or any of its departments,local chapters, or posts, for which none of thenet earnings benefits any private individual; or● A foreign government or its politicalsubdivision when the use of such property islimited exclusively to charitable purposes.

For this purpose, certain Indian tribalgovernments are treated as states andtransfers to them qualify as deductiblecharitable contributions. See Rev. Proc. 83-87,1983-2 C.B. 606, as modified andsupplemented by subsequent RevenueProcedures, for a list of qualifying Indian tribalgovernments.

You may also claim a charitable contributiondeduction for a qualifying conservationeasement granted after the decedent's deathunder the provisions of section 2031(c)(9).

The charitable deduction is allowed foramounts that are transferred to charitableorganizations as a result of either a qualifieddisclaimer (see Line 2, Qualified Disclaimer,below) or the complete termination of a powerto consume, invade, or appropriate property forthe benefit of an individual. It does not matterwhether termination occurs because of thedeath of the individual or in any other way. Thetermination must occur within the period of time(including extensions) for filing the decedent'sestate tax return and before the power hasbeen exercised.

The deduction is limited to the amountactually available for charitable uses.Therefore, if under the terms of a will or theprovisions of local law, or for any other reason,the Federal estate tax, the Federal GST tax,or any other estate, GST, succession, legacy,or inheritance tax is payable in whole or in partout of any bequest, legacy, or devise thatwould otherwise be allowed as a charitablededuction, the amount you may deduct is theamount of the bequest, legacy, or devisereduced by the total amount of the taxes.

If you elected to make installment paymentsof the estate tax, and the interest is payableout of property transferred to charity, you mustreduce the charitable deduction by an estimateof the maximum amount of interest that will bepaid on the deferred tax.

For split-interest trusts (or pooled incomefunds) enter in the “Amount” column theamount treated as passing to the charity. Donot enter the entire amount that passes to thetrust (fund).

If you are deducting the value of the residueor a part of the residue passing to charity underthe decedent's will, attach a copy of thecomputation showing how you determined thevalue, including any reduction for the taxesdescribed above.

Also include:1. A statement that shows the values of all

specific and general legacies or devises forboth charitable and noncharitable uses. Foreach legacy or devise, indicate the paragraphor section of the decedent's will or codicil thatapplies. (If legacies are made to each memberof a class (e.g., $1,000 to each of thedecedent's employees), show only the numberof each class and the total value of propertythey received.)

2. The date of birth of all life tenants orannuitants, the length of whose lives may affectthe value of the interest passing to charityunder the decedent's will.

3. A statement showing the value of allproperty that is included in the decedent'sgross estate but does not pass under the will,such as transfers, jointly owned property thatpassed to the survivor on decedent's death,and insurance payable to specific beneficiaries.

4. Any other important information such asthat relating to any claim, not arising under thewill, to any part of the estate (e.g., a spouseclaiming dower or curtesy, or similar rights).

Line 2—Qualified DisclaimerThe charitable deduction is allowed foramounts that are transferred to charitableorganizations as a result of a qualifieddisclaimer. To be a qualified disclaimer, arefusal to accept an interest in property mustmeet the conditions of section 2518. These areexplained in Regulations sections 25.2518-1through 25.2518-3. If property passes to acharitable beneficiary as the result of aqualified disclaimer, check the “Yes” box online 2 and attach a copy of the writtendisclaimer required by section 2518(b).

AttachmentsIf the charitable transfer was made by will,attach a certified copy of the order admittingthe will to probate, in addition to the copy of thewill. If the charitable transfer was made by anyother written instrument, attach a copy. If theinstrument is of record, the copy should becertified; if not, the copy should be verified.

ValueThe valuation dates used in determining thevalue of the gross estate apply also onSchedule O.


Instructions for Schedule P.Credit for Foreign Death Taxes

GeneralIf you claim a credit on line 18 of Part 2, TaxComputation, you must complete Schedule Pand file it with the return. You must attachForm(s) 706-CE, Certificate of Payment ofForeign Death Tax, to support any credityou claim.

If the foreign government refuses to certifyForm 706-CE, you must file it directly with theDistrict Director as instructed on the Form706-CE. See Form 706-CE for instructions onhow to complete the form and for a descriptionof the items that must be attached to the formwhen the foreign government refuses to certifyit.

The credit for foreign death taxes isallowable only if the decedent was a citizen orresident of the United States. However, seesection 2053(d) and the related regulations forexceptions and limitations if the executor haselected, in certain cases, to deduct these taxesfrom the value of the gross estate. For aresident, not a citizen, who was a citizen orsubject of a foreign country for which thePresident has issued a proclamation undersection 2014(h), the credit is allowable only ifthe country of which the decedent was anational allows a similar credit to decedentswho were U.S. citizens residing in that country.

The credit is authorized either by statute orby treaty. If a credit is authorized by a treaty,whichever of the following is the most beneficialto the estate is allowed: (a) the credit computedunder the treaty; (b) the credit computed underthe statute; or (c) the credit computed underthe treaty, plus the credit computed under thestatute for death taxes paid to each politicalsubdivision or possession of the treaty countrythat are not directly or indirectly creditableunder the treaty. Under the statute, the creditis authorized for all death taxes (national andlocal) imposed in the foreign country. Whetherlocal taxes are the basis for a credit under atreaty depends upon the provisions of theparticular treaty.

If a credit for death taxes paid in more thanone foreign country is allowable, a separatecomputation of the credit must be made foreach foreign country. The copies of ScheduleP on which the additional computations aremade should be attached to the copy ofSchedule P provided in the return.

The total credit allowable in respect to anyproperty, whether subjected to tax by one ormore than one foreign country, is limited to theamount of the Federal estate tax attributable tothe property. The anticipated amount of thecredit may be computed on the return, but thecredit cannot finally be allowed until the foreigntax has been paid and a Form 706-CEevidencing payment is filed. Section 2014(g)provides that for credits for foreign death taxes,each U.S. possession is deemed a foreigncountry.

Convert death taxes paid to the foreigncountry into U.S. dollars by using the rate ofexchange in effect at the time each paymentof foreign tax is made.

If a credit is claimed for any foreign death taxthat is later recovered, see Regulations section20.2016-1 for the notice required within 30days.

Limitation PeriodThe credit for foreign death taxes is limited tothose taxes that actually were paid and forwhich a credit was claimed within the later ofthe 4 years after the filing of the estate taxreturn, or before the date of expiration of any

extension of time for payment of the Federalestate tax, or 60 days after a final decision ofthe Tax Court on a timely filed petition for aredetermination of a deficiency.

Credit Under the StatuteFor the credit allowed by the statute, thequestion of whether particular property issituated in the foreign country imposing the taxis determined by the same principles that wouldapply in determining whether similar propertyof a nonresident not a U.S. citizen is situatedwithin the United States for purposes of theFederal estate tax. See the instructions forForm 706-NA.

Computation of Credit Under theStatuteItem 1. Enter the amount of the estate,inheritance, legacy, and succession taxes paidto the foreign country and its possessions orpolitical subdivisions, attributable to propertythat is (a) situated in that country, (b) subjectedto these taxes, and (c) included in the grossestate. The amount entered at item 1 shouldnot include any tax paid to the foreign countrywith respect to property not situated in thatcountry and should not include any tax paid tothe foreign country with respect to property notincluded in the gross estate. If only a part of theproperty subjected to foreign taxes is bothsituated in the foreign country and included inthe gross estate, it will be necessary todetermine the portion of the taxes attributableto that part of the property. Also attach thecomputation of the amount entered at item 1.Item 2. Enter the value of the gross estate lessthe total of the deductions on items 20 and 21of Part 5, Recapitulation.Item 3. Enter the value of the property situatedin the foreign country that is subjected to theforeign taxes and included in the gross estate,less those portions of the deductions taken onSchedules M and O that are attributable to theproperty.Item 4. Subtract line 17 of Part 2, TaxComputation, Form 706 from line 16, Part 2,Form 706, and enter the balance at item 4 ofSchedule P.

Credit Under TreatiesIf you are reporting any items on this returnbased on the provisions of a death tax treaty,you may have to attach a statement to thisreturn disclosing the return position that istreaty based. See Regulations section301.6114-1 for details.In general. If the provisions of a treaty applyto the estate of a U.S. citizen or resident, acredit is authorized for payment of the foreigndeath tax or taxes specified in the treaty.Treaties with death tax conventions are ineffect with the following countries: Australia,Austria, Canada, Denmark, Finland, France,Germany, Greece, Ireland, Italy, Japan,Netherlands, Norway, Republic of South Africa,Sweden, Switzerland, and the United Kingdom.

A credit claimed under a treaty is in generalcomputed on Schedule P in the same manneras the credit is computed under the statute withthe following principal exceptions:● The situs rules contained in the treaty applyin determining whether property was situatedin the foreign country;● The credit may be allowed only for paymentof the death tax or taxes specified in the treaty(but see the instructions above for credit underthe statute for death taxes paid to each politicalsubdivision or possession of the treaty countrythat are not directly or indirectly creditableunder the treaty);● If specifically provided, the credit isproportionately shared for the tax applicable to

property situated outside both countries, or thatwas deemed in some instances situated withinboth countries; and● The amount entered at item 4 of ScheduleP is the amount shown on line 16 of Part 2, TaxComputation, less the total of the amounts onlines 17 and 19 of the Tax Computation. (If acredit is claimed for tax on prior transfers, it willbe necessary to complete Schedule Q beforecompleting Schedule P.) For examples ofcomputation of credits under the treaties, seethe applicable regulations.Computation of credit in cases whereproperty is situated outside both countriesor deemed situated within both countries.See the appropriate treaty for details.

Instructions for Schedule Q.Credit for Tax on PriorTransfers

GeneralYou must complete Schedule Q and file it withthe return if you claim a credit on line 19 of Part2, Tax Computation.

The term “transferee” means the decedentfor whose estate this return is filed. If thetransferee received property from a transferorwho died within 10 years before, or 2 yearsafter, the transferee, a credit is allowable onthis return for all or part of the Federal estatetax paid by the transferor's estate with respectto the transfer. There is no requirement that theproperty be identified in the estate of thetransferee or that it exist on the date of thetransferee's death. It is sufficient for theallowance of the credit that the transfer of theproperty was subjected to Federal estate tax inthe estate of the transferor and that thespecified period of time has not elapsed. Acredit may be allowed with respect to propertyreceived as the result of the exercise ornonexercise of a power of appointment whenthe property is included in the gross estate ofthe donee of the power.

If the transferee was the transferor'ssurviving spouse, no credit is allowed forproperty received from the transferor to theextent that a marital deduction was allowed tothe transferor's estate for the property. Thereis no credit for tax on prior transfers for Federalgift taxes paid in connection with the transferof the property to the transferee.

If you are claiming a credit for tax on priortransfers on Form 706-NA, you should firstcomplete and attach the Recapitulation fromForm 706 before computing the credit onSchedule Q from Form 706.

Section 2056(d)(3) contains specific rules forallowing a credit for certain transfers to aspouse who was not a U.S. citizen where theproperty passed outright to the spouse, or to a“qualified domestic trust.”

PropertyThe term “property” includes any interest (legalor equitable) of which the transferee receivedthe beneficial ownership. The transferee isconsidered the beneficial owner of propertyover which the transferee received a generalpower of appointment. Property does notinclude interests to which the transfereereceived only a bare legal title, such as that ofa trustee. Neither does it include an interest inproperty over which the transferee received apower of appointment that is not a generalpower of appointment. In addition to interestsin which the transferee received the completeownership, the credit may be allowed forannuities, life estates, terms for years,remainder interests (whether contingent orvested), and any other interest that is less than


the complete ownership of the property, to theextent that the transferee became thebeneficial owner of the interest.

Maximum Amount of the CreditThe maximum amount of the credit is thesmaller of:

1. The amount of the estate tax of thetransferor's estate attributable to thetransferred property, or

2. The amount by which (a) an estate taxon the transferee's estate determined withoutthe credit for tax on prior transfers, exceeds (b)an estate tax on the transferee's estatedetermined by excluding from the gross estatethe net value of the transfer.

If credit for a particular foreign death tax maybe taken under either the statute or a deathduty convention, and on this return the creditactually is taken under the convention, then nocredit for that foreign death tax may be takeninto consideration in computing estate tax (a)or estate tax (b) above.

Percent AllowableWhere transferee predeceased thetransferor. If not more than 2 years elapsedbetween the dates of death, the credit allowedis 100% of the maximum amount. If more than2 years elapsed between the dates of death,no credit is allowed.Where transferor predeceased thetransferee. The percent of the maximumamount that is allowed as a credit depends onthe number of years that elapsed betweendates of death. It is determined using thefollowing table:

How To Compute the CreditA Worksheet for Schedule Q is provided atthe end of these instructions to allow you tocompute the limits before completing ScheduleQ. Transfer the appropriate amounts from theworksheet to Schedule Q as indicated on theschedule. You do not need to file the worksheetwith your Form 706, but should keep it for yourrecords.Cases involving transfers from two or moretransferors. Part I of the worksheet andSchedule Q enable you to compute the creditfor as many as three transferors. The numberof transferors is irrelevant to Part II of theworksheet. If you are computing the credit formore than three transferors, use more than oneworksheet and Schedule Q, Part I, andcombine the totals for the appropriate lines.Section 2032A additional tax. If thetransferor's estate elected special use valuationand the additional estate tax of section2032A(c) was imposed at any time up to 2years after the death of the decedent for whomyou are filing this return, check the box onSchedule Q. On lines 1 and 9 of the worksheet,include the property subject to the additionalestate tax at its FMV rather than its special usevalue. On line 10 of the worksheet, include theadditional estate tax paid as a Federal estatetax paid.

How To Complete the Schedule QWorksheetMost of the information to complete Part I of theworksheet should be obtained from thetransferor's Form 706.

Line 5. Enter on line 5 the applicable maritaldeduction claimed for the transferor's estate(from the transferor's Form 706).Lines 10–18. Enter on these lines theappropriate taxes paid by the transferor'sestate.

If the transferor's estate elected to pay theFederal estate tax in installments, enter on line10 only the total of the installments that haveactually been paid at the time you file this Form706. See Rev. Rul. 83-15, 1983-1 C.B. 224,for more details. Do not include as estate taxany tax attributable to section 4980A, before itsrepeal by the Taxpayer Relief Act of 1997.Line 21. Add lines 13, 15, 17, and 18 of Part2, Tax Computation, of this Form 706 andsubtract this total from line 10 of the TaxComputation. Enter the result on line 21 of theworksheet.Line 26. If you computed the marital deductionon this Form 706 using the rules that were ineffect before the Economic Recovery Tax Actof 1981 (as described in the instructions to line14 of Part 4 of General Information), enter online 26 the lesser of:● The marital deduction you claimed on line20 of Part 5 of the Recapitulation; or● 50% of the “reduced adjusted gross estate.”

If you computed the marital deduction usingthe unlimited marital deduction in effect fordecedents dying after 1981, for purposes ofdetermining the marital deduction for thereduced gross estate, see Rev. Rul. 90-2,1990-1 C.B. 170. To determine the “reducedadjusted gross estate,” subtract the amount online 25 of the Schedule Q worksheet from theamount on line 24 of the worksheet. Ifcommunity property is included in the amounton line 24 of the worksheet, compute thereduced adjusted gross estate using the rulesof Regulations section 20.2056(c)-2 and Rev.Rul. 76-311, 1976-2 C.B. 261.

Instructions for Schedules Rand R-1. Generation-SkippingTransfer Tax

Introduction and OverviewSchedule R is used to compute thegeneration-skipping transfer (GST) tax that ispayable by the estate. Schedule R-1 (Form706) is used to compute the GST tax that ispayable by certain trusts that are includible inthe gross estate.

The GST tax that is to be reported on Form706 is imposed only on “direct skips occurringat death.” Unlike the estate tax, which isimposed on the value of the entire taxableestate regardless of who receives it, the GSTtax is imposed only on the value of interests inproperty, wherever located, that actually passto certain transferees, who are referred to as“skip persons.”

For purposes of Form 706, the propertyinterests transferred must be includible in thegross estate before they are subject to the GSTtax. Therefore, the first step in computing theGST tax liability is to determine the propertyinterests includible in the gross estate bycompleting Schedules A through I of Form 706.

The second step is to determine who theskip persons are. To do this, assign eachtransferee to a generation and determinewhether each transferee is a “natural person”or a “trust” for GST purposes.

The third step is to determine which skippersons are transferees of “interests inproperty.” If the skip person is a natural person,anything transferred is an interest in property.If the skip person is a trust, make thisdetermination using the rules under Interest in

property below. These first three steps aredescribed in detail under the main heading,Determining Which Transfers Are DirectSkips.

The fourth step is to determine whether toenter the transfer on Schedule R or onSchedule R-1. See the rules under the mainheading, Dividing Direct Skips BetweenSchedules R and R-1.

The fifth step is to complete Schedules Rand R-1 using the How To Completeinstructions on page 21, for each schedule.

Determining Which Transfers AreDirect SkipsEffective dates. The rules below apply onlyfor the purpose of determining if a transfer is adirect skip that should be reported on ScheduleR or R-1 of Form 706.

In general. The GST tax is effective for theestates of decedents dying after October 22,1986.

Irrevocable trusts. The GST tax will notapply to any transfer under a trust that wasirrevocable on September 25, 1985, but only tothe extent that the transfer was not made outof corpus added to the trust after September25, 1985. An addition to the corpus after thatdate will cause a proportionate part of futureincome and appreciation to be subject to theGST tax. For more information, seeRegulations section 26.2601-1(b)(1)(ii).

Mental disability. If, on October 22, 1986,the decedent was under a mental disability tochange the disposition of his or her propertyand did not regain the competence to disposeof property before death, the GST tax will notapply to any property included in the grossestate (other than property transferred onbehalf of the decedent during life and afterOctober 21, 1986). The GST tax will also notapply to any transfer under a trust to the extentthat the trust consists of property included inthe gross estate (other than propertytransferred on behalf of the decedent during lifeand after October 21, 1986).

The term “mental disability” means thedecedent's mental incompetence to execute aninstrument governing the disposition of his orher property, whether or not there has been anadjudication of incompetence and whether ornot there has been an appointment of any otherperson charged with the care of the person orproperty of the transferor.

If the decedent had been adjudged mentallyincompetent, a copy of the judgment or decreemust be filed with this return.

If the decedent had not been adjudgedmentally incompetent, the executor must filewith the return a certification from a qualifiedphysician stating that in his opinion thedecedent had been mentally incompetent at alltimes on and after October 22, 1986, and thatthe decedent had not regained the competenceto modify or revoke the terms of the trust orwill prior to his death or a statement as to whyno such certification may be obtained from aphysician.Direct skip. The GST tax reported on Form706 and Schedule R-1 (Form 706) is imposedonly on direct skips. For purposes of Form 706,a direct skip is a transfer that is:

1. Subject to the estate tax,2. Of an interest in property, and3. To a skip person.

All three requirements must be met before thetransfer is subject to the GST tax. A transfer issubject to the estate tax if you are required tolist it on any of Schedules A through I of Form706. To determine if a transfer is of an interestin property and to a skip person, you must firstdetermine if the transferee is a natural personor a trust as defined below.

Period of TimeExceeding Not Exceeding

PercentAllowable

- - - - - 2 years 1002 years 4 years 804 years 6 years 606 years 8 years 408 years 10 years 20

10 years - - - - - none


Trust. For purposes of the GST tax, a trustincludes not only an explicit trust (as defined inSpecial rule for trusts other than explicittrusts below), but also any other arrangement(other than an estate) which, although notexplicitly a trust, has substantially the sameeffect as a trust. For example, a trust includeslife estates with remainders, terms for years,and insurance and annuity contracts.

Substantially separate and independentshares of different beneficiaries in a trust aretreated as separate trusts.Interest in property. If a transfer is made toa natural person, it is always considered atransfer of an interest in property for purposesof the GST tax.

If a transfer is made to a trust, a person willhave an interest in the property transferred tothe trust if that person either has a present rightto receive income or corpus from the trust(such as an income interest for life) or is apermissible current recipient of income orcorpus from the trust (e.g., may receive incomeor corpus at the discretion of the trustee).Skip person. A transferee who is a naturalperson is a skip person if that transferee isassigned to a generation that is two or moregenerations below the generation assignmentof the decedent. See Determining thegeneration of a transferee, below.

A transferee who is a trust is a skip personif all the interests in the property (as definedabove) transferred to the trust are held by skippersons. Thus, whenever a non-skip personhas an interest in a trust, the trust will not bea skip person even though a skip person alsohas an interest in the trust.

A trust will also be a skip person if there areno interests in the property transferred to thetrust held by any person, and futuredistributions or terminations from the trust canbe made only to skip persons.Non-skip person. A non-skip person is anytransferee who is not a skip person.Determining the generation of a transferee.Generally, a generation is determined alongfamily lines as follows:

1. Where the beneficiary is a linealdescendant of a grandparent of the decedent(e.g., the decedent's cousin, niece, nephew,etc.), the number of generations between thedecedent and the beneficiary is determined bysubtracting the number of generations betweenthe grandparent and the decedent from thenumber of generations between thegrandparent and the beneficiary.

2. Where the beneficiary is a linealdescendant of a grandparent of a spouse (orformer spouse) of the decedent, the numberof generations between the decedent and thebeneficiary is determined by subtracting thenumber of generations between thegrandparent and the spouse (or former spouse)from the number of generations between thegrandparent and the beneficiary.

3. A person who at any time was marriedto a person described in 1 or 2 above isassigned to the generation of that person. Aperson who at any time was married to thedecedent is assigned to the decedent'sgeneration.

4. A relationship by adoption or half-bloodis treated as a relationship by whole-blood.

5. A person who is not assigned to ageneration according to 1, 2, 3, or 4 above isassigned to a generation based on his or herbirth date, as follows:

a. A person who was born not more than121 / 2 years after the decedent is in thedecedent's generation.

b. A person born more than 121/2 years, butnot more than 371/2 years, after the decedent

is in the first generation younger than thedecedent.

c. A similar rule applies for a newgeneration every 25 years.

If more than one of the rules for assigninggenerations applies to a transferee, thattransferee is generally assigned to theyoungest of the generations that would apply.

If an estate, trust, partnership, corporation,or other entity (other than certain charitableorganizations and trusts described in sections511(a)(2) and 511(b)(2)) is a transferee, theneach person who indirectly receives theproperty interests through the entity is treatedas a transferee and is assigned to a generationas explained in the above rules. However, thislook-through rule does not apply for thepurpose of determining whether a transfer to atrust is a direct skip.

Generation assignment whereintervening parent is dead. A special rulemay apply in the case of the death of a parentof the transferee. For terminations,distributions, and transfers after December 31,1997, the existing rule that applied tograndchildren of the decedent has beenextended to apply to other lineal descendants.

If property is transferred to an individual whois a descendant of a parent of the transferor,and that individual's parent (who is a linealdescendant of the parent of the transferor) isdead at the time the transfer is subject to giftor estate tax, then for purposes of generationassignment, the individual is treated as if heor she is a member of the generation that isone generation below the lower of:● the transferor's generation, or● the generation assignment of the youngestliving ancestor of the individual, who is also adescendant of the parent of the transferor.

The same rules apply to the generationassignment of any descendant of the individual.

This rule does not apply to a transfer to anindividual who is not a lineal descendant of thetransferor if the transferor has any living linealdescendants.

If any transfer of property to a trust wouldhave been a direct skip except for thisgeneration assignment rule, then the rule alsoapplies to transfers from the trust attributableto such property.

Charitable organizations. Charitableorganizations and trusts described in sections511(a)(2) and 511(b)(2) are assigned to thedecedent's generation. Transfers to suchorganizations are therefore not subject to theGST tax.

Charitable remainder trusts. Transfers toor in the form of charitable remainder annuitytrusts, charitable remainder unitrusts, andpooled income funds are not considered madeto skip persons and, therefore, are not directskips even if all of the life beneficiaries are skippersons.Estate tax value. Estate tax value is the valueshown on Schedules A through I of this Form706.Examples. The rules above can be illustratedby the following examples:Example 1. Under the will, the decedent'shouse is transferred to the decedent's daughterfor her life with the remainder passing to herchildren. This transfer is made to a “trust” eventhough there is no explicit trust instrument. Theinterest in the property transferred (the presentright to use the house) is transferred to anon-skip person (the decedent's daughter).Therefore, the trust is not a skip personbecause there is an interest in the transferredproperty that is held by a non-skip person. Thetransfer is not a direct skip.

Example 2. The will bequeaths $100,000 tothe decedent's grandchild. This transfer is adirect skip that is not made in trust and shouldbe shown on Schedule R.Example 3. The will establishes a trust that isrequired to accumulate income for 10 yearsand then pay its income to the decedent'sgrandchildren for the rest of their lives and,upon their deaths, distribute the corpus to thedecedent's great-grandchildren. Because thetrust has no current beneficiaries, there are nopresent interests in the property transferred tothe trust. All of the persons to whom the trustcan make future distributions (includingdistributions upon the termination of interestsin property held in trust) are skip persons (i.e.,the decedent's grandchildren andgreat-grandchildren). Therefore, the trust itselfis a skip person and you should show thetransfer on Schedule R.Example 4. The will establishes a trust that isto pay all of its income to the decedent'sgrandchildren for 10 years. At the end of 10years, the corpus is to be distributed to thedecedent's children. All of the interests in thistrust are held by skip persons. Therefore, thetrust is a skip person and you should show thistransfer on Schedule R. You should show theestate tax value of all the property transferredto the trust even though the trust has someultimate beneficiaries who are non-skippersons.

Dividing Direct Skips BetweenSchedules R and R-1Report all generation-skipping transfers onSchedule R unless the rules belowspecifically provide that they are to bereported on Schedule R-1.

Under section 2603(a)(2), the GST tax ondirect skips from a trust (as defined for GST taxpurposes above) is to be paid by the trusteeand not by the estate. Schedule R-1 serves asa notification from the executor to the trusteethat a GST tax is due.

For a direct skip to be reportable onSchedule R-1, the trust must be includible inthe decedent's gross estate.

If the decedent was the surviving spouse lifebeneficiary of a marital deduction power ofappointment (or QTIP) trust created by thedecedent's spouse, then transfers caused byreason of the decedent's death from that trustto skip persons are direct skips required to bereported on Schedule R-1.

If a direct skip is made “from a trust” underthese rules, it is reportable on Schedule R-1even if it is also made “to a trust” rather thanto an individual.

Similarly, if property in a trust (as defined forGST tax purposes on page 19) is included inthe decedent's gross estate under section2035, 2036, 2037, 2038, 2039, 2041, or 2042and such property is, by reason of thedecedent's death, transferred to skip persons,the transfers are direct skips required to bereported on Schedule R-1.Special rule for trusts other than explicittrusts. An explicit trust is a trust as definedin Regulations section 301.7701-4(a) as “anarrangement created by a will or by an intervivos declaration whereby trustees take title toproperty for the purpose of protecting orconserving it for the beneficiaries under theordinary rules applied in chancery or probatecourts.” Direct skips from explicit trusts arerequired to be reported on Schedule R-1regardless of their size unless the executor isalso a trustee (see page 21).

Direct skips from trusts that are trusts forGST tax purposes but are not explicit trusts areto be shown on Schedule R-1 only if the totalof all tentative maximum direct skips from the


entity is $250,000 or more. If this total is lessthan $250,000, the skips should be shown onSchedule R. For purposes of the $250,000limit, “tentative maximum direct skips” is theamount you would enter on line 5 of ScheduleR-1 if you were to file that schedule.

A liquidating trust (such as a bankruptcytrust) under Regulations section 301.7701-4(d)is not treated as an explicit trust for thepurposes of this special rule.

If the proceeds of a life insurance policy areincludible in the gross estate and are payableto a beneficiary who is a skip person, thetransfer is a direct skip from a trust that is notan explicit trust. It should be reported onSchedule R-1 if the total of all the tentativemaximum direct skips from the company is$250,000 or more. Otherwise, it should bereported on Schedule R.

Similarly, if an annuity is includible onSchedule I and its survivor benefits are payableto a beneficiary who is a skip person, then theestate tax value of the annuity should bereported as a direct skip on Schedule R-1 if thetotal tentative maximum direct skips from theentity paying the annuity is $250,000 or more.Executor as trustee. If any of the executorsof the decedent's estate are trustees of thetrust, then all direct skips with respect to thattrust must be shown on Schedule R and noton Schedule R-1 even if they would otherwisehave been required to be shown on ScheduleR-1. This rule applies even if the trust has othertrustees who are not executors of thedecedent's estate.

How To Complete Schedules R and R-1Valuation. Enter on Schedules R and R-1 theestate tax value of the property interestssubject to the direct skips. If you electedalternate valuation (section 2032) and/orspecial use valuation (section 2032A), youmust use the alternate and/or special usevalues on Schedules R and R-1.

How To Complete Schedule RPart 1—GST exemption reconciliation. Part1, line 6 of both Parts 2 and 3, and line 4 ofSchedule R-1 are used to allocate thedecedent's GST exemption. This allocation ismade by filing Form 706. Once made, theallocation is irrevocable. You are not requiredto allocate all of the decedent's GSTexemption. However, the portion of theexemption that you do not allocate will beallocated by the IRS under the deemedallocation at death rules of section 2632(c).

The amount of the GST exemption isindexed to inflation for transfers made after1998. For generation-skipping transfers madethrough 1998, the amount of the exemption is$1 million. For generation-skipping transfersmade in 1999, the exemption is $1,010,000.This $10,000 increase can only be allocated totransfers made during or after 1999. Likewise,any future increases can only be allocated totransfers made during or after the year of theincrease. The IRS will announce futureexemption amounts in an annual revenueprocedure.

Special QTIP election. In the case ofproperty for which a marital deduction isallowed to the decedent's estate under section2056(b)(7) (QTIP election), section 2652(a)(3)allows you to treat such property for purposesof the GST tax as if the election to be treatedas qualified terminable interest property hadnot been made.

The 2652(a)(3) election must include thevalue of all property in the trust for which aQTIP election was allowed under section2056(b)(7).

If a section 2652(a)(3) election is made, thenthe decedent will for GST tax purposes betreated as the transferor of all the property inthe trust for which a marital deduction wasallowed to the decedent's estate under section2056(b)(7). In this case, the executor of thedecedent's estate may allocate part or all of thedecedent's GST exemption to the property.

You make the election simply by listingqualifying property on line 9 of Part 1.

Line 2. These allocations will have beenmade either on Forms 709 filed by thedecedent or on Notices of Allocation made bythe decedent for inter vivos transfers that werenot direct skips but to which the decedentallocated the GST exemption. Theseallocations by the decedent are irrevocable.

Line 3. Make an entry on this line if you arefiling Form(s) 709 for the decedent and wish toallocate any exemption.

Lines 4, 5, and 6. These lines representyour allocation of the GST exemption to directskips made by reason of the decedent's death.Complete Parts 2 and 3 and Schedule R-1before completing these lines.

Line 9. Line 9 is used to allocate theremaining unused GST exemption (from line8) and to help you compute the trust's inclusionratio. Line 9 is a Notice of Allocation forallocating the GST exemption to trusts as towhich the decedent is the transferor and fromwhich a generation-skipping transfer couldoccur after the decedent's death. If line 9 is notcompleted, the deemed allocation at deathrules will apply to allocate the decedent'sremaining unused GST exemption, first toproperty that is the subject of a direct skipoccurring at the decedent's death, and then totrusts as to which the decedent is thetransferor. If you wish to avoid the applicationof the deemed allocation rules, you shouldenter on line 9 every trust (except certain trustsentered on Schedule R-1, as described below)to which you wish to allocate any part of thedecedent's GST exemption. Unless you entera trust on line 9, the unused GST exemptionwill be allocated to it under the deemedallocation rules.

If a trust is entered on Schedule R-1, theamount you entered on line 4 of Schedule R-1serves as a Notice of Allocation and you neednot enter the trust on line 9 unless you wish toallocate more than the Schedule R-1, line 4amount to the trust. However, you must enterthe trust on line 9 if you wish to allocate anyof the unused GST exemption amount to it.Such an additional allocation would notordinarily be appropriate in the case of a trustentered on Schedule R-1 when the trustproperty passes outright (rather than to anothertrust) at the decedent's death. However, wheresection 2032A property is involved it may beappropriate to allocate additional exemptionamounts to the property. See the instructionsfor line 10.Note: To avoid application of the deemedallocation rules, Form 706 and Schedule Rshould be filed to allocate the exemption totrusts that may later have taxable terminationsor distributions under section 2612 even if theform is not required to be filed to report estateor GST tax.

Line 9, column C. Enter the GSTexemption included on lines 2 through 6 of Part1 of Schedule R, and discussed above, thatwas allocated to the trust.

Line 9, column D. Allocate the amount online 8 of Part l of Schedule R in line 9, columnD. This amount may be allocated to transfersinto trusts that are not otherwise reported onForm 706. For example, the line 8 amount maybe allocated to an inter vivos trust establishedby the decedent during his or her lifetime andnot included in the gross estate. This allocation

is made by identifying the trust on line 9 andmaking an allocation to it using column D. If thetrust is not included in the gross estate, valuethe trust as of the date of death. You shouldinform the trustee of each trust listed on line 9of the total GST exemption you allocated to thetrust. The trustee will need this information tocompute the GST tax on future distributionsand terminations.

Line 9, column E—trust's inclusion ratio.The trustee must know the trust's inclusionratio to figure the trust's GST tax for futuredistributions and terminations. You are notrequired to inform the trustee of the inclusionratio and may not have enough information tocompute it. Therefore, you are not required tomake an entry in column E. However, columnE and the worksheet below are provided toassist you in computing the inclusion ratio forthe trustee if you wish to do so.

You should inform the trustee of the amountof the GST exemption you allocated to thetrust. Line 9, columns C and D may be used tocompute this amount for each trust.

This worksheet will compute an accurateinclusion ratio only if the decedent was the onlysettlor of the trust. You should use a separateworksheet for each trust (or separate share ofa trust that is treated as a separate trust).

WORKSHEET (inclusion ratio for trust):

Line 10—Special use allocation. For skippersons who receive an interest in section2032A special use property, you may allocatemore GST exemption than the direct skipamount to reduce the additional GST tax thatwould be due when the interest is laterdisposed of or qualified use ceases. SeeSchedule A-1 of this Form 706 for more detailsabout this additional GST tax.

Enter on line 10 the total additional GSTexemption you are allocating to all skip personswho received any interest in section 2032Aproperty. Attach a special use allocationschedule listing each such skip person and theamount of the GST exemption allocated to thatperson.

If you do not allocate the GST exemption, itwill be automatically allocated under thedeemed allocation at death rules. To the extentany amount is not so allocated it will beautomatically allocated (under regulations tobe published) to the earliest disposition orcessation that is subject to the GST tax. Undercertain circumstances, post-death events maycause the decedent to be treated as atransferor for purposes of Chapter 13.

Line 10 may be used to set aside anexemption amount for such an event. You mustattach a schedule listing each such event andthe amount of exemption allocated to thatevent.Parts 2 and 3. Use Part 2 to compute the GSTtax on transfers in which the property intereststransferred are to bear the GST tax on thetransfers. Use Part 3 to report the GST tax ontransfers in which the property interests

1 Total estate and gift tax value of all of theproperty interests that passed to the trust.

2 Estate taxes, state death taxes, and othercharges actually recovered from the trust.

3 GST taxes imposed on direct skips toskip persons other than this trust andborne by the property transferred to thistrust ...........................................................

4 GST taxes actually recovered from thistrust (from Schedule R, Part 2, line 8 orSchedule R-1, line 6)................................

5 Add lines 2–4............................................6 Subtract line 5 from line 1 ........................7 Add columns C and D of line 9................8 Divide line 7 by line 6...............................9 Trust's inclusion ratio. Subtract line 8

from 1.000 ................................................


transferred do not bear the GST tax on thetransfers.

Section 2603(b) requires that unless thegoverning instrument provides otherwise, theGST tax is to be charged to the propertyconstituting the transfer. Therefore, you willusually enter all of the direct skips on Part 2.

You may enter a transfer on Part 3 only if thewill or trust instrument directs, by specificreference, that the GST tax is not to be paidfrom the transferred property interests.Part 2—Line 3. Enter zero on this line unlessthe will or trust instrument specifies that theGST taxes will be paid by property other thanthat constituting the transfer (as describedabove). Enter on line 3 the total of the GSTtaxes shown on Part 3 and Schedule(s) R-1that are payable out of the property interestsshown on Part 2, line 1.Part 2—Line 6. Do not enter more than theamount on line 5. Additional allocations maybe made using Part 1.Part 3—Line 3. See the instructions to Part2, line 3, above. Enter only the total of the GSTtaxes shown on Schedule(s) R-1 that arepayable out of the property interests shown onPart 3, line 1.Part 3—Line 6. See the instructions to Part2, line 6, above.

How To Complete Schedule R-1Filing due date. Enter the due date ofSchedule R, Form 706. You must send thecopies of Schedule R-1 to the fiduciary by thisdate.Line 4. Do not enter more than the amounton line 3. If you wish to allocate an additionalGST exemption, you must use Schedule R,Part 1. Making an entry on line 4 constitutes aNotice of Allocation of the decedent's GSTexemption to the trust.Line 6. If the property interests entered on line1 will not bear the GST tax, multiply line 6 by55% (.55).Signature. The executor(s) must signSchedule R-1 in the same manner as Form706. See Signature and Verification on page2.Filing Schedule R-1. Attach to Form 706 onecopy of each Schedule R-1 that you prepare.Send two copies of each Schedule R-1 to thefiduciary.

Schedule T. QualifiedFamily-Owned BusinessInterest DeductionUnder section 2057, you may elect to deductthe value of certain family-owned businessinterests from the gross estate. You make theelection by filing Schedule T, attaching allrequired statements, and deducting the valueof the qualifying business interests on Part 5,Recapitulation, page 3, at item 22. You canonly deduct the value of property that you havealso reported on Schedule A, B, C, E, F, G, orH of Form 706.

The amount of the deduction cannot exceedthe lesser of:● The adjusted value of the qualifiedfamily-owned business interests (QFOBI) of thedecedent otherwise includible in the grossestate, or● $675,000.

Coordination with unified credit. The sumof the QFOBI deduction and the applicableexclusion amount cannot exceed $1.3 million.Thus, if the maximum QFOBI deduction of$675,000 is claimed, the applicable exclusionamount would be limited to $625,000, and thecredit entered on line 11 of Part 2 - TaxComputation, would be $202,050.

If the amount of the QFOBI deduction is lessthan $675,000, increase the applicableexclusion amount by the difference between$675,000 and the amount of the QFOBIdeduction (but not to exceed the maximumapplicable exclusion amount in effect for theyear of death).

For example, if the estate of a decedentdying in 1999 claimed a QFOBI deduction of$665,000, the applicable exclusion amount forthe estate would be $635,000 (($675,000 −665,000) + 625,000). But if the QFOBIdeduction was $575,000, the applicableexclusion amount would be $650,000, themaximum for 1999.

General RequirementsBusiness interests may qualify for the exclusionif the following requirements are met:● The decedent was a citizen or resident of theUnited States at the date of death.● The business interests are includible in thegross estate.● The interests must have passed to or beenacquired by a qualified heir from the decedent.● The adjusted value of the qualifiedfamily-owned business interests must exceed50% of the adjusted gross estate (see belowfor a discussion of these terms).● The interest must be in a trade or businessthat has its principal place of business in theUnited States.● The business interest was owned by thedecedent or a member of the decedent's familyduring 5 of the 8 years before the decedent'sdeath.● For 5 of the 8 years before the decedent'sdeath, there was material participation by thedecedent or a member of the decedent's familyin the business to which the ownership interestrelates.

Qualified Family-Owned BusinessInterestIn general. To qualify for the deduction, thebusiness interest must be either an interest asa proprietor in a trade or business carried onas a proprietorship, or an interest in an entitycarrying on a trade or business in which:● At least 50% of the entity is owned by thedecedent or members of the decedent's family;● At least 70% of the entity is owned bymembers of two families, and at least 30% isowned by the decedent or members of thedecedent's family; or● At least 90% of the entity is owned bymembers of three families, and at least 30% isowned by the decedent or members of thedecedent's family.

In all cases, ownership may be either director indirect.Ownership rules. Ownership of the businessinterest may either be direct, or indirect througha corporation, partnership, or a trust. Aninterest owned, directly or indirectly, by or forsuch an entity is considered ownedproportionately by or for the entity'sshareholders, partners, or beneficiaries. Aperson is the beneficiary of a trust only if heor she has a present interest in the trust.

Corporations. Ownership of a corporationis determined by holding stock that has theappropriate percentage of the total combinedvoting power of all classes of stock entitled tovote and the appropriate percentage of the totalvalue of shares of all classes of stock.

Partnerships. Ownership of a partnershipis based on owning the appropriate percentageof the capital interest in the partnership.

Tiered entities. For the purpose ofdetermining ownership of a business undersection 2057, if the decedent, a member of the

decedent's family, any qualified heir, or anymember of the qualified heir's family owns aninterest in a business, and by reason of thatownership the person is treated as owning aninterest in any other business, the ownershipinterest in the other business is disregarded indetermining the ownership interest in the firstbusiness. Likewise, you must apply theownership rules separately in determiningownership of the other business.

Limitations“Qualified family-owned business interests”shall not include the following:● Any interest in a trade or business if itsprincipal place of business is located outsidethe United States.● Any interest in an entity if the stock or debtof the entity (or a controlled group of which theentity is a member) was readily tradable on anestablished securities market or secondarymarket at any time within 3 years of the dateof the decedent's death.● Any interest in a trade or business (excludingbanks and domestic building and loanassociations) if more than 35% of its adjustedordinary gross income for the taxable year thatincludes the date of the decedent's deathwould qualify as personal holding companyincome (as defined in section 2057(e)(2)(C)) ifsuch trade or business was a corporation.● The portion of an interest in a trade orbusiness that is attributable to:

1. Cash and/or marketable securities inexcess of the reasonably expected day-to-dayworking capital needs, and

2. Any other assets (other than assets heldin the active conduct of a bank or domesticbuilding and loan) that produce or are held forthe production of personal holding companyincome and most types of foreign personalholding company income. See section2057(e)(2)(D) for more information.Net cash lease. If the decedent leasedproperty on a net cash basis to a member ofthe decedent's family, income from the lease isnot considered personal holding companyincome for this purpose, and the property is notconsidered asset producing or held for theproduction of personal holding companyincome. However, if the income or propertywould have been personal holding companyincome or property if the decedent hadengaged directly in the activities of the lessee,then this net cash lease rule does not apply.

Qualified HeirA person is a qualified heir of property if he orshe is a member of the decedent's family andacquired or received the interest from thedecedent.

If a qualified heir disposes of any qualifiedfamily-owned business interest to any memberof his or her family, that person will then betreated as the qualified heir with respect to thatinterest.

The term member of the family includesonly:● An ancestor (parent, grandparent, etc.) of theindividual;● The spouse of the individual;● The lineal descendent (child, stepchild,grandchild, etc.) of the individual, theindividual's spouse, or a parent of theindividual; and● The spouse, widow, or widower of any linealdescendent described above.

A legally adopted child of an individual istreated as a child of that individual by blood.

For the purpose of this deduction, qualifiedheir also includes any active employee of thetrade or business to which the qualified


family-owned business interest relates if theemployee has been employed by the trade orbusiness for a period of at least 10 yearsbefore the date of the decedent's death.

Interests Acquired From the DecedentAn interest in a business is considered to havebeen acquired from or to have passed from thedecedent if one or more of the following apply:● The interest is considered to have beenacquired from or to have passed from thedecedent under section 1014(b) (relating tobasis of property acquired from a decedent).● The interest is acquired by any person fromthe estate.● The interest is acquired by any person froma trust, to the extent the property is includiblein the gross estate.

Material ParticipationTo make the section 2057 election, either thedecedent or a member of the decedent's familymust have materially participated in the tradeor business to which the ownership interestrelates for at least 5 of the 8 years ending onthe date of the decedent's death.

The existence of material participation is afactual determination, and the types of activitiesand financial risks that will support a finding ofmaterial participation will vary with the modeof ownership. No single factor is determinativeof the presence of material participation, butphysical work and participation in managementdecisions are the principal factors to beconsidered. Passively collecting rents, salaries,draws, dividends, or other income from thetrade or business does not constitute materialparticipation. Neither does merely advancingcapital and reviewing business plans andfinancial reports each business year.

For more information on materialparticipation, see page 7 of these instructionsand Regulations section 20.2032A-3.

Specific Instructions

Line 4If any qualified heir is not a U.S. citizen, theownership interest he or she receives mustpass, be acquired, or be held in a qualifiedtrust. See section 2057(g) for details. If anyqualified heir listed on line 4 is not a U.S.citizen, indicate along with their address“citizen of _______,” filling in the appropriatecountry.

Line 5List on line 5 all qualified family-ownedbusiness interests included in the gross estate,even if they will not be included in thededuction because, for example, they pass tothe surviving spouse and are deducted onSchedule M rather than Schedule T (see theinstructions for line 15 below).

Line 7Enter on line 7 the amount, if any, deductiblefrom the gross estate as claims against theestate or indebtedness of the estate reportedelsewhere on this Form 706. Do not includefuneral or administrative expenses on this line.

Line 8aEnter the amount of any indebtedness that isboth:● Included on line 7, and● Indebtedness on a residence of the decedentthat qualifies for the mortgage interestdeduction under section 163(h)(3).

Line 8bEnter the amount of any indebtedness:● That is included on line 7, and

● The proceeds of which were used to payeducational or medical expenses of thedecedent, the decedent's spouse, or thedecedent's dependents.

Line 8cEnter the amount of any other indebtednessincluded on line 7 but not on lines 8a or 8b, butDO NOT enter more than $10,000.

Line 11aEnter on this line the amount of gifts, if any,that were:● Included on line 4 of Part 2, page 1, Form706;● Of qualified family-owned business interests;● From the decedent to members of thedecedent's family other than the decedent'sspouse; and● Continuously held by such members of thedecedent's family from the date of the gift to thedate of the decedent's death.

Line 11bEnter the amount, if any, of gifts that wouldhave been included on line 11a except thatthey were excluded under the gift tax annualexclusion of section 2503(b).

Line 13aEnter the amount from item 12, Part 5,Recapitulation.

Line 13eEnter any amounts (other than qualifiedfamily-owned business interests and deminimis amounts) transferred from thedecedent to the decedent's spouse(determined at the time of the transfer) andwithin 10 years of the date of the decedent'sdeath. At the time this form went to print, theIRS had not issued guidelines on whatconstitutes a de minimis amount.

Line 13fEnter the amount of any other gifts:● That are not included on lines 13d or 13e;● That were from the decedent;● That were made within 3 years of the dateof the decedent's death; and● That were not both gifts to members of thedecedent's family and excluded under theannual gift tax exclusion of section 2503(b).

Line 13hEnter the amounts, if any, from lines 13d, 13e,or 13f, that are otherwise included in the grossestate (e.g., under section 2035).

Line 15The interests listed on line 5 above are usedto qualify the estate for the section 2057deduction. You may choose, however, not todeduct on Schedule T all of the trade orbusiness interests that are listed on line 5. Forexample, if a trade or business interest that isa qualified family-owned business interestpasses to the surviving spouse and you chooseto deduct it on Schedule M, you may notdeduct on Schedule T the part of its valuededucted on Schedule M. Or, you may simplychoose not to include a particular trade orbusiness interest in the section 2057 election.

Report on line 15 only the value of thosetrade or business interests listed on line 5 forwhich you are making the section 2057election.

Also, you must reduce the amount of theSchedule T deduction by the amount of anyFederal estate or GST tax and any stateinheritance taxes paid out of, and any otherdeductions claimed with respect to, the

interests that you elect to deduct on ScheduleT.

Attach a schedule showing the following:● Identify each trade or business interest fromline 5 for which you are making the section2057 election and the amount being deducted.● Specify the amount, if any, of the interests forwhich you are making the election that isdeducted on Schedule M.● List for each trade or business interest thetype and amount of any taxes paid out of thatinterest.● List for each trade or business interest thetype and amount of any other deductionsclaimed with respect to that interest.

If there are no such reductions, enter theamount from line 10 on line 15.

Schedule U. QualifiedConservation EasementExclusionUnder section 2031(c), you may elect toexclude a portion of the value of land that issubject to a qualified conservation easement.You make the election by filing Schedule U withall of the required information and excluding theapplicable value of the land that is subject tothe easement on Part 5, Recapitulation, page3, at item 11. To elect the exclusion, you mustinclude on Schedule A, B, E, F, G, or H, asappropriate, the decedent's interest in the landthat is subject to the exclusion. You must makethe election on a timely filed Form 706,including extensions.

For the estates of decedents dying in 1999,the exclusion is the lesser of:● The applicable percentage of the value ofland (after certain reductions) subject to aqualified conservation easement, or● $200,000.

Once made, the election is irrevocable.Note: See the Exclusion limitation table onpage 24 for exclusion amounts after 1999.

General Requirements

Qualified LandLand may qualify for the exclusion if all of thefollowing requirements are met:● The decedent or a member of the decedent'sfamily must have owned the land for the 3-yearperiod ending on the date of the decedent'sdeath.● No later than the date the election is made,a qualified conservation easement on the landhas been made by the decedent, a member ofthe decedent's family, the executor of thedecedent's estate, or the trustee of a trust thatholds the land.● The land is located:

1. In or within 25 miles of an area that, onthe date of the decedent's death, is ametropolitan area, as defined by the Office ofManagement and Budget;

2. In or within 25 miles of an area that, onthe date of the decedent's death, is a nationalpark or wilderness area designated as part ofthe National Wilderness Preservation System(unless it has been determined that such landis not under significant development pressure);or

3. In or within 10 miles of an area that, onthe date of the decedent's death, is an UrbanNational Forest, as designated by the ForestService.

Member of FamilyMembers of the decedent's family include thedecedent's spouse; ancestors; linealdescendants of the decedent, of the decedent'sspouse, and of the parents of the decedent;


and the spouse of any lineal descendant. Alegally adopted child of an individual isconsidered a child of the individual by blood.

Indirect Ownership of LandThe qualified conservation easement exclusionapplies if the land is owned indirectly througha partnership, corporation, or trust, if thedecedent owned (directly or indirectly) at least30% of the entity. For the rules on determiningownership of an entity, see the Schedule Tinstructions under the main heading, QualifiedFamily-Owned Business Interest.

Qualified Conservation EasementA qualified conservation easement is one thatwould qualify as a qualified conservationcontribution under section 170(h). It must bea contribution:● Of a qualified real property interest;● To a qualified organization; and● Exclusively for conservation purposes.Exclusion limitation. The conservationeasement exclusion limitation is determinedusing the following table:

Qualified real property interest. The termqualified real property interest means any ofthe following:● The entire interest of the donor, other thana qualified mineral interest;● A remainder interest; or● A restriction granted in perpetuity on the usethat may be made of the real property. Therestriction must include a prohibition on morethan a de minimis use for commercialrecreational activity.Qualified organization. Qualifiedorganizations include:● The United States, a possession of theUnited States, a state (or the District ofColumbia), or a political subdivision of them,as long as the gift is for exclusively publicpurposes.● A domestic entity that meets the generalrequirements for qualifying as a charity undersection 170(c)(2) and that generally receives asubstantial amount of its support from agovernment unit or from the general public.● Any entity that qualifies under section170(h)(3)(B).Conservation purpose. The termconservation purpose means:● The preservation of land areas for outdoorrecreation by, or the education of, the public;● The protection of a relatively natural habitatof fish, wildlife, or plants, or a similarecosystem; or● The preservation of open space (includingfarmland and forest land) where suchpreservation is for the scenic enjoyment of thegeneral public, or pursuant to a clearlydelineated Federal, state, or local conservationpolicy and will yield a significant public benefit.

Specific Instructions

Line 1If the land is reported as one or more itemnumbers on a Form 706 schedule, simply list

the schedule and item numbers. If the landsubject to the easement comprises only partof an item, however, list the schedule and itemnumber and describe the part subject to theeasement. See the instructions for ScheduleA, Real Estate, in the Form 706 itself, forinformation on how to describe the land.

Line 4Using the general rules for describing realestate, provide enough information so the IRScan value the easement. Give the date theeasement was granted and by whom it wasgranted.

Line 5Enter on this line the gross value at which theland was reported on the applicable assetschedule on this Form 706. Do not reduce thevalue by the amount of any mortgageoutstanding. Report the estate tax value evenif the easement was granted by the decedent(or someone other than the decedent) prior tothe decedent's death.

Line 6The amount on line 6 should be the date ofdeath value of any qualifying conservationeasements granted prior to the decedent'sdeath, whether granted by the decedent orsomeone other than the decedent, for whichthe exclusion is being elected.

Line 8You must reduce the land value by the valueof any development rights retained by thedonor in the conveyance of the easement. Adevelopment right is any right to use the landfor any commercial purpose that is notsubordinate to and directly supportive of theuse of the land as a farm for farming purposes.

You do not have to make this reduction ifeveryone with an interest in the land(regardless of whether in possession) agreesto permanently extinguish the retaineddevelopment right. The agreement must befiled with this return and must include thefollowing information and terms:

1. A statement that the agreement is madepursuant to IRC section 2031(c)(5).

2. A list of all persons in being holding aninterest in the land that is subject to thequalified conservation easement. Include eachperson's name, address, tax identifyingnumber, relationship to the decedent, and adescription of their interest.

3. The items of real property shown on theestate tax return that are subject to thequalified conservation easement (identified byschedule and item number).

4. A description of the retaineddevelopment right that is to be extinguished.

5. A clear statement of consent that isbinding on all parties under applicable locallaw:

a. To take whatever action is necessary topermanently extinguish the retaineddevelopment rights listed in the agreement; and

b. To be personally liable for additionaltaxes under IRC section 2031(c)(5)(C) if thisagreement is not implemented by the earlierof:

• The date that is 2 years after the date ofthe decedent's death, or• The date of sale of the land subject to thequalified conservation easement.6. A statement that in the event this

agreement is not timely implemented, that theywill report the additional tax on whatever returnis required by the IRS and will file the return

and pay the additional tax by the last day of the6th month following the applicable datedescribed above.

All parties to the agreement must sign theagreement.

For an example of an agreement containingsome of the same terms, see Schedule A-1(Form 706).

Line 11Enter the total value of the qualifiedconservation easements on which theexclusion is based. This could includeeasements granted by the decedent (orsomeone other than the decedent) prior to thedecedent's death, easements granted by thedecedent that take effect at death, easementsgranted by the executor after the decedent'sdeath, or some combination of these.Important: Use the value of the easement asof the date of death, even if the easement wasgranted prior to the date of death.

Explain how this value was determined andattach copies of any appraisals. Normally, theappropriate way to value a conservationeasement is to determine the FMV of the landboth before and after the granting of theeasement, with the difference being the valueof the easement.

You must reduce the reported value of theeasement by the amount of any considerationreceived for the easement. If the date of deathvalue of the easement is different from thevalue at the time the consideration wasreceived, you must reduce the value of theeasement by the same proportion that theconsideration received bears to the value of theeasement at the time it was granted. Forexample, assume the value of the easementat the time it was granted was $100,000 and$10,000 was received in consideration for theeasement. If the easement was worth $150,000at the date of death, you must reduce the valueof the easement by $15,000($10,000/$100,000 × $150,000) and report thevalue of the easement on line 11 as $135,000.

Line 16If a charitable contribution deduction for thisland has been taken on Schedule O, enter theamount of the deduction here. If the easementwas granted after the decedent's death, acontribution deduction may be taken onSchedule O, if it otherwise qualifies, as long asno income tax deduction was or will be claimedfor the contribution by any person or entity.

Line 17You must reduce the value of the land by theamount of any acquisition indebtedness on theland at the date of the decedent's death.Acquisition indebtedness includes the unpaidamount of:● Any indebtedness incurred by the donor inacquiring the property;● Any indebtedness incurred before theacquisition if the indebtedness would not havebeen incurred but for the acquisition;● Any indebtedness incurred after theacquisition if the indebtedness would not havebeen incurred but for the acquisition and theincurrence of the indebtedness was reasonablyforeseeable at the time of the acquisition; and● The extension, renewal, or refinancing ofacquisition indebtedness.

Continuation ScheduleSee instructions for Continuation Schedule onForm 706 itself.

For the estates ofdecedents dyingduring:

The exclusion limitationis:

1999 $200,000

2000 300,000

2001 400,000

2002 or thereafter 500,000

Page 24 Instructions for Schedules; Sch. Q Worksheet; Index

Worksheet for Schedule Q—Credit for Tax on Prior TransfersTransferor’s tax on prior transfers

Total for all transfersTransferor (From Schedule Q)

Item (line 8 only)CBA

1. Gross value of prior transfer to this transferee

2. Death taxes payable from prior transfer

3. Encumbrances allocable to prior transfer

4. Obligations allocable to prior transfer

Marital deduction applicable to line 1 above,as shown on transferor’s Form 706

5.

6. TOTAL (Add lines 2, 3, 4, and 5)

Net value of transfers (Subtractline 6 from line 1)

7.

Net value of transfers (Add columnsA, B, and C of line 7)

8.

9. Transferor’s taxable estate

10. Federal estate tax paid

State death taxes paid11.

Foreign death taxes paid12.

Other death taxes paid13.

14.

Value of transferor’s estate (Subtractline 14 from line 9)

15.

Net Federal estate tax paid ontransferor’s estate

16.

Credit for gift tax paid on transferor’s estatewith respect to pre-1977 gifts (section 2012)

17.

Credit allowed transferor’s estate for tax onprior transfers from prior transferor(s) who diedwithin 10 years before death of decedent

18.

Tax on transferor’s estate (Add lines 16, 17, and 18)19.

Transferor’s tax on prior transfers ((Line 7�line 15) � line 19 of respective estates)

20.

Transferee’s tax on prior transfersAmountItem

21. Transferee’s actual tax before allowance of credit for prior transfers (see instructions)

22. Total gross estate of transferee (from line 1 of the Tax Computation, page 1, Form 706)

23. Net value of all transfers (from line 8 of this worksheet)

24. Transferee’s reduced gross estate (subtract line 23 from line 22)

Total debts and deductions (not including marital and charitable deductions)(items 17, 18, and 19 of the Recapitulation, page 3, Form 706)

25.

26. Marital and Qualified Family-Owned Business Interest deduction (from item20 and 22, Recapitulation, page 3, Form 706) (see instructions)

27. Charitable bequests (from item 21, Recapitulation, page 3, Form 706)

28. Charitable deduction proportion ( [ line 23 � (line 22 – line 25) ] � line 27 )

29. Reduced charitable deduction (subtract line 28 from line 27)

30. Transferee’s deduction as adjusted (add lines 25, 26, and 29)

31. (a) Transferee’s reduced taxable estate (subtract line 30 from line 24)

(b) Adjusted taxable gifts

(c) Total reduced taxable estate (add lines 31(a) and 31(b))

32. Tentative tax on reduced taxable estate

33. (a) Post-1976 gift taxes paid

(b) Unified credit (applicable credit amount)

(c) Section 2011 state death tax credit

(d) Section 2012 gift tax credit

(e) Section 2014 foreign death tax credit

(f) Total credits (add lines 33(a) through 33(e))Net tax on reduced taxable estate (subtract line 33(f) from line 32)34.Transferee’s tax on prior transfers (subtract line 34 from line 21)35.

Part I

Part II

TOTAL taxes paid (Add lines 10, 11, 12, and 13)

21

22

23

24

25

26

27

28

29

3031(a)

3233(a)

3435

31(b)

31(c)

33(b)

33(c)

33(d)

33(e)

33(f)

Instructions for Schedules; Sch. Q Worksheet; Index Page 25

Index

A Address, executor ....................................... 4 Alternate valuation ....................................... 5

Amending Form 706 .................................... 3 Annuities .................................................... 14

Applicable credit amount ............................. 4Applicable exclusion amount ....................... 4

Authorization ................................................ 9

B Bequests .................................................... 17 Bonds ........................................................ 11

CChanges to note .......................................... 1

Close corporations ...................................... 9 Conservation purpose ............................... 24

Continuation Schedule (See ContinuationSchedule on Form 706)

Credit for federal gift taxes .......................... 5Credit for foreign death taxes ................... 18Credit for state death taxes ......................... 4Credit for tax on prior transfers ................. 18

D Death certificate .......................................... 3

Debts of the decedent ............................... 16Debts, mortgages and liens ...................... 16

Deductions ................................................. 10 Direct skips ................................................ 19 Disclaimer, qualified .................................. 17 Documents, supplemental ........................... 3

E Election .................................................... 8, 9

Election, lump sum distribution ................. 16 Exclusion ................................................... 10 Executor .................................................. 2, 4 Expenses, losses ...................................... 17

FForms and publications, obtaining .............. 3

G General Information ..................................... 9 General Instructions .................................... 1

Generation-skipping transfer tax ............... 19Gifts and bequests .................................... 17

Gross estate .......................................... 2, 10

IInclusion ratio for trust ............................... 21

Installment payments .................................. 8 Insurance ..................................................... 9

Interests, reversionary or remainder ........... 9

L Liens .......................................................... 16 Losses, expenses ...................................... 17

Lump sum distribution election ................. 16

MMarital deduction computation, transitional . 9

Material participation ............................. 7, 23Member of family ................................... 7, 23Mortgages and liens .................................. 16

N Nonresident Noncitizens ............................. 2

PPaperwork Reduction Act Notice ................ 1Part 1, Decedent and Executor ................... 4Part 2. Tax Computation ............................. 4Part 3. Elections by the Executor ............... 5Part 4. General Information ......................... 9Part 5. Recapitulation ................................ 10Paying the Tax ............................................ 2

Payments, installment ................................. 8 Penalties ...................................................... 3

Powers of appointment ............................. 14 Private delivery services ............................ 2

Property, section 2044 ................................ 9 Publications, obtaining ................................ 3

Purpose of Form ......................................... 2

QQualified conservation easement

exclusion ............................................... 23Qualified family-owned business interest

deduction (QFOBI) ................................ 22 Qualified heir ......................................... 7, 22

Qualified real property ................................. 6

RReal property interest, qualified ................ 24Real property, qualified ............................... 6

Recapitulation ............................................ 10Residents of U. S. Possessions .................. 2Rounding off to whole dollars ..................... 3

SSchedule A Real Estate (See reverse side of

Sch A on Form 706) Schedule A-1 Section 2032A Valuation (See

Sch A - 1 on Form 706) Schedule B Stocks and Bonds ................. 11Schedule C Mortgages, notes, and cash (See

reverse side of Sch C on Form 706) Schedule D Insurance (See reverse side of

Sch D on Form 706) Schedule E Jointly owned property (See

reverse side of Sch E on Form 706) Schedule F Other miscellaneous property

(See reverse side of Sch F on Form 706)Schedule G Transfers during decedent's

life ......................................................... 11Schedule G, how to complete ................... 14Schedule H Powers of appointment ......... 14

Schedule I Annuities ................................. 14Schedule I, how to complete ..................... 16Schedule J Expenses (See reverse side of

Sch J on Form 706) Schedule K Debts ..................................... 16Schedule L Losses, expenses during

administration ........................................ 17Schedule M (Marital deduction) (See

instructions in the Form 706, itself) Schedule O Gifts and bequests ................ 17Schedule P Foreign death taxes ............... 18Schedule Q Prior transfers, credit for ....... 18Schedule R and R-1 Generation-skipping

transfer tax ............................................ 19Schedule R-1, how to complete .......... 21, 22Schedule R, how to complete ................... 21Schedule T Qualified family-owned

business interest deduction .................. 22Schedule U Qualified conservation

easement exclusion .............................. 23Schedules R and R-1, direct skips ........... 20Schedules R, how to complete ................. 21

Section 2032A ....................................... 6, 11Section 2035(a) transfers .......................... 11Section 2035(a)) transfers ......................... 13Section 2035(b) transfers .......................... 11Section 2036 transfers ........................ 11, 13Section 2037 transfers ........................ 11, 13Section 2038 transfers ........................ 11, 13Signature and verification ............................ 2Social security number ................................ 4Special use valuation of Section 2032A ..... 6

Specific Instructions .................................... 3 Stocks ........................................................ 11

TTable A, Unified Rate Schedule .................. 4Table B, Credit for state death taxes .......... 4

Tax Computation ......................................... 4Taxes, foreign death ................................. 18Transfers, direct skips ............................... 19Transfers, valuation rules .......................... 14

Trusts ........................................................... 9

UU. S. Citizens or Residents ......................... 2Unified Credit (applicable credit amount) .... 4Unified credit adjustment ............................. 4United States Treasury bonds .................... 5

V Valuation methods ....................................... 7

Valuation rules, transfers .......................... 14

WWhen To File ............................................... 2Where To File .............................................. 2Which Estates Must File ............................. 2Worksheet for Schedule Q ........................ 19Worksheet TG-Taxable Gifts Reconciliation 4Worksheet, inclusion ratio for trust ........... 21

Page 26 Instructions for Schedules; Sch. Q Worksheet; Index