What IRS Form 706-GS(D) (2018) Is For
IRS Form 706-GS(D) is the official tax document that the Internal Revenue Service requires beneficiaries to use when reporting taxable distributions from generation-skipping trusts. It applies to skip persons, such as grandchildren or great-grandchildren, who receive property transferred through generation-skipping transfers and outright transfers. The form helps calculate the correct GST tax exemption, lifetime GST exemption, and estate tax rate for gift tax purposes.
The grantor pays the generation-skipping transfer tax (GSTT) on behalf of non-skip person beneficiaries to maintain compliance with federal tax requirements. Each initial transfer, whether through an irrevocable trust or multiple separate trusts, ensures accurate reporting of the asset value transferred. Accurate reporting supports fair wealth transfers and safeguards the interests of future generations and surviving spouses.
Taxpayers can find related trust and transfer tax documents through estate, gift, and trust forms.
When You’d Use IRS Form 706-GS(D) (2018)
Form 706-GS(D) applies when beneficiaries receive taxable distributions from a trust that transfers assets to one or more generations younger than the grantor. The Internal Revenue Service requires this filing when the inclusion ratio on Form 706-GS(D-1) exceeds zero. It ensures proper reporting of the property involved, the GSTT exemption, and the annual exclusion that applies to generation-skipping transfer tax obligations.
Taxpayers must report all taxable distributions from the entire trust, including those involving trust assets transferred for gift or estate tax purposes. Each transfer must list the correct employer identification number and beneficiary details, such as the grandchild’s parent. Filing helps prevent families from overlooking tax liabilities related to asset transfers, generation-skipping transfer tax obligations, and applicable state estate requirements.
Key Rules or Details for 2018
The 2018 generation-skipping transfer tax exemption was set at $11,180,000 for each individual under the Tax Cuts and Jobs Act. This exemption amount covers both lifetime gifts and estate transfers, ensuring consistent treatment across estate and gift taxes. Any assets transferred above the exemption limit are subject to a flat 40 percent GST tax rate.
The inclusion ratio determines how much of a distribution is subject to the generation-skipping transfer tax. Ratios range from zero to one, reflecting whether the transfer is fully or partially taxable. The Internal Revenue Service uses this measure to calculate federal estate and related transfer taxes accurately.
Beneficiaries filing Form 706-GS(D) must also report direct skips, indirect skips, or taxable terminations involving generation-skipping transfers. Proper identification of each transfer ensures that the GST amount aligns with federal estate tax standards.
Step-by-Step (High Level)
Step 1: Beneficiaries must gather all Forms 706-GS(D-1) from trustees to confirm inclusion ratios, total values, and distribution details. Each trustee must provide this form to the beneficiary for accurate tax form completion.
Step 2: Each beneficiary must enter personal and trust identification details, including name, address, and employer identification number. The beneficiary reports all taxable distributions separately and ensures that each transfer reflects the correct inclusion ratio and exemption level.
Step 3: The beneficiary calculates the tentative transfer amount by multiplying the inclusion ratio by the distribution value. The beneficiary then subtracts allowable expenses, applies the GST tax rate, and computes the total generation-skipping transfer tax due. The filer signs and dates the form, attaches the required Form 706-GS(D-1) copies, and mails them to the Internal Revenue Service.
Maintaining copies of filed forms supports accurate estate planning and helps verify taxable income or estate tax obligations in the future.
Common Mistakes and How to Avoid Them
Careful preparation of Form 706-GS(D) helps prevent filing errors that lead to incorrect tax reporting. The table below lists common mistakes and specific steps to avoid them during completion and submission.
Below is a list of common Form 706-GS(D) mistakes and how to avoid them:
1. Entering an incorrect employer identification number
- How to avoid it: Confirm the employer identification number (EIN) with the trustee before submitting the return to the IRS.
2. Failing to attach Form 706-GS(D-1)
- How to avoid it: Attach every trustee-issued Form 706-GS(D-1) to ensure proper reporting of each generation-skipping trust distribution.
3. Recording the wrong inclusion ratio
- How to avoid it: Verify the inclusion ratio using trustee-provided data and IRS instructions before calculating taxable distributions.
4. Omitting small taxable distributions
- How to avoid it: Report all taxable distributions—regardless of size—to maintain accurate GST reporting.
5. Using an outdated IRS address
- How to avoid it: Check the current IRS filing address before mailing Form 706-GS(D) to prevent misdelivery or processing delays.
Following these steps prevents recurring filing errors and promotes compliance with generation-skipping transfer tax requirements.
What Happens After You File
After Form 706-GS(D) is filed, the Internal Revenue Service reviews the submission and determines any refund or remaining balance due. Processing time varies depending on the volume of estate and gift tax filings received by the Internal Revenue Service. If discrepancies arise in the inclusion ratio or taxable estate value, the IRS may issue a clarification notice.
The statute of limitations for audits generally extends three years, or six years if the reported value is substantially understated. The taxpayer remains liable for any penalties, interest, or additional assessments made during the review. Accurate records support the proper calculation of inclusion ratios, exemption claims, and certain distributions.
Taxpayers unable to pay the skipped transfer GST tax in full may apply for an installment agreement using Form 9465. Maintaining documentation related to lifetime exemption, taxable gift, and income tax ensures compliance with federal estate tax laws.
FAQs
Do I need to file if my inclusion ratio is zero?
No filing is required when all reported distributions have an inclusion ratio of zero. These distributions are excluded from the generation-skipping transfer (GST) tax because they fall within the exemption level. Accurate reporting ensures compliance with federal estate and gift tax requirements.
What if the trustee did not provide Form 706-GS(D-1)?
Contact the trustee immediately and request the document. The Internal Revenue Service requires this form to calculate the correct inclusion ratio and taxable distribution. Failure to obtain it may delay proper GST tax reporting.
Can married couples file a joint Form 706-GS(D)?
Each spouse must file a separate return if both received taxable distributions. The generation-skipping transfer tax rules apply individually under federal estate tax laws. A separate filing allows an accurate assessment of each taxpayer’s liability.
What is the difference between direct skips and indirect skips?
Direct skips involve transfers made directly to skip persons, while indirect skips occur through trusts or intermediary entities. Both transaction types may trigger generation-skipping transfer taxes depending on the inclusion ratio and exemption limits.
Can medical expenses be deducted from the taxable distribution?
Certain medical expenses related to estate administration or trust management may qualify as deductions. These deductions must comply with federal gift or estate tax rules and require proper documentation to support their validity.
Taxpayers can use Federal Fillable Tax Forms to locate related forms for amendments, payments, or adjustments if needed.
