What IRS Form 706-GS(D) (2012) Is For
IRS Form 706-GS(D) reports the generation-skipping transfer tax (GSTT) on taxable distributions from a generation-skipping trust. The form applies when skip persons, including grandchildren or unrelated persons two or more generations younger than the person making the gift, receive property or money. Each taxable gift or distribution may involve a gift or estate tax depending on the transfer type.
The Internal Revenue Service uses this filing to ensure federal tax compliance and prevent wealthy families from transferring assets across generations without paying estate and gift tax. It calculates tax equal to the GSTT exemption and applies the correct gift tax rate or estate tax rate. The form maintains accuracy when taxpayers transfer wealth through irrevocable trusts and lifetime gifts.
Taxpayers can review estate, gift, and trust forms for related transfer tax filings and trust reporting reference.
When You’d Use IRS Form 706-GS(D) (2012)
Beneficiaries must file IRS Form 706-GS(D) when receiving taxable distributions from a trust involving generation-skipping transfers. These taxable events occur when younger generations, including great-grandchildren or unrelated individuals, receive outright gifts or property subject to GST tax. The filing helps prevent wealthy individuals from avoiding estate taxes through outright transfers that shift the family’s wealth across multiple generations.
The Internal Revenue Service requires submission between January 1 and April 15, 2013, or with an approved extension under Form 7004. A grantor pays a flat rate based on the taxable value and cannot classify the transfer as tax-free. Timely filing ensures compliance for all the beneficiaries and maintains fairness in tax treatment for married couples, trust beneficiaries, and surviving spouses.
Key Rules or Details for 2012
The 2012 GST tax rate was thirty-five percent, with a federal estate tax exemption of five million one hundred twenty thousand dollars. This exemption interacts with the annual gift tax exclusion and gift tax exemption to determine how much wealth transfers without further liability. The same amount may apply to direct skips, indirect skips, or taxable terminations that involve multiple generations.
The trustee uses automatic allocation to apply exemptions correctly for gift tax purposes. Transfers to an educational institution or medical provider qualify for a few exceptions and are not taxable when payment goes directly to those entities. Taxpayers must also retain documentation for any medical expenses, direct skip distributions, or indirect skip transfers that could trigger audit review.
Step-by-Step (High Level)
Step 1: The taxpayer must gather every Form 706-GS(D-1) provided by the trust administrator for each taxable distribution. Each form identifies values, inclusion ratios, and transfer details relevant to the generation-skipping transfer tax.
Step 2: The filer should complete Part I with their name, Social Security number, and address. The filer must include the trustee or authorized representative’s information if filing on behalf of another taxpayer.
Step 3: The taxpayer lists every taxable distribution in Part II and calculates tentative transfers using the inclusion ratio. The taxpayer applies the 2012 GST tax rate to determine the total tax owed.
Step 4: The taxpayer deducts eligible professional, appraisal, or legal expenses directly associated with determining the taxable value. The filer signs the return and sends payment to the Internal Revenue Service Center in Cincinnati, Ohio. Filing ensures compliance with the federal estate tax and GSTT tax rate for 2012.
Common Mistakes and How to Avoid Them
Careful verification of each entry on IRS Form 706-GS(D) prevents costly errors. The table below presents common mistakes and the correct methods to avoid them.
Below is a list of common Form 706-GS(D) mistakes and how to avoid them:
1. Filing without a requirement
- How to avoid it: Review the inclusion ratio before filing; if the ratio is zero, no taxable distribution is required to be reported.
2. Omitting attachments
- How to avoid it: Attach every required Form 706-GS(D-1) and include all supporting trust documents before mailing the return.
3. Misstating property value
- How to avoid it: Report the fair market value as of the exact distribution date to ensure the GST tax is calculated correctly.
4. Ignoring deductible expenses
- How to avoid it: Subtract eligible legal, appraisal, and preparation fees from total taxable distributions to reduce GST tax liability.
5. Applying the wrong tax rate
- How to avoid it: Use the 35% GST tax rate required for the 2012 filing year.
Avoiding these mistakes ensures accurate reporting, consistent compliance, and efficient processing of generation-skipping transfer tax returns.
What Happens After You File
After submission, the Internal Revenue Service reviews the taxpayer’s return to confirm the inclusion ratio, exemption amount, and taxable distributions. The IRS may issue correspondence to request clarification or additional documentation. Refunds are issued if payments exceed the required GST liability.
Audit reviews may occur if property values or exemption allocations appear inconsistent with prior filings. Taxpayers must retain records for at least three years after submission. Supporting paperwork includes appraisals, prior trust returns, and related estate planning documents.
Form 706-GS(D) operates independently of income tax reporting and addresses generation-skipping transfer tax obligations. Proper filing helps maintain transparency in multi-generational wealth transfers while reducing estate tax risk. Taxpayers who receive no distributions in later years are not required to file subsequent returns.
FAQs
Do I need to include distributions on my income tax return?
You must include distributions on your income tax return only when they represent income. The generation-skipping transfer tax applies separately through Form 706-GS(D). This distinction ensures that GST tax liability remains independent from income tax reporting under estate taxes.
Can I request a payment plan for GST tax owed?
You may contact the Internal Revenue Service to arrange a payment agreement if you cannot pay the GST tax in full. Interest continues to accrue until full payment is received, increasing total tax liability. Establishing a plan helps manage obligations while staying compliant with lifetime exemption requirements.
What if I never received Form 706-GS(D-1)?
Contact the trustee or estate representative immediately to obtain the required Form 706-GS(D-1). Without Form 706-GS(D-1), accurate calculation of the GST exemption and any additional tax cannot be completed. Maintaining records supports compliance and prevents reporting errors on direct skips or generation-skipping transfers.
How do I determine the value of property distributions?
You should use the fair market value on the date the distribution occurs. Professional appraisals are recommended for real estate, business interests, or unique assets. Correct valuation ensures accurate GST tax reporting and avoids potential disputes related to taxable events or estate plan documentation.
Who files on behalf of a minor beneficiary?
A parent or guardian must prepare and sign Form 706-GS(D) for the minor. This filing ensures proper GST exemption allocation and accurate reporting for estate and gift tax purposes. This filing safeguards the family’s wealth by ensuring compliance with the annual exclusion and applicable transfer regulations.
