What Form 706-GS(D) Is For

Form 706-GS(D) is an IRS tax form used by people who receive money or property from a trust when that distribution is subject to the generation-skipping transfer (GST) tax. Think of it as a special tax return for "skip persons"—typically individuals who are at least two generations younger than the person who created the trust.

The generation-skipping transfer tax exists to prevent wealthy families from avoiding estate taxes by bypassing their children and leaving assets directly to grandchildren or great-grandchildren. When a trust makes a taxable distribution to a skip person, that recipient must file Form 706-GS(D) to calculate and pay the GST tax due on what they received.

You'll know you need to file this form because the trustee should send you Form 706-GS(D-1), which is essentially a notification slip showing the details of your distribution. However, there's good news: if the "inclusion ratio" shown on Form 706-GS(D-1) is zero for all your distributions, you don't need to file Form 706-GS(D) at all—zero inclusion ratio means the distribution is completely exempt from GST tax. IRS

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

Regular Filing Deadline: For distributions received during 2011, Form 706-GS(D) was due by April 17, 2012 (the regular deadline is April 15, but it was extended that year because April 15 fell on a Sunday and April 16 was Emancipation Day in Washington, D.C.). The GST tax on distributions is reported on a calendar year basis, so you generally must file on or after January 1 but not later than April 15 of the year following the year you received the distributions. IRS

Extension Requests: If you couldn't meet the deadline, you could request an automatic six-month extension by filing Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) by the original due date. The extension is automatic—you don't need to provide a reason or wait for approval. However, an extension to file is not an extension to pay; interest will accrue on any unpaid taxes from the original due date. IRS

Amended Returns: If you discover errors after filing your original Form 706-GS(D), you can file an amended return by submitting another Form 706-GS(D) with "Supplemental Information" written across the top of page 1, along with copies of pages 1-4 from your original return.

Key Rules or Details for 2011

Tax Rate: The maximum GST tax rate for distributions in 2011 was 35%—down from 0% in 2010 and 45% in previous years. This was one of the lowest GST tax rates in years. IRS

GST Exemption: The GST exemption amount was $5 million per person (or $10 million for married couples). This exemption could be allocated to trusts or transfers to shield them from GST tax. If a trust had GST exemption properly allocated to it, distributions would have a lower inclusion ratio (or zero), reducing or eliminating the tax owed by recipients.

Inclusion Ratio: This is the key number that determines how much GST tax you owe. The inclusion ratio reflects how much of a trust has GST exemption allocated to it. An inclusion ratio of zero means the entire distribution is exempt; an inclusion ratio of 1.0 means the entire distribution is taxable. The trustee calculates this and reports it on Form 706-GS(D-1).

Filing Location: All Form 706-GS(D) returns for 2011 were mailed to: Department of the Treasury, Internal Revenue Service, Cincinnati, OH 45999. IRS

Step-by-Step (High Level)

Step 1: Receive Form 706-GS(D-1) from the Trustee

The trustee of the trust is required to send you Form 706-GS(D-1) by April 15 of the year following the distribution. This form tells you the value of what you received, the date of distribution, the trust's identification number, and crucially, the inclusion ratio. IRS

Step 2: Determine If You Must File

Check the inclusion ratio on Form 706-GS(D-1), Part II, line 3, column d. If it's zero for all distributions you received, you don't need to file Form 706-GS(D). If any distribution has an inclusion ratio greater than zero, you must file. IRS

Step 3: Complete Part I (General Information)

Fill in your name, Social Security number (or if you're a trust, your Employer Identification Number), and the address where you want to receive IRS correspondence. IRS

Step 4: Complete Part II (Distributions)

List each taxable distribution you received during 2011. Transfer information from each Form 706-GS(D-1) you received, including the trust's EIN, item number, and the "tentative transfer" amount (found in column f of Form 706-GS(D-1)). Attach copies of all Forms 706-GS(D-1) to your return. IRS

Step 5: Calculate the Tax (Part III)

Line 4: Deduct any allowable expenses you incurred preparing the return or dealing with GST tax matters, adjusted by multiplying by the inclusion ratio.
Line 5: Subtract expenses from total transfers to get your taxable amount.
Line 6: Enter the maximum tax rate (35% for 2011).
Line 7: Multiply the taxable amount by the rate to calculate your GST tax.
Lines 8–10: Account for any payments already made with Form 7004 and calculate the amount you owe or are due as a refund. IRS

Step 6: Sign and Mail

Sign the return (or have your authorized representative sign), attach all Forms 706-GS(D-1), and mail it to the Cincinnati address with payment (if any is due). IRS

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Because You Didn't Receive Form 706-GS(D-1)
Even if the trustee fails to send you the notification form, you're still responsible for filing if you received a taxable distribution from a generation-skipping trust. Solution: Contact the trustee and request Form 706-GS(D-1), or consult a tax professional to help you determine your filing obligations.

Mistake #2: Forgetting to Attach Form 706-GS(D-1)
The instructions explicitly state you must attach copies of all Forms 706-GS(D-1) to your return. Missing attachments can delay processing. Solution: Make copies before mailing and keep originals for your records. IRS

Mistake #3: Reporting the Wrong Value
The value you report should be the fair market value on the date of distribution, not when you received Form 706-GS(D-1) or filed your return. Solution: Use the valuation and dates provided by the trustee on Form 706-GS(D-1). If you disagree with the trustee's valuation, attach a statement explaining your reasoning and how you determined the correct value. IRS

Mistake #4: Miscalculating Adjusted Allowable Expenses
If you had multiple distributions with different inclusion ratios, you must prorate your preparation expenses based on the relative value of each distribution at its respective inclusion ratio. This is complex math. Solution: Use the example provided in the IRS instructions, or work with a tax professional to ensure accuracy. IRS

Mistake #5: Missing the Deadline and Not Requesting an Extension
Late filing can result in penalties (even if you owe no tax) unless you can demonstrate reasonable cause. Solution: File Form 7004 before the April 15 deadline if you need more time, and pay any estimated tax due to minimize interest charges. IRS

Mistake #6: Paying Late Even When Filing on Time
An extension to file is not an extension to pay. Interest accrues from the original April 15 deadline. Solution: Estimate your tax liability and pay with Form 7004, even if you're still calculating the exact amount. IRS

What Happens After You File

Processing Time: The IRS will process your Form 706-GS(D) and either cash your check (if you owed tax) or issue a refund (if you overpaid). Processing typically takes several weeks to a few months.

IRS Review: The IRS may examine your return to verify the accuracy of reported values, the inclusion ratio calculation, or the expenses you claimed. Substantial valuation understatements can trigger penalties—if you reported property at 65% or less of its actual value, you face a penalty; if you reported it at 40% or less, a gross valuation understatement penalty applies under Section 6662. IRS

Notice of Any Issues: If the IRS finds problems or has questions, they'll send you a notice. Keep all your documentation—Forms 706-GS(D-1), appraisals, receipts for expenses, and copies of your return—for at least three years (longer if there's a significant understatement).

Payment or Refund: If you owed tax, make your check payable to "United States Treasury" and write your Social Security number, "2011," and "Form 706-GS(D)" on the check. If the IRS owes you a refund because you overpaid with your extension request, they'll send you a check. IRS

Penalties and Interest for Late Filing/Payment: If you file late without reasonable cause, the IRS can impose penalties under Section 6651 for both late filing and late payment. If you receive a penalty notice, you can send an explanation demonstrating reasonable cause, but don't attach explanations to your original return—they won't be considered at that stage. IRS

Coordination with Income Taxes: Remember that GST tax is separate from income tax. The distribution you received may or may not be taxable on your income tax return (Form 1040), depending on whether it's income or principal from the trust. Consult the trust's Form 1041 Schedule K-1 for income tax reporting.

FAQs

1. What exactly is a "skip person," and how do I know if I am one?

According to IRS instructions, for GST tax purposes, a skip person is a natural person assigned to a generation that is two or more generations below the settlor (the person who created the trust). Most commonly, this means grandchildren of the person who set up the trust. The trustee should inform you if distributions to you are subject to GST tax. IRS

2. Do I need to file Form 706-GS(D) if the trustee didn't send me Form 706-GS(D-1)?

Technically, if you received a taxable distribution, you're required to file even without Form 706-GS(D-1). However, as a practical matter, if you haven't received notification and aren't sure whether your distribution is subject to GST tax, contact the trustee immediately. The trustee is legally required to notify you and provide the information you need to file.

3. Can I avoid GST tax on my distribution?

You personally cannot avoid the tax if you've received a taxable distribution—the law requires you to report it and pay the tax. However, GST tax can be avoided or minimized through proper planning by the person who created the trust (allocating GST exemption) or by the trustee (making distributions in ways that minimize GST tax). If you're concerned about future distributions, consult an estate planning attorney about the trust structure.

4. What if I disagree with the value the trustee reported on Form 706-GS(D-1)?

You have the right to report a different value on Form 706-GS(D) if you believe the trustee's valuation is incorrect. However, you must attach a detailed statement explaining how you determined the correct value and why you disagree with the trustee. Consider getting an independent appraisal to support your position, especially for real estate, business interests, or other hard-to-value assets. IRS

5. I received distributions from multiple trusts. Do I file separate returns?

No, you file one Form 706-GS(D) that includes all taxable distributions you received during the calendar year, regardless of how many trusts they came from. In Part II, you'll list distributions from all trusts, using the trust EIN to distinguish which trust each distribution came from. Attach all Forms 706-GS(D-1) from every trust. IRS

6. What happens if I simply don't file?

Failure to file can result in penalties and interest under Section 6651, even if you owe no tax. The IRS can also assess the tax they believe you owe based on available information, which may be higher than what you actually owe. It's always better to file, even if you file late, and explain any reasonable cause for the delay. IRS

7. Can I deduct the GST tax I pay on my income tax return?

GST tax is generally not deductible on your personal income tax return. However, the expenses you incurred in preparing Form 706-GS(D) (attorney fees, accountant fees, appraisal costs) may be deductible on your Form 706-GS(D) itself as adjusted allowable expenses, which reduces the GST tax you owe. IRS

For More Information

Visit the IRS page for Form 706-GS(D) at www.irs.gov/form706gsd or consult with a qualified tax professional or estate planning attorney. The generation-skipping transfer tax is one of the most complex areas of tax law, and professional guidance is often worthwhile when substantial amounts are involved.