Form 706-GS(D) Generation-Skipping Transfer Tax Return Checklist for 2011
Overview
Form 706-GS(D) serves as the Generation-Skipping Transfer Tax Return for Distributions that skip person distributees must file to calculate and report the tax due on distributions from trusts subject to the generation-skipping transfer tax.
For calendar year 2011, this form applies the 35% maximum federal estate tax rate established under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which remained effective from January 1, 2011, through December 31, 2012. The generation-skipping transfer tax on distributions is figured and reported on a calendar year basis, regardless of the distributee’s income tax accounting period.
Critical 2011 Tax Year Information
Applicable Tax Rate
For distributions made during calendar year 2011, the maximum generation-skipping transfer tax rate is 35%. This rate applies uniformly to all taxable distributions with inclusion ratios greater than zero. The GST tax rate corresponds to the maximum federal estate tax rate in effect during that period under the unified transfer tax system.
Filing Deadline
The filing deadline for Form 706-GS(D) reporting 2011 distributions is April 17, 2012. This deadline extends beyond the standard April 15 date because April 15, 2012, falls on a Sunday and April 16, 2012, is Emancipation Day, a legal holiday observed in the District of Columbia. Under section 7503, when the regular filing deadline falls on a Saturday, Sunday, or legal holiday, the deadline automatically shifts to the next business day.
Extension Availability
If you cannot file the return by April 17, 2012, you may request an automatic six-month extension of time to file by submitting Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. The extension is automatic and does not require a signature or explanation for the request. You must file Form 7004 on or before the regular due date of Form 706-GS(D). Interest will be charged on taxes not paid by the original due date, even if an extension of time to file is granted.
Filing Requirements
Who Must File
You must file Form 706-GS(D) if you are a skip person distributee who received a taxable distribution from a trust during calendar year 2011 with an inclusion ratio greater than zero. Trustees are required to report taxable distributions to skip person distributees on Form 706-GS(D-1), Notification of Distribution From a Generation-Skipping Trust.
When Filing Is Not Required
You do not need to file Form 706-GS(D) if all inclusion ratios shown on Form 706-GS(D-1) Part II, line 3, column d are zero for all distributions received, regardless of the distribution amount. If you are required to file Form 706-GS(D), you do not have to include any distributions that have an inclusion ratio of zero.
Skip Person Definition
Only individuals assigned two or more generations below the transferor’s generation, or trusts in which all beneficiaries are skip persons, qualify to file this form. Non-skip persons cannot file Form 706-GS(D) even if they received trust distributions because the GST tax does not apply to distributions made to non-skip persons.
Ten-Step Filing Checklist
Step 1: Confirm Filing Requirement
Verify that you received a taxable distribution from a trust during calendar year 2011 and that the inclusion ratio shown on Form 706-GS(D-1), Part II, line 3, column d, is greater than zero.
Request a completed copy of Form 706-GS(D-1) from the trustee for each distribution received. The trustee must provide this form by April 15, 2012. Review all Forms 706-GS(D-1) received to determine whether filing is required based on the inclusion ratios reported.
Step 2: Gather Required Documentation
Collect all Forms 706-GS(D-1) received from trustees during 2011. Keep copies for your records and prepare to attach the originals to your Form 706-GS(D). If you received distributions from multiple trusts or multiple distributions from one trust, organize all documentation by trust and by distribution date. Ensure each Form 706-GS(D-1) contains complete information, including the trust’s employer identification number, distribution date, value of distribution, inclusion ratio, and tentative transfer amount.
Step 3: Complete Part I General Information
Enter your name on line 1a. If you are an individual skip person distributee, enter your social security number on line 1b and leave line 1c blank. If the skip person distributee is a trust, enter the trust’s employer identification number on line 1c and leave line 1b blank. Do not enter a number on both line 1b and line 1c.
On line 2a, if the skip person distributee is a trust, enter the trustee’s name. If the skip person distributee is a minor or is under some disability that precludes the individual from filing the return, enter the name of the person legally responsible for conducting the affairs of the distributee, such as a parent or guardian, along with the title or relationship to the distributee.
On line 2b, enter the address where you wish to receive correspondence from the IRS regarding this return.
Step 4: Report All Distributions in Part II
For each Form 706-GS(D-1) received, extract the following information: the trust’s employer identification number for column a, the item number from Form 706-GS(D-1) Part II column a for column b, and the tentative transfer amount from Form 706-GS(D-1) Part II column f for column c.
Use the same item number in column b that was used for the corresponding distribution on Form 706-GS(D-1). If you receive distributions from more than one trust, you may need to repeat item numbers. Attach a copy of each Form 706-GS(D-1) received during the year to your return.
Step 5: Calculate Tentative Transfer if Needed
If the trustee has not completed columns e and f of Form 706-GS(D-1) or if you disagree with the amounts entered, you must calculate the tentative transfer yourself. To figure the tentative transfer for column C, multiply the applicable inclusion ratio from Form 706-GS(D-1) Part II column D by the value of the distribution.
The value of a distribution is its fair market value on the date of distribution. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller when neither is forced to buy or sell, and both have reasonable knowledge of all relevant facts.
Attach a statement to your return showing the correct amounts and how you calculated them.
Step 6: Total All Transfers on Line 3
Add all amounts entered in the Part II column c to calculate the total tentative transfers. If you require more space than provided in Part II, please attach an additional sheet of the same size, using the same format as Part II. Ensure that the total tentative transfers from any continuation sheets are included in the total on line 3. This total represents the aggregate value of all taxable distributions subject to GST tax for 2011.
Step 7: Calculate Adjusted Allowable Expenses on Line 4
You may deduct any adjusted allowable expenses incurred in connection with preparing Form 706-GS(D) or any other costs incurred in connection with the determination, collection, or refund of the GST tax reported or which should have been reported on this return. Adjusted allowable expenses equal the total permissible expenses multiplied by the inclusion ratio.
If you have more than one inclusion ratio in Part II column d of Form 706-GS(D-1), prorate the total expense among the inclusion ratios based on the relative value of each distribution made at the various inclusion ratios. You may deduct an expense even though it has not been paid at the time the return is filed, as long as the amount is clearly ascertainable at that time.
Step 8: Compute Taxable Amount on Line 5
Subtract line 4 from line 3 to determine your taxable amount subject to GST tax. This represents the net value of distributions subject to the generation-skipping transfer tax after accounting for adjusted allowable expenses. This amount forms the base upon which the GST tax will be calculated.
Step 9: Apply Maximum Tax Rate and Calculate GST Tax
Enter 35% on line 6, which is the maximum federal estate tax rate applicable to generation-skipping transfers occurring after December 31, 2010, but before January 1, 2013.
Multiply line 5 by line 6 to obtain the GST tax due and enter this amount on line 7. On line 8, subtract any payment made with Form 7004 if you filed an extension and made a payment. If line 7 exceeds line 8, enter the difference on line 9 as the tax due with this return.
Step 10: Sign, Assemble, and File the Return
Either you, as the distributee, or your authorized representative must sign Form 706-GS(D) under penalty of perjury. If someone prepares your return without charging you, that person should not sign the return, and the Paid Preparer Use Only space should be left blank. If you use a paid preparer, that person must sign the return in the space provided and complete the Paid Preparer Use Only area, including their printed name, signature, Preparer Tax Identification Number, firm name, firm’s employer identification number, firm address, and phone number. The paid preparer must give you a copy of the completed return.
Make your check payable to the United States Treasury and write your Social Security number or employer identification number, the year, and Form 706-GS(D) on the check. Enclose but do not attach the payment with Form 706-GS(D). Mail the complete original return with all Forms 706-GS(D-1) attached to the Department of the Treasury, Internal Revenue Service, Cincinnati, OH 45999. File by April 17, 2012.
Valuation Guidelines
Fair Market Value Determination
The value of a distribution is its fair market value on the date of distribution shown in Form 706-GS(D-1) Part II column c. Fair market value must not be determined by a forced sale price or by the sale price of the item in an uncommon market. The location of the item must be taken into account whenever appropriate. Reduce the reported value of any property by the amount of any consideration provided by the distributee.
Real Estate Valuation
Reduce the reported value of real estate by the amount of any outstanding lien against the property on the date of distribution. Attach copies of any such liens. Explain how the reported values were determined and attach copies of any appraisals obtained. For detailed valuation guidance, refer to the Instructions for Form 706, United States Estate and Generation-Skipping Transfer Tax Return.
Close Corporation Stock Valuation
Value the stock of close corporations or inactive stock based on net worth, earnings, dividend capacity, and other relevant factors. For such stock, attach balance sheets, particularly the one nearest the date of the distribution, and statements of net earnings or operating results and dividends paid for each of the five preceding years. Provide detailed documentation supporting the valuation methodology used.
Penalties and Interest
Late Filing and Payment Penalties
Section 6651 provides penalties for both late filing and late payment unless there is reasonable cause for the delay. The law also provides penalties for willful attempts to evade payment of tax. A return is considered late when it is filed after the due date, including extensions. The late filing penalty will not be imposed if you can show that the failure to file a timely return is due to reasonable cause.
Valuation Understatement Penalties
Section 6662 provides a penalty for underpayment of GST taxes exceeding $5,000 if the underpayment is due to a valuation understatement. A substantial valuation understatement occurs when the reported value of a property listed on Form 706-GS(D) is 65% or less of its actual value. A gross valuation understatement occurs when the reported value of a property listed on Form 706-GS(D) is 40% or less of its actual value. These penalties are in addition to any interest that may be charged on unpaid tax amounts.
Interest Charges
Interest will be charged on taxes not paid by the original April 17, 2012, due date, even if an extension of time to file is granted. Interest is also charged on any additions to tax imposed by section 6651 from the due date of the return, including any extensions, until the addition to tax is paid. Interest accrues daily on any unpaid balance.
Reasonable Cause Determinations
If you receive a notice about penalties and interest after filing Form 706-GS(D), send an explanation to the IRS, and they will determine if you meet reasonable cause criteria. Do not attach a reason when you file Form 706-GS(D). The IRS will not consider explanations attached to the return at the time of filing. Submit your explanation only in response to a notice received after filing.
Paid Preparer Requirements
Signature and Identification
Generally, anyone who is paid to prepare a return must sign it in the designated space and complete the "Paid Preparer Use Only" area. This includes entering the preparer’s printed name, signature, Preparer Tax Identification Number, firm name, firm’s employer identification number, firm address, and phone number. A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.
Preparer Penalties
The Small Business and Work Opportunity Tax Act of 2007 extended return preparer penalties to all tax return preparers. Under section 6694 and its regulations, tax return preparers who prepare any return or claim for refund that shows an understatement of tax liability due to willful or reckless conduct can be penalized $5,000 or 50% of the income earned or income to be earned, whichever is greater, for each return.
Preparer Obligations
The paid preparer must provide a copy of the completed return to the taxpayer. This requirement ensures that the taxpayer has a complete record of the information submitted to the IRS and understands the tax liability reported on the return.
Privacy and Disclosure
The IRS requires the information on Form 706-GS(D) to carry out the Internal Revenue laws of the United States. Subtitle B, Estate and Gift Taxes, of the Internal Revenue Code imposes a tax on certain distributions from a trust to a skip person, and section 6109 requires you to provide your identification number. Failure to provide this information promptly or providing false or fraudulent information may subject you to penalties.
The IRS may disclose return information to the Department of Justice for civil and criminal litigation, to cities, states, the District of Columbia, and U.S. commonwealths and possessions for use in administering their tax laws, to other countries under a tax treaty, to federal and state agencies to enforce federal nontax criminal laws, or to federal law enforcement and intelligence agencies to combat terrorism. Generally, tax returns and return information are confidential as required by section 6103.
Conclusion
Filing Form 706-GS(D) for 2011 requires careful attention to the 35% GST tax rate, the April 17, 2012, filing deadline, proper identification of skip person status, and accurate valuation of distributed property. Ensure all Forms 706-GS(D-1) received from trustees are attached to your return and that all calculations are adequately documented. Timely filing and payment avoid penalties and interest charges. If you require additional time to file, please request an automatic extension using Form 7004. However, note that payment is still due by the original deadline to avoid interest charges.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
