If you've received money or property from a family trust and you're a grandchild (or someone in a generation two or more levels below the person who created the trust), you may need to file Form 706-GS(D). This comprehensive guide breaks down everything you need to know about this specialized tax form for the 2015 tax year in plain English.

What the Form Is For

Form 706-GS(D) is the tax return that a "skip person" uses to calculate and pay tax on distributions they receive from a trust. Think of it as a special tax bill that applies when wealth jumps over a generation—typically from grandparent to grandchild, skipping over the parent generation.

In simple terms, imagine your grandmother set up a trust years ago, and now that trust is distributing money directly to you (her grandchild) while your parent is still alive. The IRS wants to collect tax on this "generation skip" because they're missing out on the estate tax they would have collected if the money had first gone to your parent and then to you.

The form works hand-in-hand with Form 706-GS(D-1), which is a notification form that the trustee (the person managing the trust) must send to you. Think of Form 706-GS(D-1) as your "tax information statement"—similar to a W-2 or 1099—that shows exactly what you received and provides the numbers you need to complete your own Form 706-GS(D).

Not everyone who receives a trust distribution needs to file this form. You only file if you're receiving a "taxable distribution" that has an inclusion ratio greater than zero. The inclusion ratio is a fraction that determines what portion of the distribution is subject to tax—if it's zero, you're in the clear and don't need to file.

When You’d Use It (Including Late and Amended Returns)

Regular Filing Timeline

For distributions you received during calendar year 2015, you must file Form 706-GS(D) between January 1, 2016, and April 15, 2016. Unlike income tax, this form always follows the calendar year, regardless of your personal tax accounting period.

For 2016 specifically, the April 15 deadline was extended to April 18, 2016, because Emancipation Day (a Washington, D.C. holiday) fell on Friday, April 15, and federal tax deadlines are pushed to the next business day when they fall on weekends or D.C. holidays—even if you don't live in D.C.

Extension Requests

If you need more time to prepare your return, you can request an automatic 6-month extension by filing Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) on or before the April 15 deadline. This is truly "automatic"—you don't need to provide a reason or wait for approval. The extension gives you until October 15, 2016, to file.

However, remember that an extension to file is not an extension to pay; any tax owed is still due by April 15, and interest will accumulate on unpaid amounts.

Late Returns

If you miss the deadline and haven't filed an extension, your return is considered late. The IRS imposes penalties for late filing unless you can demonstrate "reasonable cause" for the delay. The penalty typically equals 5% of the unpaid tax for each month (or partial month) the return is late, up to a maximum of 25%.

However, if you receive a penalty notice, you can send an explanation to the IRS, and they'll review whether your circumstances qualify as reasonable cause (such as serious illness, death in the family, natural disaster, or inability to obtain necessary records despite reasonable efforts).

Amended Returns

If you discover errors after filing your original Form 706-GS(D)—such as incorrect valuations, missed distributions, or calculation mistakes—you generally file Form 843 (Claim for Refund and Request for Abatement) rather than an amended 706-GS(D). Form 843 is used to claim refunds of overpaid GST tax or to request abatement of penalties.

Key Rules and Requirements for 2015

Tax Rate

The maximum generation-skipping transfer tax rate for 2015 was 40%. This rate had been in effect since January 1, 2013. For context, the rate has varied historically—it was 35% in 2011–2012, zero in 2010, and ranged from 45–49% in earlier years.

GST Exemption Amount

For 2015, every person who created a trust (the "settlor" or "transferor") had a lifetime GST exemption of $5,430,000. This exemption could be allocated to trusts to shelter distributions from GST tax. If the person who created your trust properly allocated their exemption when establishing or funding the trust, some or all of your distribution might be exempt from tax. The "inclusion ratio" on your Form 706-GS(D-1) reflects how much exemption was allocated—an inclusion ratio of zero means the distribution is fully exempt.

Who Must File

You must file Form 706-GS(D) if you are a "skip person" who received a taxable distribution during 2015. A skip person is typically someone assigned to a generation that is two or more generations below the person who created the trust. This usually means grandchildren, great-grandchildren, or even unrelated individuals who are more than 37½ years younger than the trust creator.

Special Generation Assignment Rules

If your parent (who was the child of the trust creator) died before the distribution was made to you, special rules apply. Under the "deceased parent rule," you move up a generation for GST tax purposes—you're treated as if you're in your deceased parent's generation. This means you're no longer a skip person, and the distribution isn't subject to GST tax.

Grandfather Clauses

Certain trusts are completely exempt from GST tax under "transition rules." If your distribution came from a trust that was irrevocable (couldn't be changed) on September 25, 1985, it's generally not subject to GST tax. Similarly, distributions from certain revocable trusts created before October 22, 1986, may be exempt if specific conditions are met.

What Counts as a Taxable Distribution

Not all distributions from trusts are taxable. Direct payments for educational expenses (like tuition paid directly to a school) or medical expenses (paid directly to healthcare providers) are not subject to GST tax, just as they're not subject to gift tax.

Step-by-Step: How to Complete the Form (High Level)

Step 1: Gather Your Documentation

Before you begin, collect all Forms 706-GS(D-1) you received from trustees during 2015. These forms contain the critical information you need: distribution dates, property descriptions, values, and inclusion ratios. You must attach copies of all Forms 706-GS(D-1) to your return.

Step 2: Complete Part I (Identification Information)

Enter your personal information: your name, Social Security Number (or the trust's EIN if you're a trust), and address. If you're a minor or unable to file for yourself, the person responsible for your affairs (parent or guardian) should provide their information as well.

Step 3: Fill Out Part II (Distributions)

This is the heart of the form. For each distribution you received, you'll create a separate line entry that includes:

• The item number (matching the Form 706-GS(D-1))
• A description of what you received (stocks, cash, real estate, etc.)
• The tentative transfer amount

The tentative transfer is calculated by multiplying the distribution value by the inclusion ratio—both figures come from your Form 706-GS(D-1). If you received distributions from multiple trusts or distributions with different inclusion ratios, list them separately.

Step 4: Complete Part III (Tax Computation)

• Line 3 is the total of all tentative transfers from Part II.
• Line 4 allows you to deduct certain expenses—specifically, professional fees you paid for preparing this return or other costs directly related to determining, collecting, or refunding your GST tax.
• Line 5 is your taxable amount (line 3 minus line 4).
• Line 6 is where you enter the applicable tax rate—for 2015, this is 40%.
• Line 7 is your GST tax owed (multiply line 5 by line 6).
• Lines 8 and 9 show any GST tax you've already paid and the balance due, respectively.

Step 5: Sign and Date

You or your authorized representative must sign the return. If you paid someone to prepare it, they must also sign in the "Paid Preparer Use Only" section and provide their information.

Step 6: Make Payment and Mail

Make your check payable to "United States Treasury," write your SSN (or EIN), "2015," and "Form 706-GS(D)" on the check. For distributions in 2015, mail the return to the IRS processing center (the specific address depends on when you're filing, as the IRS periodically updates mailing addresses).

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing When Required

Some people assume that because they received a Form 706-GS(D-1) showing a zero inclusion ratio, they're completely off the hook. While it's true you don't need to file if all your distributions have zero inclusion ratios, if even one distribution has an inclusion ratio greater than zero, you must file and report all distributions (though only the ones with inclusion ratios above zero will result in tax).

How to avoid it: Carefully review every Form 706-GS(D-1) you receive. Check column d (inclusion ratio) on each one. If any show a number greater than zero, you must file.

Mistake #2: Incorrect Valuation

The value of distributed property must reflect fair market value on the distribution date.

How to avoid it:
If you received real estate, obtain a professional appraisal as of the distribution date. For closely-held business interests or unusual property, document your valuation method carefully.

Mistake #3: Mishandling Deductible Expenses

Filers often claim the full amount of their tax preparation fees as a deduction on line 4, forgetting that these expenses must be adjusted by multiplying them by the inclusion ratio(s).

How to avoid it:
Follow the IRS example to prorate and adjust expenses correctly for inclusion ratios.

Mistake #4: Missing the Separate Trust Rule

When a single trust contains portions from different grantors or substantially separate shares for different beneficiaries, each must be treated as a separate trust.

How to avoid it:
Work with your trustee to identify each separate trust and list them individually in Part II.

Mistake #5: Ignoring Transition Rules

Many older trusts are grandfathered and exempt from GST tax.

How to avoid it:
Ask your trustee about the trust’s creation date and status before paying any GST tax unnecessarily.

What Happens After You File

Processing Timeline

The IRS typically processes GST returns within 6–12 weeks. During processing, they verify calculations, attached forms, and valuations.

Payment Posting

Your payment is posted to your account. You can confirm payment posting by contacting the IRS after several weeks.

Potential Inquiries

If the IRS has questions about your return, they’ll send a letter requesting clarification or documents. Respond promptly.

Audits and Examinations

The IRS may audit your return if valuations appear low, amounts are large, or inconsistencies exist. The audit period is generally three years but may extend to six for major understatements.

Interest and Penalties

Interest compounds daily from the original due date. Penalties for late filing (5%/month) and late payment (0.5%/month) can each reach 25%.

Refunds

Refunds for overpaid GST tax may take 3–6 months to process. Interest is paid only if processing exceeds 45 days past the deadline.

Record Retention

Keep all related forms and records for at least three years after filing.

Frequently Asked Questions

Q1: How do I know if I'm a "skip person"?

You're generally a skip person if you're two or more generations below the trust creator. However, if your parent (the creator’s child) is deceased, you’re not treated as a skip person.

Q2: The trustee sent me Form 706-GS(D-1) showing all zeros for inclusion ratio. Do I still need to file?

No. If all inclusion ratios are zero, no filing is required—but keep the forms for your records.

Q3: I received distributions from three different trusts. Do I need to file three separate Forms 706-GS(D)?

No. File one Form 706-GS(D) listing all distributions for the year.

Q4: What if I never received Form 706-GS(D-1) from the trustee?

Contact the trustee immediately. If unavailable, file using the best information you can gather and attach an explanatory statement.

Q5: Can I deduct attorney or accountant fees?

Yes—only those directly tied to GST tax computation, and they must be adjusted by the inclusion ratio.

Q6: The property I received had a mortgage. What value do I report?

Report the net value (fair market value minus liens). Attach supporting documentation.

Q7: I just discovered I should have filed Form 706-GS(D) for 2015. What should I do?

File immediately. Include tax, interest, and a reasonable-cause explanation if applicable.

Important Note

This guide provides general information about Form 706-GS(D) for the 2015 tax year based on IRS publications. Generation-skipping transfer tax is complex—consult a qualified tax professional for personalized advice.