Prepare a 2013 gift tax return (Form 709) for Natalie (Social Security number 123-45-6787). Natalie made no taxable gifts in prior years

Hint: A correct submission for this assignment will include the following schedules: A, B, C, D, E, F, J, K, and O. The fill-in PDF form in Doc Sharing includes only the required schedules for this particular problem.

All submissions for this assignment MUST be in PDF format.

Harriet C. Harper, age 74, died as a result of an automobile accident on June 6, 2013. At the time of her death, Harriet lived at 1520 Marlin Drive, Clearwater, FL 33758. She was predeceased by her husband, John W. Harper, who died in 2001. Harriet is survived by her two adult children, Travis Harper and Hannah Baker. Information regarding Harriet's estate is summarized below. ? John's will established a marital deduction trust with $1 million of assets. Under the terms of the trust, Harriet received a life estate with the remainder passing to their children (i.e., Travis and Hannah). To obtain a marital deduction for John's estate, his executor made a QTTP election. On June 6, 2013, the trust had a value of $2 million. During 2013, the trust assets are distributed to Travis and Hannah. ? Harriet owned three insurance policies with Falcon Assurance Company?one on her life and one on the life of each of her children. All policies have a maturity value of $100,000; all name Harriet or her estate as the beneficiary. As of June 6, 2013, the policies on Travis and Hannah each had a value of $40,000. ? A tract of undeveloped land in Pinellas County (FL) was purchased by Harriet as an investment in 2002 for $300,000. To help finance the purchase, Harriet obtained mortgage funds from Tampa Savings and Loan. As of June 6, 2013, the land was worth $900,000, andHarriet owed $100,000 on the mortgage. ? Rental beach cottages in Destin (FL) were inherited from John and worth $1 million on June 6, 2013. The cottages had a value of $600,000 when John died; his original cost is unknown. ? A family vacation lodge in Union (SC) was held as joint tenants with right of survivorship in the names of Harriet Harper, Travis Harper, and Hannah Baker. The property was purchased in 2002 for $400,000; $200,000 was provided by Harriet and $100,000 was furnished by each of her children. On June 6, 2013, the lodge was worth $1 million. ? Harriet's Marlin Drive residence is owned by her. It had a value of $500,000 on June 6, 2013. ? The accident that fatally injured Harriet was caused by the delivery truck of a national soft drink bottling company. Not only was the truck in disrepair, but the driver was charged with DUI. To avoid the adverse publicity of a lawsuit involving the obvious gross negligence, the corporate office offered to settle any claims. After careful deliberation, Harriet's co-executors (Travis and Hannah) signed a release. In return, the estate received $400,000 in cash plus payment of all medical expenses. Of the medical expenses, the doctors and hospital were paid directly by the bottling company. The settlement was received by the estate before it was closed and the Form 706 filed.

Other assets owned by Harriet as of June 6, 2013 included: Checking account at Dunedin State Bank-$ 17,500 State of Georgia bonds (interest accrued to date of death)-105,000 Personal and household effects- 60,000 Federal income tax refund receivable (for tax year 2012) -2,000

Liabilities and expenses in connection with the administration of the estate include: Harriet's credit card debt and household bills (e.g., utilities, gardener)-$13,000 Federal income tax (January 1, 2013, to June 6, 2013)- 27,000 Funeral expenses-8,000 Attorney's fees-12,000 Accounting fees-10,000 Appraisal fees and court costs- 6,000

Unpaid pledge to Clearwater First Methodist Church Building Fund (paid by the estate during its administration)- 20,000

Because Travis and Hannah had experience in handling their father's estate, Harriet's will designated them as co-executors of her estate. The probate of the Estate of Harriet C. Harper is completed December 16, 2013. Travis and Hannah are the sole heirs. Prepare an estate tax return (Form 706) for Harriet. In this regard, make the following assumptions. ? Disregard any request for information that is not available. ? Some deductions require a choice between the income and estate taxes (Form 706 or Form 1041) and cannot be deducted twice (see Chapters 19 and 20). Resolve all choices in favor of Form 706. ? Harriet had made no taxable gifts in prior years. ? Relevant Social Security numbers: Name -Social Security Number Harriet Harper-123-45-6781 Travis Harper-123-45-6782 Hannah Baker-123-45-6783

Instructions for Form 706 Department of the Treasury Internal Revenue Service (Rev. August 2013) For decedents dying after December 31, 2012 United States Estate (and Generation-Skipping Transfer) Tax Return Section references are to the Internal Revenue Code unless otherwise noted. Prior Revisions of Form 706 For Decedents Dying After December 31, 1998 December 31, 2000 December 31, 2001 December 31, 2002 December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 December 31, 2007 December 31, 2008 December 31, 2009 December 31, 2010 December 31, 2011 and Before January 1, 2001 January 1, 2002 January 1, 2003 January 1, 2004 January 1, 2005 January 1, 2006 January 1, 2007 January 1, 2008 January 1, 2009 January 1, 2010 January 1, 2011 January 1, 2012 January 1, 2013 Use Revision of Form 706 Dated July 1999 November 2001 August 2002 August 2003 August 2004 August 2005 October 2006 September 2007 August 2008 September 2009 July 2011 August 2011 August 2012 Contents Reminders . . . . . . . . . . . . . . General Instructions . . . . . . . . Purpose of Form . . . . . . . Which Estates Must File . . Executor . . . . . . . . . . . . When To File . . . . . . . . . Where To File . . . . . . . . . Paying the Tax . . . . . . . . Signature and Verification . Amending Form 706 . . . . Supplemental Documents . Rounding Off to Whole Dollars . . . . . . . . . . . Penalties . . . . . . . . . . . . Obtaining Forms and Publications To File or Use . . . . . . . . . . . . . Specific Instructions . . . . . . . . Part 1Decedent and Executor . . . . . . . . . . Part 2Tax Computation . Part 3Elections by the Executor . . . . . . . . . . Part 4General Information Nov 18, 2013 Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 2 2 3 3 3 3 3 3 4 ..... 4 ..... 4 ..... 4 ..... 4 ..... 5 ..... 5 ..... 9 . . . 15 Contents Page Part 5Recapitulation . . . . Part 6Portability of Deceased Spousal Unused Exclusion (DSUE) . . . . . . . . . . . . Schedule AReal Estate . . Schedule A-1Section 2032A Valuation . . . . . . Schedule BStocks and Bonds . . . . . . . . . . . . . Schedule CMortgages, Notes, and Cash . . . . . . Schedule DInsurance on the Decedent's Life . . . . Schedule EJointly Owned Property . . . . . . . . . . . Schedule FOther Miscellaneous Property . Decedent Who Was a Surviving Spouse . . . . . Schedule GTransfers During Decedent's Life . . Schedule HPowers of Appointment . . . . . . . . Schedule IAnnuities . . . . Schedule JFuneral Expenses and Expenses Incurred in Administering Property Subject to Claims . . . . . . . . . . . . Schedule KDebts of the Decedent and Mortgages and Liens . . . . . . . . . . Schedule LNet Losses During Administration and Expenses Incurred in Administering Property Not Subject to Claims . . . Schedule MBequests, etc., to Surviving Spouse (Marital Deduction) . . . . Schedule OCharitable, Public, and Similar Gifts and Bequests . . . . . . . . Schedule PCredit for Foreign Death Taxes . . . Schedule QCredit for Tax on Prior Transfers . . . . . Schedules R and R-1 - Generation-Skipping Transfer Tax . . . . . . . . Schedule UQualified Conservation Easement Exclusion . . . . . . . . . . Schedule PCProtective Claim for Refund . . . . . . Continuation Schedule . . . . Index . . . . . . . . . . . . . . . . . . Checklist . . . . . . . . . . . . . . . . Cat. No. 16779E . . . 16 . . . 17 . . . 18 . . . 19 . . . 21 . . . 23 . . . 24 . . . 24 . . . 25 . . . 26 . . . 26 . . . 28 . . . 29 . . . 31 . . . 32 . . . 33 . . . 34 . . . 37 . . . 38 . . . 39 . . . 42 . . . 46 . . . . . . . . . . . . 48 49 51 52 Future Developments For the latest information about developments related to Form 706 and its instructions, such as legislation enacted after they were published, go to www.irs.gov/form706. What's New Schedule PCProtective Claim for Refund has been added to Form 706. By filing Schedule PC, taxpayers can preserve their right to a refund of estate taxes paid when a claim or expense which is the subject of unresolved controversy at the time of filing the return later becomes deductible under section 2053. Line 7 Worksheet in the instructions has been expanded to include the calculation for cumulative lifetime gifts on which tax was paid or payable. This amount is used in Section C of Part 6- Portability of Deceased Spousal Unused Exclusion (DSUE). Submit a copy of the Line 7 Worksheet (if completed) when you file Form 706. Various dollar amounts and limitations in the Form 706 are indexed for inflation. For decedents dying in 2013, the following amounts are applicable: a. The basic exclusion amount is $5,250,000. b. The ceiling on special-use valuation is $1,070,000. c. The amount used in figuring the 2% portion of estate tax payable in installments is $1,430,000. The IRS will publish amounts for future years in annual revenue procedures. Reminders Executors must provide documentation of their status. The credit for transfers made by lifetime gift has been reunified with the credit against transfers made at death. The applicable credit amount for 2013 is $2,045,800 (based on the basic exclusion amount of $5,250,000). This does not include any applicable credit resulting from DSUE amount received from a predeceased spouse. Portability of Deceased Spousal Unused Exclusion 1. Part 6Portability of Deceased Spousal Unused Exclusion (DSUE) was added to Form 706. The only action required to elect portability of the DSUE amount, if any, is to file a timely and complete Form 706. In this Part, taxpayers can opt out of electing to transfer any DSUE amount to a surviving spouse, calculate the amount of DSUE to be transferred in the event of an election, and/or account for any DSUE amount received from predeceased spouse(s). 2. Line 9 of Part 2Tax Computation was replaced with lines 9a through 9d to calculate the applicable exclusion amount and applicable credit amount (formerly unified credit amount), factoring in any DSUE amount received from a predeceased spouse. 3. Executors of estates who are not required to file Form 706 under section 6018(a) but who are filing to elect portability of DSUE amount to the surviving spouse are not required to report the value of certain property eligible for the marital deduction under section 2056 or 2056A or the charitable deduction under section 2055 under the special rule of Reg. section 20.2010- 2T(a)(7)(ii). However, the value of those assets must be estimated and included in the total value of the gross estate. The special rule does not apply to assets whose valuation is required for eligibility under section 2032, 2032A, 2652(a)(3), 6166 or other provision of the Code or Regulations. A timely and complete Form 706 must be filed by the executor of any estate who intends to transfer the DSUE amount to the decedent's surviving spouse, regardless of the amount of the gross estate. See instructions for Part 6Portability of Deceased Spousal Unused Exclusion, below. Filing a timely and complete Form 706 with a DSUE amount will be considered an election to transfer the DSUE amount to the surviving spouse. An executor of an estate who files a Form 706 that does not elect to transfer the DSUE amount to the surviving spouse must affirmatively opt out of portability. See Part 6Portability of Deceased Spousal Exclusion, Section A. General Instructions Purpose of Form The executor of a decedent's estate uses Form 706 to figure the estate tax imposed by Chapter 11 of the Internal Revenue Code. This tax is levied on the entire taxable estate and not just on the share received by a particular beneficiary. Form 706 is also used to figure the generation-skipping transfer (GST) tax imposed by Chapter 13 on direct skips (transfers to skip persons of interests in property included in the decedent's gross estate). Which Estates Must File For decedents who died in 2013, Form 706 must be filed by the executor of the estate of every U.S. citizen or resident: a. Whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $5,250,000; or, b. Whose executor elects to transfer the DSUE amount to the surviving spouse, regardless of the size of the decedent's gross estate. See instructions for Part 6Portability of Deceased Spousal Unused Exclusion and sections 2010(c)(4) and (c)(5). To determine whether you must file a return for the estate under test a above, add: 1. The adjusted taxable gifts (as defined in section 2503) made by the decedent after December 31, 1976; 2. The total specific exemption allowed under section 2521 (as in effect before its repeal by the Tax Reform Act of 1976) for gifts made by the decedent after September 8, 1976; and 3. The decedent's gross estate valued as of the date of death. Gross Estate The gross estate includes all property in which the decedent had an interest (including real property outside the United States). It also includes: Certain transfers made during the decedent's life without an adequate and full consideration in money or money's worth, Annuities, The includible portion of joint estates with right of survivorship (see instructions for Schedule E), The includible portion of tenancies by the entirety (see instructions for Schedule E), -2- Certain life insurance proceeds (even though payable to beneficiaries other than the estate) (see instructions for Schedule D), Property over which the decedent possessed a general power of appointment, Dower or curtesy (or statutory estate) of the surviving spouse, and Community property to the extent of the decedent's interest as defined by applicable law. Note. Under the special rule of Regulations section 20.2010-2T(a)(7) (ii), executors of estates who are not required to file Form 706 under section 6018(a), but who are filing to elect portability of DSUE amount to the surviving spouse, are not required to report the value of certain property eligible for the marital deduction under section 2056 or 2056A or the charitable deduction under section 2055. However, the value of those assets must be estimated and included in the total value of the gross estate. See instructions for Part 5Recapitulation, lines 10 and 23, for more information. For more specific information, see the instructions for Schedules A through I. U.S. Citizens or Residents; Nonresident Noncitizens File Form 706 for the estates of decedents who were either U.S. citizens or U.S. residents at the time of death. For estate tax purposes, a resident is someone who had a domicile in the United States at the time of death. A person acquires a domicile by living in a place for even a brief period of time, as long as the person had no intention of moving from that place. File Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return, for the estates of nonresident alien decedents (decedents who were neither U.S. citizens nor U.S. residents at the time of death). Residents of U.S. Possessions All references to citizens of the United States are subject to the provisions of sections 2208 and 2209, relating to decedents who were U.S. citizens and residents of a U.S. possession on the date of death. If such a decedent became a U.S. citizen only because of his or her connection with a possession, then the decedent is considered a nonresident alien decedent for estate tax purposes, and you should file Form 706-NA. If such a decedent became a U.S. citizen wholly independently of his General Instructions or her connection with a possession, then the decedent is considered a U.S. citizen for estate tax purposes, and you should file Form 706. Executor The term executor includes the executor, personal representative, or administrator of the decedent's estate. If none of these is appointed, qualified, and acting in the United States, every person in actual or constructive possession of any property of the decedent is considered an executor and must file a return. Executors must provide documentation proving their status. Documentation will vary, but may include documents such as a certified copy of the will or a court order designating the executor(s). A statement by the executor attesting to their status is insufficient. When To File You must file Form 706 to report estate and/or GST tax within 9 months after the date of the decedent's death. If you are unable to file Form 706 by the due date, you may receive an extension of time to file. Use Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, to apply for an automatic 6-month extension of time to file. Note. An executor can only elect to transfer the DSUE amount to the surviving spouse if the Form 706 is filed timely; that is, within 9 months of the decedent's date of death or, if you have received an extension of time to file, before the 6-month extension period ends. Private delivery services. You can use certain private delivery services designated by the IRS to meet the \"timely mailing as timely filing/paying\" rule for tax returns and payments. These private delivery services include only the following: DHL Express (DHL): DHL Same Day Service. Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, FedEx International First. United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express. General Instructions The private delivery service can tell you how to get written proof of the mailing date. Where To File File Form 706 at the following address: Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999 Paying the Tax The estate and GST taxes are due within 9 months of the date of the decedent's death. You may request an extension of time for payment by filing Form 4768. You may also elect under section 6166 to pay in installments or under section 6163 to postpone the part of the tax attributable to a reversionary or remainder interest. These elections are made by checking lines 3 and 4 (respectively) of Part 3Elections by the Executor, and attaching the required statements. If the tax paid with the return is different from the balance due as figured on the return, explain the difference in an attached statement. If you have made prior payments to the IRS, attach a statement to Form 706 including these facts. Paying by check. Make the check payable to the \"United States Treasury.\" Please write the decedent's name, social security number (SSN), and \"Form 706\" on the check to assist us in posting it to the proper account. Paying Electronically. Payment of the tax due shown on Form 706 may be submitted electronically through the Electronic Federal Tax Payment System (EFTPS). EFTPS is a free service of the Department of Treasury. To be considered timely, payments made through EFTPS must be completed no later than 8 p.m. Eastern time the day before the due date. All EFTPS payments must be scheduled in advance of the due date and, if necessary, may be changed or cancelled up to two business days before the scheduled payment date. To get more information about EFTPS or to enroll, visit www.eftps.gov or call 1-800-555-4477. Additional information about EFTPS is available in Publication 966, Electronic Federal Tax Payment System: A Guide to Getting Started. -3- Signature and Verification If there is more than one executor, all listed executors CAUTION are responsible for the return. However, it is sufficient for only one of the co-executors to sign the return. ! All executors are responsible for the return as filed and are liable for penalties imposed for erroneous or false returns. If two or more persons are liable for filing the return, they should all join together in filing one complete return. However, if they are unable to join in making one complete return, each is required to file a return disclosing all the information the person has about the estate, including the name of every person holding an interest in the property and a full description of the property. If the appointed, qualified, and acting executor is unable to make a complete return, then every person holding an interest in the property must, on notice from the IRS, make a return regarding that interest. The executor who files the return must, in every case, sign the declaration on page 1 under penalties of perjury. Generally, anyone who is paid to prepare the return must sign the return in the space provided and fill in the Paid Preparer Use Only area. See section 7701(a)(36)(B) for exceptions. In addition to signing and completing the required information, the paid preparer must give a copy of the completed return to the executor. Note. A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program. Amending Form 706 If you find that you must change something on a return that has already been filed, you should: File another Form 706; Enter \"Supplemental Information\" across the top of page 1 of the form; and Attach a copy of pages 1, 2, 3, and 4 of the original Form 706 that has already been filed. If you have already been notified that the return has been selected for examination, you should provide the additional information directly to the office conducting the examination. Supplemental Documents Note. You must attach the death certificate to the return. If the decedent was a citizen or resident of the United States and died testate (leaving a valid will), attach a certified copy of the will to the return. If you cannot obtain a certified copy, attach a copy of the will and an explanation of why it is not certified. Other supplemental documents may be required as explained below. Examples include Forms 712, Life Insurance Statement; 709, United States Gift (and Generation-Skipping Transfer) Tax Return; and 706-CE, Certificate of Payment of Foreign Death Tax; trust and power of appointment instruments; and state certification of payment of death taxes. If you 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 a resident of the United States, you must attach the following documents to the return: 1. A copy of the inventory of property and the schedule of liabilities, claims against the estate, and expenses of administration filed with the foreign court of probate jurisdiction, certified by a proper official of the court; 2. A copy of the return filed under the foreign inheritance, estate, legacy, succession tax, or other death tax act, certified by a proper official of the foreign tax department, if the estate is subject to such a foreign tax; and 3. If the decedent died testate, a certified copy of the will. Rounding Off to Whole Dollars You may show the money items on the return and accompanying schedules as whole-dollar amounts. To do so, drop the cents from any amount with less than 50 cents and increase any amount with 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.55 become $3. If you have to add two or more amounts to compute an item's value, include the cents when adding the amounts and round off only the total. Penalties Late filing and late payment. Section 6651 provides for penalties for both late filing and for late payment unless there is reasonable cause for the delay. The law also provides for penalties for willful attempts to evade payment of tax. The late filing penalty will not be imposed if the taxpayer can show that the failure to file a timely return is due to reasonable cause. Reasonable cause determinations. If you receive a notice about penalties after you file Form 706, send an explanation and we will determine if you meet reasonable cause criteria. Do not attach an explanation when you file Form 706. Explanations attached to the return at the time of filing will not be considered. Valuation understatement. Section 6662 provides a 20% penalty for the underpayment of estate tax that exceeds $5,000 when the underpayment is attributable to valuation understatements. A valuation understatement occurs when the value of property reported on Form 706 is 65% or less of the actual value of the property. This penalty increases to 40% if there is a gross valuation understatement. A gross valuation understatement occurs if any property on the return is valued at 40% or less of the value determined to be correct. Penalties also apply to late filing, late payment, and underpayment of GST taxes. Return preparer. Estate tax return preparers, who prepare any return or claim for refund which reflects an understatement of tax liability due to willful or reckless conduct, are subject to a penalty of $5,000 or 50% of the income derived (or income to be derived), whichever is greater, for the preparation of each such return. See section 6694(b), the regulations thereunder, and Ann. 2009-15, 2009-11 I.R.B. 687 (available at www.irs.gov/ pub/irs-irbs/irb09-11.pdf) for more information. Form 706-CE, Certificate of Payment of Foreign Death Tax. Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States. Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Form 712, Life Insurance Statement. Form 2848, Power of Attorney and Declaration of Representative. Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. Form 4808, Computation of Credit for Gift Tax. Form 8821, Tax Information Authorization. Form 8822, Change of Address. Additional Information. The following publications may assist you in learning about and preparing Form 706: Publication 559, Survivors, Executors, and Administrators. Publication 910, IRS Guide to Free Tax Services. Note. For information about release of nonresident U.S. citizen decedents' assets using transfer certificates under Regulations section 20.6325-1, write to: Internal Revenue Service Cincinnati, OH 45999 Stop 824G Specific Instructions You must file the first four pages of Form 706 and all required schedules. File Schedules A through I, as appropriate, to support the entries in items 1 through 9 of Part 5Recapitulation. Obtaining Forms and Publications To File or Use Internet. You can access the IRS website 24 hours a day, 7 days a week at IRS.gov to: Download forms, instructions, and publications; Order IRS products online; Research your tax questions online; Search publications online by topic or keyword; and Sign up to receive local and national tax news by email. Other forms that may be required. Form SS-5, Application for a Social Security Card. -4- General, Specific, and Part Instructions you must report the asset on the appropriate schedule, but you are not required to enter a value for the asset. Include the estimated value of the asset in the totals entered on lines 10 and 23 of Part 5 Recapitulation. you claim an exclusion on item 11, complete and attach Schedule U. you claim any deductions on items 14 through 22 of the Recapitulation, complete and attach the appropriate schedules to support the claimed deductions. you claim credits for complete and attach foreign death taxes or Schedule P or Q. tax on prior transfers, there is not enough space on a schedule to list all the items, attach a Continuation Schedule (or additional sheets of the same size) to the back of the schedule (see the Continuation Schedule at the end of Form 706); photocopy the blank schedule before completing it, if you will need more than one copy. Also consider the following: Form 706 has 31 numbered pages. The pages are perforated so that you can remove them for copying and filing. Number the items you list on each schedule, beginning with the number \"1\" each time, or using the numbering convention as indicated on the schedule (for example, Schedule M). Total the items listed on the schedule and its attachments, Continuation Schedules, etc. Enter the total of all attachments, Continuation Schedules, etc., at the bottom of the printed schedule, but do not carry the totals forward from one schedule to the next. Enter the total, or totals, for each schedule on page 3, Part 5Recapitulation. Do not complete the \"Alternate valuation date\" or \"Alternate value\" columns of any schedule unless you elected alternate valuation on line 1 of Part 3Elections by the Executor. Part Instructions Line 2 Enter the social security number (SSN) assigned specifically to the decedent. You cannot use the SSN assigned to the decedent's spouse. If the decedent did not have an SSN, the executor should obtain one for the decedent by filing Form SS-5, with a local Social Security Administration office. Line 6a. Name of Executor If there is more than one executor, enter the name of the executor to be contacted by the IRS and see line 6d. Line 6b. Executor's Address Use Form 8822 to report a change of the executor's address. Line 6c. Executor's Social Security Number Only one executor should complete this line. If there is more than one executor, see line 6d. Line 6d. Multiple Executors Check here if there is more than one executor. On an attached statement, provide the names, addresses, telephone numbers, and SSNs of any executor other than the one named on line 6a. Line 11. Special Rule If the estate is estimating the value of assets under the special rule of Regulations section 20.2010-2T(a)(7) (ii), check here and see the instructions for lines 10 and 23 of Part 5Recapitulation. Part 2Tax Computation In general, the estate tax is figured by applying the unified rates shown in Table A to the total of transfers both during life and at death, and then subtracting the gift taxes, as refigured based on the date of death rates. See Worksheet TG, Line 4 Worksheet, and Line 7 Worksheet. Note. You must complete Part 2Tax Computation. -5- Column A Taxable amount over Column B Taxable amount not over $0 $10,000 10,000 20,000 20,000 40,000 40,000 60,000 60,000 80,000 80,000 100,000 100,000 150,000 150,000 250,000 250,000 500,000 500,000 750,000 750,000 1,000,000 1,000,000 ---- Column C Tax on amount in Column A $0 1,800 3,800 8,200 13,000 18,200 23,800 38,800 70,800 155,800 248,300 345,800 Column D Rate of tax on excess over amount in Column A . you are estimating the value of one or more assets pursuant to the special rule of Regulations section 20.2010-2T(a)(7)(ii), Part 1Decedent and Executor Table A Unified Rate Schedule . you enter zero on any you need not file the item of the schedule (except for Recapitulation, Schedule F) referred to on that item. When you complete the return, staple all the required pages together in the proper order. . THEN . . . . IF . . . 18% 20% 22% 24% 26% 28% 30% 32% 34% 37% 39% 40% Line 1 If you elected alternate valuation on line 1, Part 3Elections by the Executor, enter the amount you entered in the \"Alternate value\" column of item 13 of Part 5Recapitulation. Otherwise, enter the amount from the \"Value at date of death\" column. Line 3b. State Death Tax Deduction The estates of decedents dying after December 31, 2004, will CAUTION be allowed a deduction for state death taxes, instead of a credit. The state death tax credit was repealed as of January 1, 2005. ! You may take a deduction on line 3b for estate, inheritance, legacy, or succession taxes paid as the result of the decedent's death to any state or the District of Columbia. You may claim an anticipated amount of deduction and figure the federal estate tax on the return before the state death taxes have been paid. However, the deduction cannot be finally allowed unless you pay the state death taxes and claim the deduction within 4 years after the return is filed, or later (see section 2058(b)) if: A petition is filed with the Tax Court of the United States, You have an extension of time to pay, or You file a claim for refund or credit of an overpayment which extends the deadline for claiming the deduction. Worksheet TG and Line 4 Worksheet a. b. Calendar year or calendar quarter Total taxable gifts for period (see Note) Note. For the definition of a taxable gift, see section 2503. Follow Form 709. That is, include only the decedent's one-half of split gifts, whether the gifts were made by the decedent or the decedent's spouse. In addition to gifts reported on Form 709, you must include any taxable gifts in excess of the annual exclusion that were not reported on Form 709. c. 1. Taxable amount included in col. b for gifts included in the gross estate Total taxable gifts made before 1977 d. Taxable amount included in col. b for gifts that qualify for \"special treatment of split gifts\" described below e. f. Gift tax paid by decedent on gifts in col. d Gift tax paid by decedent's spouse on gifts in col. c Gifts made after 1976 Gifts made after June 6, 1932, and before 1977 Worksheet TG Taxable Gifts Reconciliation (To be used for lines 4 and 7 of the Tax Computation) 2. Totals for gifts made after 1976 Line 4 WorksheetAdjusted Taxable Gifts Made After 1976 1. Taxable gifts made after 1976. Enter the amount from Worksheet TG, line 2, column b 1 2. Taxable gifts made after 1976 reportable on Schedule G. Enter the amount 2 from Worksheet TG, line 2, column c 3. Taxable gifts made after 1976 that qualify for \"special treatment.\" Enter the 3 amount from Worksheet TG, line 2, column d 4. Add lines 2 and 3 5. Adjusted taxable gifts. Subtract line 4 from line 1. Enter here and on Part 2Tax Computation, line 4 Note. The deduction is not subject to dollar limits. If you make a section 6166 election to pay the federal estate tax in installments and make a similar election to pay the state death tax in installments, see section 2058(b) for exceptions and periods of limitation. If you transfer property other than cash to the state in payment of state inheritance taxes, the amount you may claim as a deduction is the lesser of the state inheritance tax liability discharged or the fair market value (FMV) of the property on the date of the transfer. For more information on the application of such transfers, see the principles discussed in Revenue Ruling 86-117, 1986-2 C.B. 157, prior to the repeal of section 2011. Send the following evidence to the IRS: 1. Certificate of the proper officer of the taxing state, or the District of Columbia, showing the: a. Total amount of tax imposed (before adding interest and penalties and before allowing discount), b. Amount of discount allowed, c. Amount of penalties and interest imposed or charged, d. Total amount actually paid in cash, and e. Date of payment. 2. Any additional proof the IRS specifically requests. File the evidence requested above with the return, if possible. Otherwise, send it as soon as possible after the return is filed. Line 6 To figure the tentative tax on the amount on line 5, use Table AUnified Rate Schedule, above, and put the result on this line. Lines 4 and 7 Three worksheets are provided to help you figure the entries for these lines. Worksheet TGTaxable Gifts Reconciliation allows you to reconcile the decedent's lifetime taxable gifts to figure totals that will be used for the Line 4 Worksheet and the Line 7 Worksheet. 4 5 completing Worksheet TGTaxable Gifts Reconciliation. The amounts needed for Worksheet TG can usually be found on the filed returns that were subject to tax. However, if any of the returns were audited by the IRS, use the amounts that were finally determined as a result of the audits. In addition, you must make a reasonable effort to discover any gifts in excess of the annual exclusion made by the decedent (or on behalf of the decedent under a power of attorney) for which no Forms 709 were filed. Include the value of such gifts in column b of Worksheet TG. The annual exclusion per donee for 1977 through 1981 was $3,000, $10,000 for 1981 through 2001, $11,000 for 2002 through 2005, $12,000 for 2006 through 2008, and $13,000 for 2009 through 2012. For 2013, the annual exclusion for gifts of present interest is $14,000 per donee. You must have all of the decedent's gift tax returns (Forms 709) before -6- Part Instructions Line 7 Worksheet - Submit a copy with Form 706 Line 7 Worksheet Part A- Used to determine Applicable Credit Allowable for Prior Periods after 1976 (a) Tax Period1 (b) Taxable Gifts for Applicable Period (c) Taxable Gifts for Prior Periods 2 (d) Cumulative Taxable Gifts Including Applicable Period (add Row (b) and Row (c)) (e) Tax at Date of Death Rates for Prior Gifts (from Row (c))3 (f) Tax at Date of Death Rates for Cumulative Gifts including Applicable Period (from Row (d)) (g) Tax at Date of Death Rates for Gifts in Applicable Period (subtract Row (e) from Row (f)) (h) Total DSUE applied from Prior Periods and Applicable Period (from Line 2 of Schedule C of Applicable Period Form 709) (i) Basic Exclusion for Applicable Period (Enter the amount from the Table of Basic Exclusion Amounts) (j) Basic Exclusion amount plus Total DSUE applied in prior periods and applicable period (add Row (h) and Row (i)) (k) Maximum Applicable Credit amount based on Row (j) (Using Table AUnified Rate Schedule)4 (l) Applicable Credit amount used in Prior Periods (add Row (l) and Row (n) from prior period) (m) Available Credit in Applicable Period (subtract Row (l) from Row (k)) (n) Credit Allowable (lesser of Row (g) or Row (m)) (o) Tax paid or payable at Date of Death rates for Applicable Period (subtract Row (n) from Row (g)) (p) Tax on Cumulative Gifts less tax paid or payable for Applicable Period (subtract Row (o) from Row (f)) (q) Cumulative Taxable Gifts less Gifts in the Applicable Period on which tax was paid or payable based on Row (p) (Using the Taxable Gift Amount Table) (r) Pre-1977 Gifts in the Applicable Period on which tax was payable (subtract Row (q) from Row (d)) Line 7 Worksheet Part B 1 Total gift taxes payable on gifts after 1976 (sum of amounts in Row (o)). 2 Gift taxes paid by the decedent on gifts that qualify for \"special treatment.\" Enter the amount from Worksheet TG, line 2, col. (e). 3 Subtract line 2 from line 1. 4 Gift tax paid by decedent's spouse on split gifts included on Schedule G. Enter amount from Worksheet TG, line 2, col. (f). 5 Add lines 3 and 4. Enter here and on Part 2Tax Computation, line 7. 6 Cumulative lifetime gifts on which tax was paid or payable. Enter this amount on line 3, Section C, Part 6 of Form 706 (sum of amounts in Row (r)). Footnotes: 1 Row (a): For annual returns, enter the tax period as (YYYY). For quarterly returns enter tax period as (YYYY-Q). 2 Row (c): Enter amount from Row (d) of the previous column. 3 Row (e): Enter amount from Row (f) of the previous column. 4 Row (k): Calculate the applicable credit on the amount in Row (j), using Table A Unified Rate Schedule, and enter here. (For each column in Row (k), subtract 20 percent of any amount allowed as a specific exemption for gifts made after September 8, 1976, and before January 1, 1977.) Part Instructions -7- Taxable Gift Amount Table Column A Column B Column C Column D Amount in Amount in Property Rate Row (p) Row (p) Value on (Divisor) Line 7 Line 7 Amount on excess Worksheet Worksheet in of amount over... not over... Column A in Column A 0 1,800 0 18% 1,800 3,800 10,000 20% 3,800 8,200 20,000 22% 8,200 13,000 40,000 24% 13,000 18,200 60,000 26% 18,200 23,800 80,000 28% 23,800 38,800 100,000 30% 38,800 70,800 150,000 32% 70,800 155,800 250,000 34% 155,800 248,300 500,000 37% 248,300 345,800 750,000 39% 345,800 ------ 1,000,000 40% How to complete line 7 worksheet. Row (a). Beginning with the earliest year in which the taxable gifts were made, enter the tax period of prior gifts. If you filed returns for gifts made after 1981, enter the calendar year in Row (a) as (YYYY). If you filed returns for gifts made after 1976 and before 1982, enter the calendar quarters in Row (a) as (YYYY-Q). Row (b). Enter all taxable gifts made in the specified year. Enter all pre-1977 gifts on the pre-1977 column. Row (c). Enter the amount from Row (d) of the previous column. Row (d). Enter the sum of Row (b) and Row (c) from the current column. Row (e). Enter the amount from Row (f) of the previous column. Row (f). Enter the tax based on the amount in Row (d) of the current column using Table A Unified Rate Schedule, earlier. Row (g). Subtract the amount in Row (e) from the amount in Row (f) for the current column. Row (h). Complete this row only if a DSUE amount was received from predeceased spouse(s) and was applied to lifetime gifts. See line 2 of Schedule C on the Form 709 filed for the year listed in Row (a) for the amount to be entered in this row. Row (i). Enter the applicable amount from the Table of Basic Exclusion Amounts. Row (j). Enter the sum of Rows (h) and Row (i). Row (k). Calculate the applicable credit on the amount in Row (j) using Table A Unified Rate Schedule, and enter here. Note. The entries in each column of Row (k) must be reduced by 20 percent of the amount allowed as a specific exemption for gifts made after September 8, 1976, and before January 1, 1977 (but no more than $6,000). Row (l). Add the amounts in Row (l) and Row (n) from the previous column. Row (m). Subtract the amount in Row (l) from the amount in Row (k) to determine the amount of any available credit. Enter result in Row (m). Row (n). Enter the lesser of the amounts in Row (g) or Row (m). Row (o). Subtract the amount in Row (n) from the amount in Row (g) for the current column. Row (p). Subtract the amount in Row (o) from the amount in Row (f) for the current column. Row (q). Enter the Cumulative Taxable Gift amount based on the amount in Row (p) using the Taxable Gift Amount Table. Row (r). If Row (o) is greater than zero in the applicable period, subtract Row (q) from Row (d). If Row (o) is not greater than zero enter -0-. Repeat for each year in which taxable gifts were made. Remember to submit a copy of the Line 7 Worksheet when you CAUTION file Form 706. If additional space is needed to report prior gifts, please attach additional sheets. ! -8- Table of Basic Exclusion Amounts Period Basic Exclusion Amount Credit Equivalent at 2013 rates 1977 (Quarters 1 and 2) $30,000 $6,000 1977 (Quarters 3 and 4) $120,667 $30,000 1978 $134,000 $34,000 1979 $147,333 $38,000 1980 $161,563 $42,500 1981 $175,625 $47,000 1982 $225,000 $62,800 1983 $275,000 $79,300 1984 $325,000 $96,300 1985 $400,000 $121,800 1986 $500,000 $155,800 1987 through 1997 $600,000 $192,800 1998 $625,000 $202,050 1999 $650,000 $211,300 2000 and 2001 $675,000 $220,550 2002 through 2010 $1,000,000 $345,800 2011 $5,000,000 $1,945,800 2012 $5,120,000 $1,993,800 2013 $5,250,000 $2,045,800 Note. In figuring the line 7 amount, do not include any tax paid or payable on gifts made before 1977. The line 7 amount is a hypothetical figure used to calculate the estate tax. Special treatment of split gifts. These special rules apply only if: The decedent's spouse predeceased the decedent; The decedent's spouse made gifts that were \"split\" with the decedent under the rules of section 2513; The decedent was the \"consenting spouse\" for those split gifts, as that term is used on Form 709; and The split gifts were included in the decedent's spouse's gross estate under section 2035. If all four conditions above are met, do not include these gifts on line 4 of the Tax Computation and do not include the gift taxes payable on these gifts on line 7 of the Tax Computation. These adjustments are incorporated into the worksheets. Part Instructions Lines 9a through 9d. Applicable Credit Amount (formerly Unified Credit Amount) The applicable credit amount is allowable credit against estate and gift taxes. It is calculated by determining the tentative tax on the applicable exclusion amount, which is the amount that can be transferred before an estate tax liability will be incurred. The applicable exclusion amount equals the total of: Line 9a: The basic exclusion amount. In 2013, the basic exclusion amount, as adjusted for inflation under 2010(c)(3), is $5,250,000. Line 9b: The deceased spousal unused exclusion amount (DSUE). If the decedent had a spouse who died on or after January 1, 2011, whose estate did not use all of its applicable exclusion against gift or estate tax liability, a DSUE amount may be available for use by the decedent's estate. If the predeceased spouse died in 2011, the DSUE amount was calculated and attached to his or her Form 706. If the predeceased spouse died in 2012 or after, this amount is found in Part 6, Section C of the Form 706 filed by the estate of the decedent's predeceased spouse. The amount to be entered on line 9b is calculated in Part 6, Section D. Line 10. Adjustment to Applicable Credit If the decedent made gifts (including gifts made by the decedent's spouse and treated as made by the decedent by reason of gift splitting) after September 8, 1976, and before January 1, 1977, for which the decedent claimed a specific exemption, the applicable credit amount on this estate tax return must be reduced. The reduction is figured by entering 20% of the specific exemption claimed for these gifts. Note. The specific exemption was allowed by section 2521 for gifts made before January 1, 1977. If the decedent did not make any gifts between September 8, 1976, and January 1, 1977, or if the decedent made gifts during that period but did not claim the specific exemption, enter zero. Line 15. Total Credits Generally, line 15 is used to report the total of credit for foreign death taxes (line 13) and credit for tax on prior transfers (line 14). However, you may also use line 15 to report credit taken for federal gift taxes imposed by Chapter 12 of the Code, Part Instructions and the corresponding provisions of prior laws, on certain transfers the decedent made before January 1, 1977, that are included in the gross estate. The credit cannot be more than the amount figured by the following formula: Gross estate tax minus (the sum of the state death taxes and unified credit) Value of gross estate minus (the sum of the deductions for charitable, public, and similar gifts and bequests and marital deduction) Line 1. Alternate Valuation TIP x Value of included gift When taking the credit for pre-1977 federal gift taxes: Include the credit in the amount on line 15 and Identify and enter the amount of the credit you are taking on the dotted line to the left of the entry space for line 15 on page 1 of Form 706 with a notation, \"section 2012 credit.\" For more information, see the regulations under section 2012. This computation may be made using Form 4808. Attach a copy of a completed Form 4808 or the computation of the credit. Also, attach all available copies of Forms 709 filed by the decedent to help verify the amounts entered on lines 4 and 7, and the amount of credit taken (on line 15) for pre-1977 federal gift taxes. Canadian marital credit. In addition to using line 15 to report credit for federal gift taxes on pre-1977 gifts, you may also use line 15 to claim the Canadian marital credit, where applicable. When taking the marital credit under the 1995 Canadian Protocol: Include the credit in the amount on line 15 and Identify and enter the amount of the credit you are taking on the dotted line to the left of the entry space for line 15 on page 1 of Form 706 with a notation, \"Canadian marital credit.\" Also, attach a statement to the return that refers to the treaty, waives QDOT rights, and shows the computation of the marital credit. See the 1995 Canadian income tax treaty protocol for details on figuring the credit. Part 3Elections by the Executor Note. The election to allow the decedent's surviving spouse to use the decedent's unused exclusion amount is made by filing a timely and complete Form 706. See instructions for Part -9- 6Portability of Deceased Spousal Unused Exclusion, below, and sections 2010(c)(4) and (c)(5). See the example showing the use of Schedule B where the alternate valuation is adopted. Unless you elect at the time the return is filed to adopt alternate valuation as authorized by section 2032, value all property included in the gross estate as of the date of the decedent's death. Alternate valuation cannot be 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 unless the election will decrease both the value of the gross estate and the sum (reduced by allowable credits) of the estate and GST taxes payable by reason of the decedent's death for the property includible in the decedent's gross estate. Elect alternate valuation by checking \"Yes,\" on line 1 and filing Form 706. You may make a protective alternate valuation election by checking \"Yes,\" on line 1, writing the word \"protective,\" and filing Form 706 using regular values. Once made, the election may not be revoked. The election may be made on a late-filed Form 706 provided it is not filed later than 1 year after the due date (including extensions actually granted). Relief under sections 301.9100-1 and 301.9100-3 may be available to make an alternate valuation election or a protective alternate valuation election, provided a Form 706 is filed no later than 1 year after the due date of the return (including extensions actually granted). If alternate valuation is elected, value the property included in the gross estate as of the following dates as applicable: Any property distributed, sold, exchanged, or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent's death is valued on the date of distribution, sale, exchange, or other disposition. Value this property on the date it ceases to be a part of the gross estate; for example, on the date the title passes as the result of its sale, exchange, or other disposition. Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued as of 6 months after the date of the decedent's death. Any property, interest, or estate that is affected by mere lapse of time is valued as of the date of decedent's death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first. However, you may change the date of death value to account for any change in value that is not due to a \"mere lapse of time\" on the date of its distribution, sale, exchange, or other disposition. The property included in the alternate valuation and valued as of 6 months after the date of the decedent's death, or as of some intermediate date (as described above) is the property included in the gross estate on the date of the decedent's death. Therefore, you must first determine what property was part of the gross estate at the decedent's death. Interest. Interest accrued to the date of the decedent's death on bonds, notes, and other interest-bearing obligations is property of the gross estate on the date of death and is included in the alternate valuation. Rent. Rent accrued to the date of the decedent's death on leased real or personal property is property of the gross estate on the date of death and is included in the alternate valuation. Dividends. Outstanding dividends that were declared to stockholders of record on or before the date of the decedent's death are considered property of the gross estate on the date of death, and are included in the alternate valuation. Ordinary dividends declared to stockholders of record after the date of the decedent's death are not included in the gross estate on the date of death and are not eligible for alternate valuation. However, if dividends are declared to stockholders of record after the date of the decedent's death so that the shares of stock at the later valuation date do not reasonably represent the same property at the date of the decedent's death, include those dividends (except dividends paid from earnings of the corporation after the date of the decedent's death) in the alternate valuation. On Schedules A through I, you must show: 1. What property is included in the gross estate on the date of the decedent's death; 2. What property was distributed, sold, exchanged, or otherwise disposed of within the 6-month period after the decedent's death, and the dates of these distributions, etc. (These two items should be entered in the \"Description\" column of each schedule. Briefly explain the status or disposition governing the alternate valuation date, such as: \"Not disposed of within 6 months following death, \"\"Distributed,\" \"Sold,\" \"Bond paid on maturity,\" etc. In this same column, describe each item of principal and includible income); 3. The date of death value, entered in the appropriate value column with items of principal and includible income shown separately; and 4. The alternate value, entered in the appropriate value column with items of principal and includible income shown separately. (In the case of any interest or estate, the value of which is affected by lapse of time, such as patents, leaseholds, estates for the life of another, or remainder interests, the value shown under the heading \"Alternate value\" must be the adjusted value; for example, the value as of the date of death with an adjustment reflecting any difference in its value as of the later date not due to lapse of time.) Note. If any property on Schedules A through I is being valued pursuant to the special rule of Regulations section 20.2010-2T(a)(7)(ii), values for those assets are not required to be reported on the Schedule. See Part 5Recapitulation, line 10. Distributions, sales, exchanges, and other dispositions of the property within the 6-month period after the decedent's death must be supported by evidence. If the court issued an order of distribution during that period, you must submit a certified copy of the order as part of the evidence. The IRS may require you to submit additional evidence, if necessary. If the alternate valuation method is used, the values of life estates, remainders, and similar interests are figured using the age of the recipient on the date of the decedent's death and the value of the property on the alternate valuation date. Line 2. Special-Use Valuation of Section 2032A In general. Under section 2032A, you may elect to value certain farm and closely held business real property at its farm or business use value rather than its fair market value (FMV). Both special-use valuation and alternate valuation may be elected. To elect special-use valuation, check \"Yes,\" on line 2 and complete and -10- attach Schedule A-1 and its required additional statements. You must file Schedule A-1 and its required attachments with Form 706 for this election to be valid. You may make the election on a late-filed return so long as it is the first return filed. The total value of the property valued under section 2032A may not be decreased from FMV by more than $1,070,000 for decedents dying in 2013. Real property may qualify for the section 2032A election if: 1. The decedent was a U.S. citizen or resident at the time of death; 2. The real property is located in the United States; 3. At the decedent's death, the real property was used by the decedent or a family member for farming or in a trade or business, or was rented for such use by either the surviving spouse or a lineal descendant of the decedent to a family member on a net cash basis; 4. The real property was acquired from or passed from the decedent to a qualified heir of the decedent; 5. The real property was owned and used in a qualified manner by the decedent or a member of the decedent's family during 5 of the 8 years before the decedent's death; 6. There was material participation by the decedent or a member of the decedent's family during 5 of the 8 years before the decedent's death; and 7. The property meets the following percentage requirements: a. At least 50% of the adjusted value of the gross estate must consist of the adjusted value of real or personal property that was being used as a farm or in a closely-held business and that was acquired from, or passed from, the decedent to a qualified heir of the decedent, and b. At least 25% of the adjusted value of the gross estate must consist of the adjusted value of qualified farm or closely-held business real property. For this purpose, adjusted value is the value of property determined without regard to its special-use value. The value is reduced for unpaid mortgages on the property or any indebtedness against the property, if the full value of the decedent's interest in the property (not reduced by such mortgage or indebtedness) is included in the value of the gross estate. The adjusted value of the qualified real and personal property used in different businesses may be Part Instructions combined to meet the 50% and 25% requirements. Qualified Real Property Qualified use. Qualified use means use of the property as a farm for farming purposes or in a trade or business other than farming. Trade or business applies only to the active conduct of a business. It does not apply to passive investment activities or the mere passive rental of property to a person other than a member of the decedent's family. Also, no trade or business is present in the case of activities not engaged in for profit. Ownership. To qualify as special-use property, the decedent or a member of the decedent's family must have owned and used the property in a qualified use for 5 of the last 8 years before the decedent's death. Ownership may be direct or indirect through a corporation, a partnership, or a trust. If the ownership is indirect, the business must qualify as a closely-held business under section 6166. The indirect ownership, when combined with periods of direct ownership, must meet the requirements of section 6166 on the date of the decedent's death and for a period of time that equals at least 5 of the 8 years preceding death. Directly owned property leased by the decedent to a separate closely-held business, is considered qualified real property if the business entity to which it was rented was a closely-held business (as defined by section 6166) for the decedent on the date of the decedent's death and for sufficient time to meet the \"5 in 8 years\" test explained above. Structures and other real property improvements. Qualified real property includes residential buildings and other structures and real property improvements regularly occupied or used by the owner or lessee of real property (or by the employees of the owner or lessee) to operate a farm or other closely-held business. A farm residence which the decedent occupied is considered to have been occupied for the purpose of operating the farm even when a family member and not the decedent was the person materially participating in the operation of the farm. Qualified real property also includes roads, buildings, and other structures and improvements functionally related to the qualified use. Elements of value such as mineral rights that are not related to the farm or Part Instructions business use are not eligible for special-use valuation. days) during which there was uninterrupted material participation. Property acquired from the decedent. Property is considered to have been acquired from or to have passed from the decedent if one of the following applies: The property is considered to have been acquired from or to have passed from the decedent under section 1014(b) (relating to basis of property acquired from a decedent); The property is acquired by any person from the estate; or The property is acquired by any person from a trust, to the extent the property is includible in the gross estate. Retirement or disability. If, on the date of death, the time period for material participation could not be met because the decedent was retired or disabled, a substitute period may apply. The decedent must have retired on social security or been disabled for a continuous period ending with death. A person is disabled for this purpose if he or she was mentally or physically unable to materially participate in the operation of the farm or other business. The substitute time period for material participation for these decedents is a period totaling at least 5 years out of the 8-year period that ended on the earlier of: The date the decedent began receiving social security benefits or The date the decedent became disabled. Qualified heir. A person is a qualified heir of property if he or she is a member of the decedent's family and acquired or received the property from the decedent. If a qualified heir disposes of any interest in qualified real property to any member of his or her family, that person will then be treated as the qualified heir for that interest. A member of the family includes only: An ancestor (parent, grandparent, etc.) of the individual; The spouse of the individual; The lineal descendant (child, stepchild, grandchild, etc.) of the individual, the individual's spouse, or a parent of the individual; or The spouse, widow, or widower of any lineal descendant described above. A legally adopted child of an individual is treated as a child of that individual by blood. Material Participation To elect special-use valuation, either the decedent or a member of his or her family must have materially participated in the operation of the farm or other business for at least 5 of the 8 years ending on the date of the decedent's death. The existence of material participation is a factual determination. Passively collecting rents, salaries, draws, dividends, or other income from the farm or other business is not sufficient for material participation, nor is merely advancing capital and reviewing a crop plan and financial reports each season or business year. In determining whether the required participation has occurred, disregard brief periods (that is, 30 days or less) during which there was no material participation, as long as such periods were both preceded and followed by substantial periods (more than 120 -11- Surviving spouse. A surviving spouse who received qualified real property from the predeceased spouse is considered to have materially participated if he or she was engaged in the active management of the farm or other business. If the surviving spouse died within 8 years of the first spouse's death, you may add the period of material participation of the predeceased spouse to the period of active management by the surviving spouse to determine if the surviving spouse's estate qualifies for special-use valuation. To qualify for this, the property must have been eligible for special-use valuation in the predeceased spouse's estate, though it does not have to have been elected by that estate. For additional details regarding material participation, see Regulations section 20.2032A-3(e). Valuation Methods The primary method of valuing special-use property that is used for farming purposes is the annual gross cash rental method. If comparable gross cash rentals are not available, you can substitute comparable average annual net share rentals. If neither of these is available, or if you so elect, you can use the method for valuing real property in a closely-held business. Average annual gross cash rental. Generally, the special-use value of property that is used for farming purposes is determined as follows: 1. Subtract the average annual state and local real estate taxes on actual tracts of comparable real property from the average annual gross cash rental for that same comparable property and 2. Divide the result in (1) by the average annual effective interest rate charged for all new Federal Land Bank loans. See Effective interest rate, below. The computation of each average annual amount is based on the 5 most recent calendar years ending before the date of the decedent's death. Gross cash rental. Generally, gross cash rental is the total amount of cash received in a calendar year for the use of actual tracts of comparable farm real property in the same locality as the property being specially valued. You may not use: Appraisals or other statements regarding rental value or areawide averages of rentals, or Rents paid wholly or partly in-kind, or Property for which the amount of rent is based on production. The rental must have resulted from an arm's-length transaction and the amount of rent may not be reduced by the amount of any expenses or liabilities associated with the farm operation or the lease. Comparable proper