If you're a beneficiary who received money or property from a trust that skipped a generation—perhaps from your grandparent's trust—you might need to file Form 706-GS(D). This tax form can seem intimidating, but understanding the basics will help you navigate the process with confidence.

What the Form Is For

Form 706-GS(D) is the tax return used by "skip persons" to report and pay the generation-skipping transfer (GST) tax on distributions they received from a trust. But what exactly is a "skip person"? In simple terms, it's someone who receives property from a trust where the transfer skips a generation—typically grandchildren receiving assets from grandparents' trusts, or even great-grandchildren.

The generation-skipping transfer tax exists to prevent wealthy families from avoiding estate taxes by bypassing the next generation. Without this tax, a grandparent could transfer wealth directly to grandchildren, skipping the estate tax that would have applied when passing through their children's generation.

As the person receiving these distributions (called the "distributee"), you're responsible for calculating and paying the GST tax owed on these assets. The trustee managing the trust will send you Form 706-GS(D-1), which provides critical information about your distributions—think of it as your informational statement, similar to a W-2 for wages.

When You’d Use Form 706-GS(D) (Late/Amended)

The deadline for filing Form 706-GS(D) depends on when you received distributions from the trust. The GST tax operates on a calendar year basis, regardless of your personal income tax filing period. You must file Form 706-GS(D) between January 1 and April 15 of the year following the calendar year when you received the distributions. For example, if you received distributions in 2021, your Form 706-GS(D) would be due by April 15, 2022.

If you miss the deadline, you can request an automatic 6-month extension by filing Form 7004 before the original due date. The extension is automatic—you don't need IRS approval or even a reason for requesting it. However, remember that an extension to file is not an extension to pay. You'll still owe interest on any unpaid taxes from the original due date, even with an approved extension.

For amended returns, if you discover errors after filing or receive corrected information from the trustee, you'll need to file Form 843 (Claim for Refund and Request for Abatement) to request a refund of overpaid taxes. There's no specific "amended" version of Form 706-GS(D).

Late filing comes with penalties unless you can demonstrate reasonable cause. The IRS imposes penalties for both late filing and late payment, plus interest charges that accumulate until the full amount is paid.

Key Rules for 2021

Several important rules governed Form 706-GS(D) for tax year 2021:

The exemption amount: For 2021, the GST tax exemption was $11.7 million per person. This means that generation-skipping transfers up to this amount during someone's lifetime could be shielded from GST tax. However, as the distributee, you're dealing with distributions that may have already exceeded this exemption or come from trusts with varying "inclusion ratios."

The tax rate: The GST tax rate for 2021 was a flat 40%—the same as the maximum estate tax rate. This rate applies to the "taxable amount" of your distribution after accounting for the inclusion ratio and allowable deductions.

The inclusion ratio: This crucial number appears on Form 706-GS(D-1) from your trustee. It represents what portion of the distribution is subject to GST tax. An inclusion ratio of zero means no GST tax is owed on that distribution—you don't even need to report it on Form 706-GS(D). An inclusion ratio of 1.0 means the entire distribution is taxable. Many trusts have inclusion ratios somewhere in between, depending on how much GST exemption was allocated to the trust.

Fair market value: Distributions must be valued at their fair market value on the distribution date—the price a willing buyer would pay a willing seller in an open market. For real estate or business interests, this might require professional appraisals. For publicly traded securities, use the trading price on the distribution date.

Step-by-Step (High Level)

Filing Form 706-GS(D) involves several key steps:

Step 1: Gather your Forms 706-GS(D-1)

The trustee is required to send you Form 706-GS(D-1) for each distribution subject to GST tax by April 15 of the year following distribution. This form contains essential information including the trust's name, distribution dates, values, and critically, the inclusion ratio for each distribution. Organize these forms carefully—you'll need to attach copies to your Form 706-GS(D).

Step 2: Complete Part I (General Information)

Enter your identifying information. If you're an individual, use your Social Security number. If the distributee is a trust, use the trust's employer identification number. Include your address and, if someone else is preparing the return (like a guardian for a minor), their information as well.

Step 3: Fill out Part II (Taxable Distributions)

List each distribution you received during the calendar year that has an inclusion ratio greater than zero. Use the same item numbers from your Forms 706-GS(D-1) to maintain consistency. For each distribution, you'll calculate the "tentative transfer" by multiplying the distribution's value by its inclusion ratio. If you received property worth $100,000 with an inclusion ratio of 0.50, your tentative transfer would be $50,000. Total all these tentative transfers at the bottom of Part II.

Step 4: Complete Part III (Tax Computation)

This section walks you through calculating your actual GST tax liability. Start with your total tentative transfers from Part II. Subtract any "adjusted allowable expenses"—these are costs directly related to preparing the return or determining your GST tax obligation, proportioned by inclusion ratios. Multiply the result by the applicable tax rate (40% for 2021) to arrive at your total GST tax due.

Step 5: Sign and submit

Either you or your authorized representative must sign the return. If you paid someone to prepare the return, they must also sign in the "Paid Preparer Use Only" section. Mail the return to the IRS address specified in the instructions (which changed to Kansas City, Missouri in mid-2019). If you owe taxes, include your payment made payable to "United States Treasury" with your SSN or EIN, the tax year, and "Form 706-GS(D)" written on the check.

Common Mistakes and How to Avoid Them

Several pitfalls can trip up first-time filers:

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 before assuming you must file. Similarly, only report distributions with inclusion ratios greater than zero—leave off the zero-ratio distributions entirely.

Mistake #2: Using incorrect values

The distribution value must reflect fair market value on the distribution date, not when you eventually sell the property or what the grantor originally paid. For complex assets like real estate, business interests, or artwork, obtain professional appraisals and attach them to your return. Don't guess at valuations—the IRS can impose substantial penalties for valuation understatements (when you report 65% or less of actual value).

Mistake #3: Miscalculating adjusted allowable expenses

You can deduct expenses related to preparing Form 706-GS(D), but these must be "adjusted" by multiplying them by the inclusion ratio. If you have multiple distributions with different inclusion ratios, you must prorate the expenses based on the relative value of each distribution. Many taxpayers either forget this adjustment or calculate it incorrectly.

Mistake #4: Missing the attachment requirement

You must attach copies of all Forms 706-GS(D-1) you received to your return. This is not optional—the IRS needs these to verify your reported distributions and inclusion ratios.

Mistake #5: Confusing filing dates

Form 706-GS(D) follows a calendar year, not your personal tax year. If you typically file business returns on a fiscal year, don't apply that schedule here. The form is always due April 15 following the calendar year of distribution.

Mistake #6: Forgetting to pay

An extension to file is not an extension to pay. Interest accrues from the original due date on any unpaid taxes. Calculate your estimated tax liability and pay by the April deadline, even if you've filed for an extension.

What Happens After You File

Processing timeline

The IRS typically processes Form 706-GS(D) within several months, though complex returns or those selected for review may take longer. You won't receive confirmation unless there's a problem or you're due a refund.

Payment processing

If you included payment with your return, the IRS will cash your check and apply it to your account. You can verify this by checking your bank statements or calling the IRS.

Potential audits or inquiries

The IRS may contact you if they need clarification about valuations, have questions about the inclusion ratios reported by the trustee, or identify discrepancies between your return and the Forms 706-GS(D-1) filed by the trustee. Estate and gift tax returns, including GST returns, face higher audit rates than typical income tax returns due to the large dollar amounts involved.

Penalties and interest notices

If you filed or paid late without reasonable cause, you'll receive a notice explaining the penalties and interest assessed. You can respond to these notices with an explanation of reasonable cause, which the IRS will review.

Record retention

Keep copies of Form 706-GS(D), all attached Forms 706-GS(D-1), supporting documentation, and proof of payment indefinitely. While the general statute of limitations for assessment is three years, the IRS can review these returns for much longer in cases of substantial undervaluation or fraud.

FAQs

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

A: The trustee is legally required to provide Form 706-GS(D-1) by April 15 of the year following distribution. Contact the trustee immediately to request the form. If they're unresponsive, you may need to consult with a tax attorney, as you cannot properly complete Form 706-GS(D) without this information.

Q: Can I avoid GST tax by refusing the distribution?

A: Potentially, yes. If you execute a qualified disclaimer under IRS rules before accepting the distribution (typically within nine months of the transfer), the assets pass as if you never received them, avoiding GST tax for you. However, this is an irrevocable decision with complex requirements—consult an estate planning attorney before attempting this.

Q: How does the inclusion ratio get determined?

A: The inclusion ratio is calculated based on how much GST exemption was allocated to the trust by the person who created it. This happens when the trust is established or when the trustee makes certain elections. As the distributee, you don't calculate this—the trustee provides it on Form 706-GS(D-1). If you believe the inclusion ratio is incorrect, address this with the trustee and potentially the trust's tax advisor.

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

A: Form 706-GS(D) is for distributions—when you receive property from a trust during its existence. Form 706-GS(T) is filed by trustees when the trust itself terminates and is subject to GST tax. These are different taxable events with different filing requirements and responsible parties.

Q: Do I need to file Form 706-GS(D) if I'm also filing an income tax return?

A: Yes. Form 706-GS(D) is separate from your income tax return (Form 1040). The GST tax is distinct from income tax—you may owe both income tax on distributions (reported on Schedule K-1 from the trust) and GST tax (reported on Form 706-GS(D)). These are filed separately and address different types of taxation.

Q: Can the trustee pay the GST tax instead of me?

A: By default, the distributee (you) is responsible for GST tax on distributions. However, trust documents sometimes authorize the trustee to pay GST taxes on behalf of distributees, or the trustee might voluntarily do so. This is a matter of trust administration and the specific trust terms—discuss with the trustee if you're concerned about paying the tax.

Q: What if I disagree with the valuation the trustee reported on Form 706-GS(D-1)?

A: You have the right to use different values if you believe the trustee's valuation is incorrect. Attach a detailed statement to your Form 706-GS(D) explaining the discrepancy, how you determined the correct value, and include supporting documentation like appraisals. However, be prepared to substantiate your position if the IRS questions it.

For more information and official forms, visit IRS.gov/Form706GSD.