Federal Estate Tax Return (Form 706-NA)

What is a Federal Estate Tax Return (Form 706-NA)?

The United States Estate Tax Return (Form 706-NA) is an estate tax return filed with the IRS upon the death of a person who is not a citizen and resident of the United States. A person who is not a resident of the United States and does not have U.S. citizenship is referred to as a NRNC (Nonresident not a citizen). Form 706-NA, the federal estate tax return form, is the same as the Generation-Skipping Transfer Tax return form, so Form 706-NA may be used for both federal estate tax returns and Generation-Skipping Transfer Tax returns. In principle, Form 706-NA must be filed upon the death of a Japanese national who was not a citizen or resident of the U.S. (a Japanese national who falls under the NRNC category).

When the Federal Estate Tax Return (Form 706-NA) is not required to be filed

The United States Estate Tax Return (Form 706-NA) is required to be filed when the value of the estate in the United States is $60,000 or more, and when a U.S. citizen residing abroad dies (regardless of the value of the estate in this case).Conversely, Form 706-NA is not required if the estate is less than $60,000 and the deceased is not a U.S. citizen residing abroad. If a Japanese person who is not a U.S. citizen dies and the estate is less than $60,000, the Form 706-NA is not required to be filed. In most cases, Japanese nationals are exempt from paying federal estate tax even if the estate is over $60,000 due to the Japan-U.S. tax treaty.

Affidavit if the estate is less than $60,000

If a non-U.S. citizen dies and the estate is $60,000 or less, Form 706-NA is not required, but even in this case, a U.S. financial institution may request a Federal Transfer Certificate if you wish to transfer your estate out of the United States. The Federal Transfer Certificate (Form 5173) verifies to the IRS that estate taxes have been paid and that no taxes are owed on the estate. If the value of the U.S. estate is $60,000 or less, the Form 706-NA is not required to be filed, but the heirs must submit a copy of the will and its translation, the Japanese estate tax return and its translation, the death certificate and its translation, and an affidavit for nonresident alien estates to be executed at a notary public’s office to the IRS to obtain a Federal Transfer Certificate. The Affidavit for Non-Resident Alien Estates includes the decedent’s place and date of birth, the fact that the decedent was not a U.S. citizen (or the date of citizenship if the decedent acquired U.S. citizenship), all property held by the decedent in the U.S. on the date of death and the value of such property, the decedent’s nationality and address on the date of death, and an explanation as to whether the U.S. deposits were used for business in the U.S.

Who Files the Federal Estate Tax Return?

In general, probate proceedings are taken when there is an estate in the United States. In the case of a probate proceeding, an administrator of the estate (an executor or administrator) is appointed by the U.S. court to administer and distribute the estate. If an administrator of the estate is appointed through the probate process, the administrator of the estate will handle the tax procedures and is not required to file a Form 706-NA. If the estate in the U.S. consists only of stocks or mutual funds, or if the amount of the estate is small, the probate procedure will not be performed. In these cases, an administrator of the estate will not be appointed, and the heirs must file a federal estate tax return.

Power of Attorney Form

When a Japanese person files a United States Estate Tax Return (Form 706-NA) with the IRS, it is customary for the Japanese person to provide a Power of Attorney or Declaration of Representative in the United States, which is prepared and filed by such an agent. The IRS has published Instructions for Form 2848, Power of Attorney and Declaration of Representative, for U.S. attorneys or tax attorneys, and you should follow the instructions on that form. The Power of Attorney and Declaration of Representative form (Form 2848) must be completed in accordance with the IRS regulations. The Power of Attorney (Form 2848) includes the name and address of the taxpayer and the name and address of the agent.

Deadline for Filing Federal Estate Tax Return

The United States Estate Tax Return (Form 706-NA) must be filed with the IRS within nine months of the decedent’s death. Since the tax return in Japan is due within 10 months of the decedent’s death, this means that the deadline for filing the United States Estate Tax Return in the United States is earlier than the deadline for filing the tax return in Japan.

Application for Extension of Time to File Federal Estate Tax Return

If circumstances prevent the filing of a United States Estate Tax Return (Form 706-NA) within 9 months of the decedent’s death, you may file an Application for Extension of Time to File a Return (Form 4768) with the IRS to extend the filing deadline by 6 months. In addition, if you are an overseas resident and are unable to file within the extended filing period, you may extend the filing deadline further by resubmitting an Application for Extension of Time to File a Return (Form 4768). Instructions for Form 4768 can be obtained from the IRS website.

Late Filing of Federal Estate Tax Returns

Failure to file the United States Estate Tax Return by the due date may result in the imposition of a penalty sanction. Fines are also imposed for attempting to evade payment of estate tax by understating the value of the estate or failing to pay the estate tax as required. If you receive a notice of sanction for a fine after filing your United States Estate Tax Return and you have good cause, you may file an appeal to have the fine waived. Please note that this appeal must be filed after the notice of penalty is given, so even if you are late in filing your United States Estate Tax Return, you do not need to file the appeal stating the reason for the delay at the same time you file your United States Estate Tax Return.

Death Tax Treaties

Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, South Africa, Switzerland, and the United Kingdom have signed Death Tax Treaty agreements with the United States. Japan is included in these countries and is entitled to the same basic exemption as Americans. When Japanese nationals file their United States Estate Tax Return (Form 706-NA), they must include a statement explaining that the treaty applies to them. The form to apply for U.S.-Japan tax treaty coverage is called Form 8833 (Treaty-Based Return Position Disclosure). Form 8833 states that the United States-Japan Transfer Tax Agreement, effective April 1, 1955, provides that Japanese nationals are entitled to the same deduction as citizens of the United States and that the amount of the deduction is based on the amount of the estate, if any, located outside of the United States. If a portion of the estate is located outside of the United States, the amount of the deduction is limited to the percentage of the estate located in the United States. For example, if the U.S. federal estate tax basis at the time of the decedent’s death is 1.5 billion yen and the percentage of the estate located in the U.S. is limited to 10% of the world total, the U.S. basis deduction would be 1.5 billion yen x 10% = 150 million yen.

How to Complete Part I of the Federal Estate Tax Return (Form 706-NA)

When preparing the United States Estate Tax Return (Form 706-NA), you should review the Instructions for Form 706-NA issued by the IRS and follow the instructions. The United States Estate Tax Return (Form 706-NA) consists of Part I, Part II, and Part III. Part I includes the decedent’s name, place of death, domicile at death, nationality, date of death, date of birth, place of birth, occupation, name, address, telephone number, fax number, e-mail address, and the name, address, telephone number, fax number, and e-mail address of the representative. If the decedent had a SSN, enter the SSN. If the decedent had an ITIN and has previously filed a tax return using the taxpayer’s ITIN, the taxpayer’s ITIN should be listed. If the decedent does not have an SSN and has never filed a tax return with an ITIN, the IRS will assign a new Internal Revenue Service Number (“IRS”) by filing an application with the IRS. If the applicant has no SSN, ITIN, or IRS number, the U.S. taxpayer ID number for the United States should be left blank.

How to Complete Part II of the Federal Estate Tax Return (Form 706-NA)

On Part II of the United States Estate Tax Return (Form 706-NA), you will enter the amount of estate tax. You are required to calculate and enter the amount of your estate subject to estate tax, the amount of property gifted to you during your lifetime, the amount of tax due, the amount of deductions, and the amount of tax due after deductions. Please note that for real estate in the U.S., it is necessary to have the appraised value of the property calculated by Appraisal.

How to Complete Part III of the Federal Estate Tax Return (Form 706-NA)

On the United States Estate Tax Return (Form 706-NA) Part III, answer the general information questions, signed and dated by the agent. The questions on Part III include whether there is a will, whether the estate has real property, stock, debts, or other assets subject to the estate, whether the decedent was doing business in the United States at the time of death, whether or not the decedent had a safe deposit box, whether or not the decedent had assets that were joint tenants, whether or not the decedent ever had U.S. citizenship or domicile, whether or not the decedent had assets transferred overseas, whether or not the decedent created a Trust, whether the decedent has appointed an agent for assets in the United States, and whether the decedent has ever filed a gift tax return in the United States.

Attachments to the Federal Estate Tax Return (Form 706-NA)

For Attachment to United States Estate Tax Return (Form 706-NA), all documents prepared in Japanese must be translated into English. If there is a will, the will must be attached, but proof that the copy does not differ from the original is required. The decedent’s death certificate must also be attached. If there are shares of unlisted companies in the estate, balance sheets, profit and loss statements, dividend statements, etc. for the five years prior to the decedent’s death must be attached.

Report on Heirs (Form 8971)

When filing a United States Estate Tax Return (Form 706-NA) with the IRS, you must also provide information about your heirs. Information regarding heirs must be submitted on Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent, as required by the IRS.

What is a Closing Letter (Estate Tax Closing Letter)

The IRS will review the documents submitted on Form 706-NA, asking questions and conducting research as necessary, and after verifying that the information submitted is accurate and that no taxes are owed in the U.S., the IRS will issue a closing letter to the attorney or tax attorney representing you. The closing letter is titled “Estate Tax Closing Documents.” A $67 fee must be paid to the IRS to apply for a closing letter. If the Net Estate Tax figure in the closing letter from the IRS is zero, it means that there are no taxes owed. Conversely, if there is a number in the Net Estate Tax column, either you owe tax or the IRS may have made a mistake, and you should check the cause of the error. In most cases, Japanese nationals will not be required to pay estate tax due to the application of the Japan-U.S. Tax Treaty. Since IRS examiners are sometimes unaware of the fact that Japanese nationals are entitled to the same deductions as Americans, it is necessary to explain that if the decedent is Japanese, the Japan-U.S. Tax Treaty applies and the same deductions are available as those of Americans.

Filing a Federal Transfer Certificate (Form 5173)

Once the closing letter is issued by the IRS, you will apply for a Transfer Certificate on Form 5173. It usually takes six to nine months to obtain a Federal Transfer Certificate after the Form 706-NA is filed with the IRS.

Necessity of Professional Advice

The IRS has published guidelines on the procedures for preparing Form 706-NA, and anyone can review them on the Internet. However, the actual filing of a United States Estate Tax Return (Form 706-NA) is a complicated process that requires many forms to be submitted. It is important to obtain professional tax advice to ensure that the process is accurate and proper.

Support at Kuribayashi Sogo Law Office

Kuribayashi Sogo Law Office assists Japanese nationals in filing estate tax returns in the United States. We also assist Japanese individuals in obtaining a Transfer Certificate, which is required when transferring assets in the U.S. to Japan. Please contact Kuribayashi Sogo Law Office if you are interested in learning more about filing estate tax returns in the United States.