What Form 706-GS(D) (2021) Is For
IRS Form 706-GS(D) is the tax return used to report and pay the generation-skipping transfer tax on distributions received from a trust. This tax applies when wealth is transferred to a person two or more generations younger than the transferor, such as a grandchild or great-grandchild.
This form must be filed by a skip person who receives a taxable distribution from a generation-skipping trust. Trustees provide beneficiaries with Form 706-GS(D-1), which includes the distribution’s value, the inclusion ratio, and other identifying information needed to calculate the GST tax owed. The beneficiary, not the trustee, is responsible for filing and paying this federal tax.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions for IRS Form 706-GS(D) (2021)—Generation-Skipping Transfer Tax, see our comprehensive guide.
When You’d Use Form 706-GS(D)
Form 706-GS(D) is required when a skip person or trust beneficiary receives a taxable distribution from a generation-skipping trust. This situation occurs when assets are transferred to younger generations—such as grandchildren or great-grandchildren—bypassing the children of the original transferor. The form ensures the correct GST tax is calculated and paid on wealth that would otherwise escape estate taxation.
The filing deadline is April 15 of the year following the calendar year in which the distribution is made. Taxpayers may request an automatic six-month extension by filing Form 7004, but payment of taxes owed must still be made by the original due date. If errors or corrected information are later received from the trustee, the taxpayer can file Form 843 to request an amendment or a refund.
Key Rules or Details for 2021
For 2021, the generation-skipping transfer tax exemption amount was $11.7 million per taxpayer. This lifetime exemption allowed most people to transfer wealth, property, or other assets to younger generations without paying GST tax. Transfers exceeding this exemption were taxed at a flat 40 percent rate, matching the federal estate tax rate.
The inclusion ratio of each taxable distribution determined how much of the transferred amount was subject to GSTT taxes. An inclusion ratio of zero meant that no tax was due, while a ratio of one suggested that the entire distribution was taxable. All assets transferred had to be reported at their fair market value on the date of distribution, using appraisals or market prices to ensure proper federal tax reporting and compliance.
For complete details on wage reporting, withholdings, and unemployment tax filings, see our guide for estate, gift, and trust forms.
Step-by-Step (High Level)
Filing Form 706-GS(D) involves several key steps.
Step 1: Collect Required Forms
The trustee must provide Form 706-GS(D-1) for each distribution subject to GST tax. These forms should be received by April 15 of the year following the distribution. Each document includes the trust’s name, inclusion ratio, and value of the assets transferred.
Step 2: Complete Part I (General Information)
Enter identifying details such as the distributee’s name, address, and taxpayer identification number. If the filer is a trust rather than an individual, include the trust’s Employer Identification Number (EIN).
Step 3: Complete Part II (Taxable Distributions)
Report all distributions with inclusion ratios greater than zero. Multiply each distribution’s value by its inclusion ratio to determine the tentative taxable amount. Total these amounts at the bottom of the section.
Step 4: Complete Part III (Tax Computation)
Subtract any allowable expenses related to the preparation of the return or valuation of assets. Multiply the adjusted total by 40 percent to calculate the GST tax owed.
Step 5: Sign and Submit
The taxpayer or authorized preparer must sign the return and send it to the IRS processing center in Kansas City, Missouri. Payments should be made to the United States Treasury and include identifying information such as the tax year and form number.
Common Mistakes and How to Avoid Them
Errors on Form 706-GS(D) often result in delayed processing, penalties, or correspondence from the IRS. Understanding these common issues can help ensure accuracy and timely filing.
- Filing when no GST tax is due: Some taxpayers submit Form 706-GS(D) even when all distributions have an inclusion ratio of zero, meaning no tax liability exists.
- Incorrectly adjusting allowable expenses: Allowable expenses must be prorated according to the inclusion ratios; failing to change them results in inaccurate tax calculations.
- Omitting required attachments: Copies of Forms 706-GS(D-1) must be attached to allow the IRS to verify distribution details. Missing attachments delay processing.
- Missing the payment deadline: Some taxpayers assume a filing extension also extends payment time, which is incorrect. GST tax payments are due by the original deadline.
Careful review of all values, attachments, and payment requirements helps taxpayers file Form 706-GS(D) accurately and avoid unnecessary IRS penalties or delays.
What Happens After You File
After Form 706-GS(D) is filed, the IRS reviews the return for accuracy and completeness. The agency verifies the reported inclusion ratios, asset values, and amounts paid against the trustee’s records. Processing generally takes several months, depending on the complexity of the trust distributions and transferred assets.
If taxes were paid with the return, the IRS applies the payment to the taxpayer’s federal estate and GST tax account. In some cases, the IRS may contact the filer if values or inclusion ratios differ from those reported on Form 706-GS(D-1). Taxpayers should retain copies of all forms, valuations, and payment proofs indefinitely for audit or verification purposes.
FAQs
Who must file IRS Form 706-GS(D) (2021)?
A skip person or trust beneficiary who receives a taxable distribution from a generation-skipping trust must file IRS Form 706-GS(D) (2021) to report and pay GST tax on assets transferred to younger generations.
How does the generation-skipping transfer tax differ from the estate tax?
The generation-skipping transfer tax applies to taxable distributions or direct skips that bypass children and go directly to grandchildren or great-grandchildren. Unlike the estate tax, this additional tax ensures equal taxation of wealth transfers between generations.
Can the grantor pay GST tax on behalf of the beneficiary?
In certain generation-skipping trusts, the grantor pays GSTT taxes directly for gift tax purposes. However, most distributions require the skip person to file the tax return and pay taxes owed unless the trust specifies otherwise.
What qualifies as a taxable distribution or taxable termination?
A taxable distribution occurs when a skip person receives money or property from a generation-skipping trust. In contrast, a taxable termination occurs when a trust ends and its assets are transferred to younger generations, triggering GST tax or estate taxes.
Are transfers to a surviving spouse exempt from GST tax?
Transfers to a surviving spouse are generally exempt from GST tax and gift or estate tax. These exempt transfers enable married couples to utilize the same amount of lifetime exemption when transferring assets to future generations.
How does Form 706-GS(D) affect federal tax reporting?
Form 706-GS(D) reports generation-skipping transfers subject to GST tax and complements other federal tax filings, including estate and gift taxes. Taxpayers must file this form to document taxable distributions, ensuring proper taxation and compliance with IRS requirements.
