Understanding Post-Mortem Dividends: Form 706 And Life Insurance

Form 706 is used to calculate the estate tax owed, according to Chapter 11 of the Internal Revenue Code (IRC), and to calculate the generation-skipping transfer tax (GSTT) imposed by Chapter 13 of the IRC.

Form 706 must be filed by the executor of the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $12.92 million for decedents who died in 2023, or $13.61 million in 2024.

The gross estate includes all property in which the decedent had an interest, certain transfers made during the decedent's life without an adequate and full consideration in money or money's worth, the includible portion of joint estates with right of survivorship, the includible portion of tenancies by the entirety, certain life insurance proceeds, property over which the decedent possessed a general power of appointment, dower or curtesy, and community property to the extent of the decedent's interest as defined by applicable law.

Life insurance proceeds are generally not taxable, and are not included in gross income. However, if the policy was transferred to the beneficiary for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration paid, additional premiums paid, and certain other amounts.

What is Form 706?

Form 706, also known as the United States Estate and Generation-Skipping Transfer Tax Return, is a form used by the executor of a decedent's estate to calculate the estate tax owed according to Chapter 11 of the Internal Revenue Code (IRC). The executor calculates the generation-skipping transfer tax (GSTT) imposed by Chapter 13 of the IRC.

The form must be filed on behalf of a deceased US citizen or resident whose gross estate, adjusted taxable gifts, and specific exemptions exceed the limit for the year of their death. For 2023, this limit was $12.92 million, and for 2024, it is $13.61 million. The form must also be filed if the executor elects to transfer the deceased spousal unused exclusion (DSUE) amount to the surviving spouse, regardless of the size of the decedent's gross estate.

The gross estate includes all property in which the decedent had an interest, certain transfers made during their life without adequate consideration, certain life insurance proceeds, and property over which the decedent had a general power of appointment, among other things.

The executor must file Form 706 within nine months of the decedent's death. If more time is needed, an automatic six-month extension can be requested using Form 4768.

When are life insurance dividends taxable?

Life insurance dividends are generally not taxable because the IRS considers them a return of premiums paid. However, there are a few exceptions where life insurance dividends may be taxable:

• Dividends Exceed Total Premiums Paid: If the amount of dividends you receive is greater than the total premiums you have paid into the policy, the excess may be taxable as it is considered income, not a return of premium.
• Interest Earned on Dividends: If you earn interest on your dividends by leaving them in your policy, this interest income may be taxable if it earns you more than you have paid in premiums.

How can you use life insurance dividends?

Dividends are considered a return of a portion of the premiums you paid for a life insurance policy, for tax purposes. Here are some ways you can use your life insurance dividends:

• Cash payment: You can receive any dividends as a cash payment. The insurance company will send you a check after every policy anniversary.
• Reduce future premium payments: With this option, the insurance company automatically applies any dividends to reduce your future premiums. As dividends increase, your required premium payments decrease.
• Leave the dividends with the insurance company and collect interest: With this option, the dividend is retained by the insurance company and earns interest in a dividend accumulation account. There is a minimum guaranteed interest rate, but you might get an even higher interest rate.
• Buy paid-up additional life insurance: You could use your dividends to purchase small amounts of completely paid-up additional life insurance. This additional life insurance will be the same type of life insurance as your original policy.
• Buy one-year term life insurance: You could use your dividend money to purchase as much one-year term life insurance coverage as possible. The amount of coverage you can get will depend on your age and the amount of dividend money you have.

What is the difference between Form 706 and Form 709?

Form 706, also known as the United States Estate and Generation-Skipping Transfer Tax Return, is used by the executor of a decedent's estate to calculate the estate tax owed according to Chapter 11 of the Internal Revenue Code (IRC). It is also used to compute 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). Form 706 must be filed on behalf of a deceased US citizen or resident whose gross estate, adjusted taxable gifts, and specific exemptions exceed the exclusion amount, which was $12.92 million for decedents who died in 2023 and will be adjusted to $13.61 million in 2024.

Form 709, on the other hand, is the United States Gift (and Generation-Skipping Transfer) Tax Return. It is filed by an individual to report gifts that have surpassed the annual limit. Form 709 is used to determine the total taxable gifts made by the individual and to calculate the gift tax liability. It is important to note that Form 709 is not just for large gifts but also for multiple small gifts that exceed the annual exclusion amount.

What is the purpose of Form 706-GS(D)?

Form 706-GS(D) is a tax form distributed by the Internal Revenue Service (IRS) that is used to calculate taxes due on trust distributions subject to a generation-skipping transfer tax (GSTT).

When a person dies and leaves their estate to heirs, they may attempt to avoid a large amount of estate taxes by passing assets to heirs who are not their children. To do this, they may transfer a large amount of assets to their grandchildren or other inheritors. If the grantor’s children never personally take possession of the assets, the estate tax does not apply. One way a person may choose to do this is through a trust.

Generation-skipping may still provide some benefits to a grantor's children. For example, the grantor may specify that their children are entitled to any income that the assets in the trust generate, even if the assets themselves are left in trust for their grandchildren.

Form 706-GS(D) is used to calculate taxes due on trust distributions subject to a generation-skipping transfer tax. Anyone who receives a taxable distribution from a trust must use this form.

This form must be filed between January 1st and the filing deadline of the year following the distribution of money from the trust. If the form cannot be filed on time, an extension can be requested by filing Form 7004.

Frequently asked questions