What Form 706-GS(D) Is For

Form 706-GS(D) is a specialized tax form used by people who receive money or property from a trust when they are considered a "skip person." In plain language, a skip person is typically a grandchild receiving a distribution from a trust set up by a grandparent—someone two generations removed. The form can also apply to more distant relatives or even unrelated people who are at least 37½ years younger than the person who created the trust.

Think of this as the federal government's way of collecting tax that would have been missed if wealth jumped over a generation. Normally, if grandparents left everything to their children, and then the children left everything to their grandchildren, the government would collect estate or gift taxes twice. Generation-skipping trusts allow wealth to skip the middle generation, so the IRS imposes a Generation-Skipping Transfer (GST) tax to make up for that lost tax opportunity.

You only file Form 706-GS(D) if you actually received a distribution from a trust during the year and the trust's administrator sent you a Form 706-GS(D-1) showing that the distribution is subject to GST tax. If the "inclusion ratio" on your Form 706-GS(D-1) is zero for all distributions, you don't need to file—there's no tax owed. IRS.gov

When You’d Use Form 706-GS(D)

Regular Filing

For distributions you received during 2012, you must file Form 706-GS(D) between January 1 and April 15, 2013. The tax is calculated on a calendar-year basis regardless of what tax year you use for your personal income taxes.

Late Filing

If you missed the April 15, 2013 deadline, you should file as soon as possible. The IRS charges penalties for late filing—typically 5% of the unpaid tax per month (or partial month), up to a maximum of 25%. There's also a separate penalty for late payment of the tax itself. However, if you have reasonable cause for the delay (such as serious illness or natural disaster), you may be able to avoid penalties by explaining your situation when the IRS contacts you about penalties. Don't include explanations when you first file—wait until you receive a notice. IRS.gov

Amended Filing

If you discover an error after filing your original return—perhaps you miscalculated the value of property you received or made a mathematical mistake—you'll need to file Form 843 (Claim for Refund and Request for Abatement) to correct it, not an amended Form 706-GS(D).

Extensions

If you need more time to file (but not to pay), file Form 7004 by April 15, 2013 for an automatic six-month extension to October 15, 2013. Remember: an extension to file is not an extension to pay. Interest accrues on any unpaid tax from the original due date, even with an extension. IRS.gov

Special Circumstance

If the person who received the distributions died during 2012, the executor must file the return by the earlier of: (1) the due date for the estate tax return, or (2) April 15, 2013 (or the extended due date).

Key Rules or Details for 2012

GST Tax Rate

The maximum generation-skipping transfer tax rate for distributions in 2012 was 35%. This was a reduced rate following temporary tax law changes; the rate had been 0% in 2010, and would eventually increase in later years. IRS.gov

GST Exemption Amount

For 2012, the GST exemption was $5,120,000 per person. This is the amount that could be transferred generation-skipping without owing GST tax. This exemption is typically allocated by the person who created the trust (the "transferor"), not by you as the beneficiary. If the trust creator properly allocated their GST exemption to the trust, your distributions may be partially or fully exempt. IRS.gov

Inclusion Ratio

This critical number, shown on the Form 706-GS(D-1) you receive from the trustee, determines what portion of each distribution is taxable. An inclusion ratio of 0 means the distribution is completely exempt (no tax owed and no filing required). An inclusion ratio of 1.0 means the entire distribution is taxable. Many trusts have inclusion ratios between these extremes.

Where to Mail

All Form 706-GS(D) returns for 2012 should be mailed to: Department of the Treasury, Internal Revenue Service Center, Cincinnati, OH 45999. IRS.gov

Recordkeeping

You must keep copies of all Forms 706-GS(D-1) you received, along with any supporting documentation about property values and your completed return. The IRS can audit returns for at least three years after filing.

Step-by-Step (High Level)

Step 1: Gather Documentation

Collect all Forms 706-GS(D-1) that the trust administrator sent you for 2012. Each form shows a distribution you received, its value, and the all-important inclusion ratio. Keep these forms—you must attach copies to your return.

Step 2: Complete Part I (General Information)

Enter your identifying information: name, Social Security number (or trust EIN if you're filing as a trust), and address. If someone is filing on your behalf (like a parent for a minor), include that representative's information.

Step 3: Complete Part II (List Your Distributions)

List each taxable distribution you received during 2012. Copy the information directly from the Forms 706-GS(D-1). If any distribution has an inclusion ratio of zero, skip it entirely—you don't report or pay tax on those. For each distribution, multiply its value by the inclusion ratio to calculate the "tentative transfer" amount (Column C).

Step 4: Calculate Allowable Expenses (Part III)

You can deduct expenses you incurred specifically related to filing this return or determining your GST tax liability—such as fees paid to a tax preparer or attorney for help with this form. These expenses must be multiplied by the inclusion ratio(s) to arrive at "adjusted allowable expenses."

Step 5: Compute the Tax (Part III)

Subtract your adjusted allowable expenses from the total tentative transfers to get your "net transfers." Multiply this by 35% (the 2012 rate) to calculate your GST tax due.

Step 6: Sign and Submit

Either you or your authorized representative must sign the form. If you paid someone to prepare it, they must also sign and provide their information. Mail the form to Cincinnati along with any payment due (make checks payable to "United States Treasury"). IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Filing When Not Required

If all your distributions have an inclusion ratio of zero, you don't need to file Form 706-GS(D) at all. Check your Forms 706-GS(D-1) carefully—many people file unnecessarily.

Mistake #2: Forgetting to Attach Forms 706-GS(D-1)

You must attach copies of all Forms 706-GS(D-1) you received from the trustee. Without these, the IRS can't verify your calculations and may reject your return.

Mistake #3: Incorrect Property Valuation

The value of property distributions must reflect fair market value on the date of distribution, not when the trust was created. If you disagree with the trustee's valuation on Form 706-GS(D-1), attach a detailed statement explaining your reasoning and provide supporting documentation like appraisals. The IRS imposes substantial penalties (20-40% of underpaid tax) for significant valuation understatements.

Mistake #4: Miscalculating the Inclusion Ratio

Don't try to calculate the inclusion ratio yourself—use the number provided by the trustee on Form 706-GS(D-1). This ratio reflects complex trust accounting and GST exemption allocations that only the trustee has access to.

Mistake #5: Not Claiming Allowable Deductions

Many filers forget they can deduct expenses directly related to filing Form 706-GS(D), such as tax preparation fees, legal fees, or appraisal costs. Just remember to multiply these by the inclusion ratio. You can deduct expenses even if you haven't paid them yet, as long as the amount is determinable.

Mistake #6: Using the Wrong Tax Rate

Make sure to use 35% for 2012 distributions. The GST tax rate changed over the years, and using the wrong rate will cause errors.

Mistake #7: Missing Payment Deadlines

Even if you get an extension to file, your tax payment is still due April 15, 2013. Interest accrues daily on unpaid amounts from that date, even with a valid extension. IRS.gov

What Happens After You File

Immediate Processing

Once the IRS receives your Form 706-GS(D), they'll process it within several weeks to a few months. If you owed tax and paid it with your return, the IRS will deposit your check and apply it to your account.

Possible IRS Contact

The IRS may contact you if there are mathematical errors, missing information, or questions about valuations. This doesn't necessarily mean you're being audited—it may simply be a request for clarification or missing documentation.

Audit Possibility

Like all tax returns, Form 706-GS(D) can be selected for audit. The IRS has at least three years from the filing date to examine your return. However, if you substantially undervalued property (reporting 65% or less of actual value), the IRS may have additional time. Keep all supporting documents for at least three years.

Refund Scenarios

If you overpaid, the IRS will send you a refund check. If you later discover you overpaid after they processed your return, file Form 843 to claim a refund.

Penalties for Serious Errors

If the IRS finds you significantly undervalued property, penalties can range from 20% to 40% of the tax underpayment, depending on the severity of the understatement. IRS.gov

Long-Term Impact

The GST tax you pay is separate from income tax—it doesn't appear on your Form 1040. However, it does affect your overall tax liability and should be factored into your financial planning when you know distributions are coming.

No Ongoing Obligations

Form 706-GS(D) is filed only for the year you receive distributions. If you receive distributions in future years, you'll need to file separate returns for each year. If you receive no distributions in a given year, you have no filing obligation.

FAQs

Q1: Do I need to report trust distributions on my income tax return (Form 1040) as well?

It depends. Distributions from the trust may or may not be taxable income, depending on whether they consist of trust income or principal. The trust will send you a Schedule K-1 (Form 1041) if there's income to report. Form 706-GS(D) deals only with the generation-skipping transfer tax, which is separate from income tax. You may owe GST tax even on distributions that aren't income.

Q2: Can I set up a payment plan if I can't pay the GST tax I owe?

Yes. The IRS offers installment agreements for taxpayers who can't pay their tax liability in full. You'll need to file the return on time and contact the IRS to arrange payments. Interest and penalties will continue to accrue on the unpaid balance.

Q3: What if I never received Form 706-GS(D-1) from the trustee?

Contact the trustee immediately and request it. The trustee is legally required to provide this form to skip person beneficiaries who receive taxable distributions. Without it, you won't have the information needed to complete Form 706-GS(D). If the trustee refuses or is unresponsive, you may need to consult a tax attorney. IRS.gov

Q4: I received property instead of cash. How do I determine its value?

The value is the fair market value on the date of distribution—what a willing buyer would pay a willing seller, both having reasonable knowledge of the facts. For real estate, you may need a professional appraisal. For publicly traded stock, use the closing price on the distribution date. For closely held business interests or unusual assets, consult a qualified appraiser. Keep all appraisal documentation to support your reported values. IRS.gov

Q5: What if I'm a minor and received a distribution? Who files the form?

Your parent or legal guardian must file Form 706-GS(D) on your behalf. They should enter your name and Social Security number in Part I, then list themselves as the representative with their relationship to you (e.g., "father" or "legal guardian").

Q6: Can the generation-skipping tax be avoided or reduced?

The tax can only be reduced if the person who created the trust properly allocated their GST exemption to it. Once distributions are made to skip persons, the tax (if any) is determined by the trust's inclusion ratio. As a beneficiary, you can't retroactively reduce the tax. However, proper planning by the trust creator beforehand—through strategic GST exemption allocation—can minimize or eliminate the tax burden.

Q7: What's the difference between Form 706-GS(D) and Form 706-GS(T)?

Form 706-GS(D) is filed by the skip person distributee (you) when you receive distributions from a trust. Form 706-GS(T) is filed by the trustee when the trust terminates and all remaining assets pass to skip persons. They cover different types of generation-skipping transfer events. You, as a beneficiary, will typically only deal with Form 706-GS(D). IRS.gov

Additional Resources

• IRS Form 706-GS(D) Page: IRS.gov/forms-pubs/about-form-706-gs-d
• Instructions for Form 706-GS(D): Available at IRS.gov
• IRS Tax Assistance: 1-800-829-1040 (for general tax questions)

This guide provides general information based on 2012 tax law. For specific advice about your situation, consult a qualified tax professional or estate planning attorney.