IRS Form 706 (Schedule G) – If you’re handling estate taxes in the United States, navigating IRS Form 706 can be complex, especially when it comes to reporting lifetime transfers. Schedule G of Form 706 specifically addresses transfers made during the decedent’s lifetime that must be included in the gross estate for tax purposes. This guide breaks down everything you need to know about IRS Form 706 Schedule G, including its purpose, the types of transfers to report, and step-by-step instructions for completion. Whether you’re an executor, tax professional, or beneficiary, understanding these rules can help ensure compliance and avoid penalties.
What Is IRS Form 706?
IRS Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return, is filed for estates of decedents who were U.S. citizens or residents at the time of death. It’s required if the gross estate exceeds the basic exclusion amount (which adjusts annually for inflation). The form calculates the estate tax owed and may also involve generation-skipping transfer (GST) taxes. Schedule G is one of several schedules attached to Form 706, focusing on certain lifetime transfers that are pulled back into the estate for taxation.
Purpose of Schedule G on Form 706
The primary goal of Schedule G is to report property transfers made by the decedent during their lifetime that are includible in the gross estate under Internal Revenue Code (IRC) sections 2035 through 2038, as well as related provisions like 2035(b) and 2041. These transfers include uncompensated gifts, retained interests, and certain annuities that could affect the estate’s taxable value. By including these, the IRS ensures that assets the decedent effectively controlled or benefited from are taxed appropriately. This schedule reconciles taxable gifts from previous years (post-1976) with estate inclusions, even if no gift tax return (Form 709) was filed for them.
Importantly, only transfers that meet specific criteria are reported—outright sales for full consideration are generally excluded. The information from Schedule G flows into other parts of Form 706, such as Part II (for taxable gifts) and Part V (for the gross estate).
Types of Transfers Reported on Schedule G
Schedule G captures a range of lifetime transfers that the IRS considers part of the decedent’s estate. Here’s a breakdown of the key types, organized by IRC section:
IRC Section 2035(a): Transfers Within 3 Years of Death
This includes any transfer, such as life insurance policies on the decedent’s life or retained interests in trusts, that would have been includible under sections 2036–2038 if held until death. Examples include revocable transfers or gifts that take effect at death. The value is based on the date of death or an alternate valuation date under section 2032.
IRC Section 2035(b): Gift Taxes Paid
Report the total gift taxes paid on gifts made by the decedent or their spouse within 3 years of death. This focuses on the date of the gift, not payment. You’ll need to review Forms 709 from the prior 3 years and attach copies if involving a spouse.
IRC Section 2036: Transfers With Retained Life Estate
Covers transfers where the decedent kept income, possession, or control, such as trusts with retained income rights or voting rights in at least 20% of a controlled corporation’s stock (for transfers after June 22, 1976). Partial retentions include only the proportional value.
IRC Section 2037: Transfers Taking Effect at Death
These are transfers where possession or enjoyment depends on surviving the decedent, with a reversionary interest exceeding 5% of the property’s value. Pre-October 8, 1949, transfers require an express reversion.
IRC Section 2038: Revocable Transfers
Includes property subject to the decedent’s power to alter, amend, revoke, or terminate, like revocable trusts or powers in IRAs. Powers relinquished within 3 years are treated as retained.
IRC Section 2039: Annuities
Reports annuities payable to the decedent or beneficiaries, including pensions under section 401(a) or IRAs under section 408. Exclusions apply for approved plans without decedent contributions or based on contribution ratios.
Other examples include split gifts under section 2513, unreported gifts exceeding the annual exclusion, and pre-1977 gifts.
How to Complete Schedule G: Step-by-Step Guide?
Filling out Schedule G requires using Worksheet TG to reconcile data from prior Forms 709, unreported gifts, and adjustments. Here’s how to approach it:
Part I: Summary of Taxable Gifts
This part reconciles post-1976 gifts:
- Line 1: Total taxable gifts after 1976 (from Worksheet TG, line 2, col. b).
- Line 2: Taxable gifts reportable on Schedule G (col. c).
- Line 3: Gifts with special treatment (col. d, e.g., split gifts).
- Line 4: Sum of lines 2 and 3.
- Line 5: Adjusted taxable gifts (line 1 minus line 4; carry to Form 706, Part II, line 4).
Part II: Gifts Subject to Federal Estate Tax
List details of includible gifts sequentially:
- Column (i): Item number.
- Column (ii): Description (transferee details, date, property).
- Column (iii): Alternate valuation date.
- Column (iv): Alternate value.
- Column (v): Value at date of death.
- Column (vi): Consideration received.
- Column (vii): IRC section. On line 4, report gift taxes under section 2035(b).
Attach copies of transfer instruments, Forms 712 for insurance, and appraisals if needed. If space is limited, use Schedule W.
For the actual form layout, you can download the PDF of Schedule G directly from the IRS website: https://www.irs.gov/pub/irs-pdf/f706sg.pdf.
Special Rules and Exceptions for Schedule G
Several nuances apply:
- 3-Year Rule: Transfers or relinquishments within 3 years are valued as if retained.
- Partial Interests: Only the retained portion is included.
- Exclusions: Community property treated as the spouse’s, annuities ceasing at death, or those not meeting criteria.
- Valuation Discounts: Attach statements explaining discounts over $3,000 for collectibles.
- Approved Plans: Full or proportional exclusions based on contributions.
- Split Gifts: Adjust if the spouse predeceased and gifts were included in their estate.
- DSUE and Restored Exclusion: Incorporate for spousal gifts in Worksheet TG.
Always conduct a reasonable search for unreported gifts.
Related Reporting Requirements and Attachments
Schedule G ties into other forms:
- Attach prior Forms 709, trust documents, and protective claims (Schedule PC).
- File Form 8971 for basis reporting to beneficiaries within 30 days.
- Cross-reference with Schedules D, F, M, R for insurance, QTIPs, and GST allocations. Penalties for underreporting can reach 20% under section 6662.
Why Schedule G Matters for Estate Planning?
Properly completing IRS Form 706 Schedule G ensures accurate estate tax calculations and can impact portability of the deceased spouse’s unused exclusion (DSUE). Mistakes here could lead to audits or additional taxes. Consulting a tax advisor is recommended for complex estates. For the most up-to-date guidance, always refer to official IRS resources.
By understanding transfers during the decedent’s lifetime, you can better manage estate tax obligations and preserve more for heirs. If you’re preparing Form 706, start with the official instructions to stay compliant.