IRS Form 706 (Schedule D) – When dealing with estate taxes, navigating IRS forms can be complex, but understanding specific schedules like Schedule D of Form 706 is crucial for accurate reporting. This schedule focuses on life insurance policies on the decedent’s life, which may or may not be includible in the gross estate. Whether you’re an executor, estate planner, or beneficiary, knowing how to handle IRS Form 706 Schedule D ensures compliance and potentially minimizes tax liabilities. In this guide, we’ll break down what Schedule D entails, when it’s required, and how to complete it based on the latest IRS guidelines for decedents dying after December 31, 2024.
What Is IRS Form 706?
IRS Form 706, known as the United States Estate (and Generation-Skipping Transfer) Tax Return, is filed by the executor of a decedent’s estate to calculate estate taxes under Chapter 11 of the Internal Revenue Code. It’s required for U.S. citizens or residents whose gross estate, plus adjusted taxable gifts, exceeds the basic exclusion amount—$13,990,000 for deaths in 2025. The form also addresses generation-skipping transfer (GST) taxes on direct skips.
Form 706 includes various schedules to report different assets. Schedule D specifically deals with insurance on the decedent’s life, ensuring all relevant policies are disclosed, even if not taxable. If the estate is below the filing threshold but filed for portability of the deceased spousal unused exclusion (DSUE) amount, you may not need to report full values for certain assets eligible for marital or charitable deductions.
Overview of Schedule D: Insurance on the Decedent’s Life
Schedule D requires listing all life insurance policies on the decedent’s life, regardless of whether they’re included in the gross estate. This includes term life, whole life, endowment, group-term, annuity policies, fraternal benefits, and even no-fault auto death benefits if they meet inclusion criteria under IRC Section 2042 or related sections like 2036–2038.
Key inclusion rules:
- Proceeds receivable by or for the estate/executor (e.g., to pay taxes or debts).
- Proceeds to other beneficiaries if the decedent had “incidents of ownership,” such as the right to change beneficiaries, surrender the policy, or borrow against it.
- Reversionary interests exceeding 5% of the policy value.
- Policies transferred with retained rights or within three years of death under certain conditions.
Exclusions apply if the decedent had no incidents of ownership and proceeds aren’t payable to the estate. For group-term life insurance, up to $50,000 may be excludable. Always attach Form 712 (Life Insurance Statement) for each policy, obtained from the insurer.
When to Use Schedule D?
You must complete Schedule D if the decedent had any life insurance policies, even if the estate doesn’t owe taxes. It’s attached to Form 706 when the gross estate exceeds the exclusion threshold or for DSUE portability elections. For estates filed solely for portability where the gross estate plus gifts is below the exclusion, identify the property but omit values in the last three columns if eligible for deductions.
Foreign policies or those subject to foreign death taxes should be labeled accordingly. If proceeds are in dispute or paid in installments, report the present value and provide details.
How to Complete IRS Form 706 Schedule D?
Filling out Schedule D involves detailing each policy accurately. The form is structured with headers for the decedent’s name and SSN, followed by a table for entries.
Step-by-Step Guide
- List All Policies: Enter each policy starting with item number 1. Use additional sheets or Schedule W if needed.
- Columns:
- (i) Item Number: Sequential numbering.
- (ii) Description: Include insurer name/address, policy number, type, face amount, and any unpaid premiums or interest.
- (iii) Alternate Valuation Date: If electing alternate valuation under IRC Section 2032 (six months after death), enter the date.
- (iv) Alternate Value: Value on the alternate date.
- (v) Value at Date of Death: Default fair market value.
- Totals: Sum values in column (iv) or (v) on line 2. Add from attachments on line 3, then total on line 4. Transfer to Form 706, Part V, item 4.
- Attachments: Form 712 for each policy; explanations for exclusions.
Here’s a visual example of Schedule D:
For non-includible policies, explain why in an attachment and answer “Yes” to relevant questions in Form 706 Part IV.
Valuation of Life Insurance Proceeds
Valuation is at fair market value (FMV) on the date of death, reduced by loans or encumbrances. Use Form 712 values:
- One-sum payments: Line 24 net proceeds.
- Installments: Line 25 present value.
- Unmatured policies: Interpolated terminal reserve or IRS-approved method.
Alternate valuation can be elected if it reduces the estate tax, but it applies to the entire estate. No reductions for marital or charitable deductions occur here; claim those on Schedules M or O.
Common Mistakes When Filing Schedule D
- Omitting Policies: Failing to list all policies, even non-includible ones.
- Incorrect Valuation: Not attaching Form 712 or miscalculating present values for installments.
- Ignoring Incidents of Ownership: Assuming policies are excludable without verifying rights like beneficiary changes.
- Portability Oversights: Reporting unnecessary values when electing DSUE.
- Documentation Gaps: Not providing explanations for exclusions or foreign taxes.
To avoid penalties, retain records like policies and appraisals for IRS review. Consult a tax professional for complex cases.
FAQs About IRS Form 706 Schedule D
Do I need to report life insurance if it’s not taxable?
Yes, all policies on the decedent’s life must be listed, with explanations for exclusions.
What if the policy is owned by a trust?
If the decedent had incidents of ownership or the trust is includible in the estate, report it.
How do I get Form 712?
Request it from the insurance company; if unavailable, provide alternative evidence like assignment documents.
Is group-term life insurance always included?
Only the portion over $50,000 if employer-owned, or fully if the decedent had ownership rights.
Where can I download the form?
Access the latest version at IRS.gov/pub/irs-pdf/f706sd.pdf.
For more details, refer to the full instructions at IRS.gov.
In summary, IRS Form 706 Schedule D plays a vital role in estate tax reporting by ensuring life insurance is properly accounted for. By using trusted sources like the official IRS instructions and consulting experts, you can navigate this process effectively and avoid costly errors. Always stay updated with IRS changes, as tax laws evolve.