General Instructions

Purpose of Form

The trustee or designated filer (described below) of a qualified domestic trust (QDOT) uses Form 706-QDT to figure and report the estate tax due on:

  • Certain distributions from the QDOT,

  • The value of the property remaining in the QDOT on the date of the surviving spouse's death, and

  • The corpus portion of certain annuity payments.

Under certain circumstances, the trustee/designated filer uses Form 706-QDT to notify the IRS that the trust is exempt from future filing because the surviving spouse has become a U.S. citizen and meets the requirements listed under Part II—Elections by the Trustee/Designated Filer, Line 4. Spousal election, later.

The QDOT rules apply only in those situations where a decedent's surviving spouse is not a U.S. citizen.

Who Must File

Either the trustee or the designated filer, as described below, must file Form 706-QDT for any year in which the QDOT has a taxable event (defined below) or makes a distribution on account of hardship.

Trustee

If the surviving spouse is the beneficiary of only one QDOT, the trustee of that QDOT is liable for filing Form 706-QDT and paying the tax.

The trustee must also file Form 706-QDT if the surviving spouse is the beneficiary of more than one QDOT, unless the decedent's executor designated one U.S. trustee as the designated filer.

If there is more than one trustee for any single trust, each trustee is liable for filing the return and paying the tax.

If there is a designated filer, the trustee must still complete a separate Schedule B of Form 706-QDT for each trust for which he or she is the trustee and provide the completed Schedule B to the designated filer at least 60 days before the due date for filing Form 706-QDT.

Designated Filer

If the surviving spouse is the beneficiary of more than one QDOT from a single decedent, and the decedent's executor has made such a designation, then the designated filer selected by the executor is liable for filing the return and paying the tax for all QDOTs. This designation can be made on either the decedent's estate tax return or the first Form 706-QDT that is timely filed.

In this case, the trustee of each QDOT is responsible for completing Schedule B of Form 706-QDT for his  
or her trust and giving it to the designated filer.

Definitions

Qualified domestic trust.   A qualified domestic trust (QDOT) is any trust that qualifies for an estate tax marital deduction under section 2056 and also meets all of the following requirements.
  • The trust instrument requires that at least one trustee be either a U.S. citizen or a domestic corporation.

  • The trust instrument requires that no distribution of corpus from the trust may be made unless the trustee has the right to withhold from the distribution the QDOT tax imposed on the distribution.

  • The QDOT election under section 2056A(d) has been made for the trust by the executor of the estate on the decedent's estate tax return.

  • The requirements of all applicable regulations have been met.

Taxable event.   A taxable event is any of the following.
  1. Any distribution from a QDOT (and certain annuity payments) before the death of the surviving spouse, except:

    a. Distributions of income to the surviving spouse, and

    b. Any distributions made to the surviving spouse on account of hardship.

  2. The death of the surviving spouse.

  3. The failure of the trust to qualify as a QDOT.

Hardship distribution.    A distribution of principal is treated as made on account of hardship if it is made to the spouse from the QDOT in response to an immediate and substantial financial need relating to the spouse's health, maintenance, education, or support, or the health, maintenance, education, or support of any person that the surviving spouse is legally obligated to support.

Decedent.   In these instructions, decedent means the grantor of the QDOT on whose estate tax return the executor makes the QDOT election.

Surviving spouse.   In these instructions, surviving spouse means the individual who is both the surviving spouse of the decedent and also the beneficiary of the decedent's QDOT.

When To File

Form 706-QDT is an annual return.

Generally, the return to report distributions is due on or after January 1 but not later than April 15 of the year following any calendar year in which a taxable event occurred or a distribution was made on account of hardship.

However, if you are filing the return because of the death of the surviving spouse, you must file it within 9 months following the date of death. You must also report on that return all reportable distributions made during the calendar year in which the surviving spouse died. This rule may result in a return being due before April 15. For example, if the surviving spouse died on June 14, 2013, Form 706-QDT would be due March 14, 2014, and must include all reportable distributions made during 2013.

If the trust ceases to qualify as a QDOT, you must file Form 706-QDT within 9 months of the date on which the trust ceased to qualify. You must include on that return any reportable distributions made during the calendar year of the failure to qualify.

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 Form 706-QDT. Check the “Form 706-QDT” box in Part II of Form 4768.

Note.

An extension of time to file does not extend the time to pay the tax.

Where To File

File Form 706-QDT at the following address.

Department of the Treasury 
Internal Revenue Service Center 
Cincinnati, OH 45999

Paying the Tax

Generally, the QDOT estate tax is due by April 15 of the year following the calendar year in which taxable distributions were made. However, if the surviving spouse died during the year or if the trust ceased to qualify as a QDOT during the year, the tax on those events and on any taxable distributions occurring during that calendar year is due within 9 months following the date of death or the failure to qualify.

If the QDOT qualifies, you may elect under section 6166 to pay the tax in installments. You may make either a protective or final election by checking “Yes” on line 3 of Part II—Elections by the Trustee/Designated Filer, and attaching the required statements. See the instructions under Line 3. Installment payments, later for additional information.

Make the check payable to “United States Treasury.” Write the surviving spouse's social security number (SSN) (or individual taxpayer identification number (ITIN), if applicable) and “Form 706-QDT” on the check to assist us in posting it to the proper account.

Signature(s)

If the trustee is filing the return and there is more than one trustee listed, all listed trustees must verify the return. All trustees are responsible for the return as filed and are liable for penalties provided for erroneous or false returns.

The trustee/designated filer who files the return must, in every case, sign the declaration on page 1 under penalties of perjury. The trustee/designated filer may use Form 2848, Power of Attorney and Declaration of Representative, to authorize another person to act for him or her before the IRS.

Generally, anyone who is paid to prepare the return must sign the return in the space provided and fill in the Paid Preparer's 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 trustee/designated filer.

Note.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.

Supplemental Documents

You must attach a copy of the trust instrument to the first Form 706-QDT filed for the trust. You do not need to attach a copy of the trust to any subsequent filings of Form 706-QDT.

If you are filing the return due to the death of the surviving spouse, attach a copy of the death certificate.

Penalties

Section 6651 provides penalties for both late filing and for late payment unless there is reasonable cause for the delay. The law also provides penalties for willful attempts to evade payment of tax.

Section 6662 provides penalties for underpayment of estate taxes which exceed $5,000 that are attributable to valuation understatements. See sections 6662(g) and (h) for more details.

Return preparer.   The Small Business and Work Opportunity Tax Act of 2007 (Act) extends the application of return preparer penalties to preparers of estate tax returns. Under section 6694, as amended by the Act, 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; the regulations thereunder; and Ann. 2009-15, 2009-11 I.R.B. 687 for more information.

Security for Payment of the Tax

Assets in Excess of $2 Million

If the estate tax value of the assets passing to the QDOT exceeds $2 million (determined without regard to any indebtedness), the trust instrument must require that the trust meet at least one of the following conditions at all times during the term of the QDOT.

  • At least one U.S. trustee must be a bank as defined in section 581.

  • The U.S. trustee must furnish a bond in favor of the IRS in an amount equal to 65% of the fair market value (FMV) of the trust assets.

  • The U.S. trustee must furnish an irrevocable letter of credit issued by a bank in an amount equal to 65% of the FMV of the trust assets.

The trust instrument may also meet this requirement by specific reference to the applicable paragraph of Regulations section 20.2056A-2(d).

The QDOT may alternate between any of these arrangements provided that one of the arrangements is operative at any given time. The QDOT may give the trustee the discretion to use any one of the security arrangements, or may limit the trustee to using only one or two of the arrangements.

Assets of $2 Million or Less

If the estate tax value of the assets passing to the QDOT is $2 million or less (determined without regard to any indebtedness), the trust instrument must require that the trust meet at least one of the following conditions at all times during the term of the QDOT.

  • No more than 35% of the FMV of trust assets, determined annually on the last day of the taxable year of the trust, will consist of real property located outside the United States.

  • The trust will meet the requirements described above for QDOTs with assets in excess of $2 million.

For this purpose, if more than one QDOT is established for the benefit of the surviving spouse, the value of all of the QDOTs is aggregated in determining whether the $2 million threshold is exceeded.

Personal Residence

For the purpose of (1) figuring the $2 million threshold, and (2) determining the amount of any bond or letter of credit, the executor of the decedent's estate may elect to exclude up to $600,000 in the value of real property that meets the following requirements.

  • It is used by or held for the use of the surviving spouse as a personal residence.

  • It is owned directly by the QDOT.

  • It passed or was treated as passing to the QDOT under the rules for the marital deduction when the surviving spouse is not a U.S. citizen (section 2056(d)(2)(B)).

The $600,000 may include the value of any related furnishings.

Either election may have been made by the executor on the estate tax return for the decedent's estate. The election to exclude the personal residence amount from the amount of the bond or letter of credit may also be made prospectively by the U.S. trustee by attaching a statement to Form 706-QDT claiming the exclusion. This election, whether made by the executor or by a trustee, may be canceled by attaching such a statement to Form 706-QDT.

Filing a Bond or Letter of Credit

If the bond or letter of credit arrangement is selected, the executor must have filed the bond or letter of credit with the Form 706 or 706-NA on which the QDOT election is made.

The U.S. trustee must provide a written statement with the bond or letter of credit listing the assets that will fund the QDOT, the values of the assets, and whether any exclusion for a personal residence is being claimed.

Additional Information

For more information, including additional requirements for a bond and letter of credit, details on the exclusion of a personal residence, rules on the disallowance of the marital deduction for substantial undervaluation of QDOT property, rules regarding foreign real property, and certain annual reporting requirements (concerning ownership of foreign real property, cessation of use of a personal residence, and look-through rules applied to the ownership of foreign real property), see Regulations section 20.2056A-2(d).

How To Complete Form 706-QDT

Trustee Filing the Return

If the trustee is filing the complete return, prepare it in the following order.

  1. Part I—General Information on page 1.

  2. Part II—Elections by the Trustee/Designated Filer on page 1.

  3. All of Schedule B (but only lines 1a and 1b of Part I).

  4. Schedule A.

  5. Part III—Tax Computation on page 1.

Enter only the totals from Parts II through VI of Schedule B in the corresponding “Total” lines of  
Schedule A.

Trustee Completing Schedule B Only

If a designated filer will file the return, the trustee must complete all applicable parts of Schedule B for his or her respective trust and provide it to the designated filer at least 60 days before the due date for filing Form 706-QDT.

Designated Filer Filing the Return

The designated filer must receive a completed Schedule B from the trustee of every QDOT that has had a reportable event or a hardship distribution during the tax year. The designated filer would then summarize these on Schedule A.

Complete the return in the following order.

  1. Part I—General Information on page 1.

  2. Part II—Elections by the Trustee/Designated Filer on page 1.

  3. Schedule A.

  4. Part III—Tax Computation on page 1.

Attach each Schedule B to the return when you file it.

If there is not enough space on a schedule to list all the items, attach an additional sheet of the same size to the back of the schedule.

Rounding off to Whole Dollars

You may show the money items on the return and accompanying schedules as whole dollars. To do so, drop any amount less than 50 cents and increase any amount from 50 cents through 99 cents to the next dollar.


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