What Form 706-GS(D) Is For

Form 706-GS(D), officially titled "Generation-Skipping Transfer Tax Return for Distributions," is used by beneficiaries (called "skip persons" in tax lingo) who receive distributions from a trust that are subject to generation-skipping transfer tax. Think of it as a companion to your regular tax return, but specifically for this special type of transfer.

Here's the basic concept: The federal government wants to collect estate or gift taxes at each generational level. When wealthy families set up trusts that skip their children and go directly to grandchildren, the IRS potentially loses out on one round of taxation. The GST tax closes this loophole by imposing an additional tax on these generation-skipping transfers.

As the recipient (distributee), you're responsible for calculating and paying this tax when you receive a "taxable distribution" from the trust. The trustee will notify you of these distributions using Form 706-GS(D-1), which provides the information you need to complete your Form 706-GS(D). According to the IRS instructions, any skip person who receives a taxable distribution from a trust must file this form—unless the inclusion ratio is zero for all distributions, which means no tax is owed.

When You’d Use Form 706-GS(D)

Regular Filing Timeline

The GST tax on distributions operates on a calendar year basis, regardless of your personal income tax accounting period. You must file Form 706-GS(D) on or after January 1 but no later than April 15 of the year following the calendar year when you received the distributions. For example, if you received distributions from a generation-skipping trust in 2013, you would file Form 706-GS(D) by April 15, 2014.

Late Filing

Life happens, and sometimes deadlines slip by. If you need more time, you can 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) on or before the original due date. The extension is automatic—you don't need to explain why you need it or sign the form. However, remember that an extension to file is not an extension to pay. Interest will be charged on any unpaid taxes from the original due date, and late payment penalties may apply under Section 6651 of the tax code unless you can demonstrate reasonable cause.

Amended Returns

If you discover an error after filing your original Form 706-GS(D), you'll need to file an amended return. To do this, prepare a new Form 706-GS(D) with the corrected information and write "Amended Return" or "Supplemental Information" clearly across the top of page 1. Include an explanation of the changes and attach copies of any supporting documentation. Mail it to the same IRS address you used for the original return (Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999 for most filers as of 2013).

Key Rules or Details for 2013

The year 2013 brought significant changes to the GST tax landscape following the American Taxpayer Relief Act of 2012. Understanding these specific rules is crucial for accurately completing your form.

GST Tax Rate

For distributions made after December 31, 2012, the maximum GST tax rate was 40%—a substantial increase from the 35% rate that applied in 2011 and 2012. This rate matches the top federal estate and gift tax rates for 2013.

GST Exemption Amount

In 2013, the GST exemption amount was $5.25 million per person (adjusted for inflation from the $5 million base established in 2011). This exemption amount is allocated by the person who created the trust (the settlor or grantor), not by you as the recipient. The settlor allocates this exemption on Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) when making gifts or at death on Form 706 (United States Estate Tax Return).

Inclusion Ratio

The inclusion ratio is the key to determining how much tax you actually owe. It's calculated by the trustee and reported on your Form 706-GS(D-1). The inclusion ratio represents the portion of the distribution that wasn't sheltered by the GST exemption. It ranges from 0 to 1:

• An inclusion ratio of 0 means the entire distribution is exempt—you don't owe any GST tax and don't need to file Form 706-GS(D)
• An inclusion ratio of 1 means none of the distribution is exempt—you'll pay the full 40% GST tax rate
• An inclusion ratio between 0 and 1 (like 0.25 or 0.50) means you'll pay a proportional amount of the GST tax

Skip Person Definition

You're considered a "skip person" if you're related to the person who created the trust and you're two or more generations younger (typically a grandchild or great-grandchild), or if you're an unrelated person more than 37½ years younger than the grantor.

Step-by-Step (High Level)

While tax forms can seem daunting, Form 706-GS(D) follows a logical progression. Here's how to complete it:

Step 1: Gather Your Documents

Before you start, collect all Forms 706-GS(D-1) you received from trustees during the calendar year. These forms contain critical information you'll need to transfer to your return. You'll need to attach copies of all these forms to your completed Form 706-GS(D).

Step 2: Complete Part I (General Information)

Fill in your identification information. If you're an individual, enter your name and Social Security number. If you're a trust, use your employer identification number (EIN). Include the address where you want to receive IRS correspondence about this return.

Step 3: Complete Part II (Distributions)

This is where you report each taxable distribution you received. For each distribution, enter:

• Column a: The trust's EIN (from Form 706-GS(D-1), line 2a)
• Column b: The item number (from Form 706-GS(D-1), line 3, column a)
• Column c: The tentative transfer amount (from Form 706-GS(D-1), line 3, column f)

Add up all the amounts in column c and enter the total on line 3. If you need more space, attach additional sheets using the same format.

Step 4: Complete Part III (Tax Computation)

Now you'll calculate the actual tax:

• Line 4: Enter any adjusted allowable expenses (these are costs related to preparing the form or determining the tax, multiplied by the inclusion ratio)
• Line 5: Subtract line 4 from line 3 to get the taxable amount
• Line 6: Enter the maximum federal estate tax rate (40% for 2013)
• Line 7: Multiply line 5 by line 6 to calculate your GST tax
• Line 8: Enter any payment you made with Form 7004 when requesting an extension
• Line 9: If line 7 is larger than line 8, enter the tax due; if line 8 is larger than line 7, enter the overpayment on line 10

Step 5: Sign and Mail

Sign and date the form. If someone prepares your return for a fee, they must also sign in the "Paid Preparer Use Only" section. Mail the form to the IRS address specified in the instructions (Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999 for most filers). If you owe tax, include your check or money order made payable to "United States Treasury," with your SSN or EIN, the year, and "Form 706-GS(D)" written on it.

Common Mistakes and How to Avoid Them

Mistake #1: Filing When You Don't Need To

If all your distributions have an inclusion ratio of zero, you don't need to file Form 706-GS(D) at all. Check Part II, line 3, column d on each Form 706-GS(D-1) you received. Zero means fully exempt—no filing required.

Solution: Review all Forms 706-GS(D-1) before assuming you need to file. Only include distributions with inclusion ratios greater than zero.

Mistake #2: Using the Wrong Tax Rate

Different years have different maximum GST tax rates. For 2013 distributions, the rate is 40%, not the 35% rate from prior years or the 45% rate from earlier periods.

Solution: Consult the tax rate table in the instructions. For distributions made after December 31, 2012, always use 40%.

Mistake #3: Incorrectly Calculating Adjusted Allowable Expenses

Many filers forget to multiply their expenses by the inclusion ratio. If you have multiple distributions with different inclusion ratios, you must prorate expenses proportionally.

Solution: Follow the calculation example in the IRS instructions carefully. If you paid $200 to prepare the form and have distributions with inclusion ratios of 0.25, 0.33, and 0.50, you can't simply deduct $200. You must calculate the weighted average based on the value and inclusion ratio of each distribution.

Mistake #4: Disagreeing with Trustee Valuations Without Documentation

Sometimes you might believe the trustee's valuation on Form 706-GS(D-1) is incorrect. However, simply changing the numbers without explanation creates problems.

Solution: If you disagree with values or tentative transfer amounts, attach a detailed statement showing your calculations and the reasoning behind them. Include professional appraisals if available.

Mistake #5: Missing the Filing Deadline

The April 15 deadline is firm, and missing it triggers penalties and interest charges under Section 6651.

Solution: Mark the deadline on your calendar as soon as you receive Form 706-GS(D-1). If you're cutting it close, file Form 7004 for an automatic extension. Remember: extensions only apply to filing, not to paying any tax due.

Mistake #6: Forgetting to Attach Forms 706-GS(D-1)

The IRS requires you to attach copies of all Forms 706-GS(D-1) you received. Without these, the IRS can't verify your calculations.

Solution: Make photocopies of all Forms 706-GS(D-1) and attach them to your return. Keep the originals for your records.

What Happens After You File

Once you've mailed your Form 706-GS(D), here's what typically occurs:

IRS Processing

The IRS will process your return at their Cincinnati, Ohio service center (or Kansas City, Missouri, depending on when you filed). Processing typically takes 8-12 weeks, though complex returns may take longer. The IRS will check for mathematical errors, verify that all required forms are attached, and ensure your calculations are correct.

Payment Processing

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

Refund Processing

If line 10 shows an overpayment, the IRS will issue a refund, typically within 6-8 weeks of processing your return. You can check your refund status using the "Where's My Refund?" tool on IRS.gov.

Potential for Additional Review

The IRS may select your return for additional review or examination. This doesn't necessarily mean there's a problem—sometimes returns are randomly selected for audit. If the IRS needs additional information, they'll send you a letter explaining what they need. Respond promptly with the requested documentation.

Interest and Penalties

If you filed or paid late without reasonable cause, the IRS will assess penalties under Section 6651. The late filing penalty is typically 5% of unpaid taxes per month (up to 25% maximum), while the late payment penalty is 0.5% per month. Interest accrues on both unpaid taxes and penalties from the due date until paid.

Keep Records

Maintain copies of your Form 706-GS(D), all Forms 706-GS(D-1), supporting documentation, and proof of payment for at least seven years. These records are essential if questions arise later or if you need to file an amended return.

FAQs

1. What's the difference between Form 706-GS(D) and Form 706-GS(D-1)?

Form 706-GS(D-1) is filed by the trustee to notify you (the skip person distributee) about distributions from the trust. Think of it as an information form, like a W-2 or 1099. Form 706-GS(D) is what you file to calculate and pay the actual GST tax on those distributions. The trustee sends you the 706-GS(D-1), and you use that information to complete your 706-GS(D).

2. Do I need to report distributions from Form 706-GS(D) on my regular income tax return (Form 1040)?

Generally, no—the GST tax is separate from income tax. However, the trust distributions themselves may have income tax consequences that should be reported on Schedule K-1 and your Form 1040. Consult with a tax professional to ensure you're handling both the GST tax and income tax aspects correctly.

3. Can I pay the GST tax in installments if I can't afford the full amount?

While the standard payment is due with the return, you may be eligible for an installment agreement if you can't pay in full. Contact the IRS to discuss your options. Interest and penalties will continue to accrue on unpaid balances, but an installment agreement can prevent more severe collection actions.

4. What if the trustee made a mistake on Form 706-GS(D-1)?

First, contact the trustee and request a corrected Form 706-GS(D-1). If the trustee corrects the error, file your Form 706-GS(D) using the corrected information. If you disagree with the trustee's figures and can't resolve the issue, you can report your own calculations on Form 706-GS(D) but must attach a detailed explanation and supporting documentation.

5. I received distributions from multiple trusts. Do I file multiple Forms 706-GS(D)?

No, you file one Form 706-GS(D) that reports all distributions you received during the calendar year. In Part II, you'll list each distribution separately, even if they came from different trusts. You may need to use continuation sheets if you received many distributions.

6. What does "reasonable cause" mean for penalty abatement?

Reasonable cause is a legal standard that excuses penalties when circumstances beyond your control prevented timely filing or payment. Examples include serious illness, death in the immediate family, natural disasters, or inability to obtain records despite reasonable efforts. Do not attach explanations when filing—wait for a penalty notice, then respond with your explanation and supporting documentation.

7. How is the fair market value of distributed property determined?

Fair market value (FMV) is the price property would sell for between a willing buyer and willing seller, neither being forced to transact, and both having reasonable knowledge of relevant facts. The trustee typically determines FMV as of the distribution date. For real estate, professional appraisals are recommended. For publicly traded securities, use the closing price on the distribution date. For closely held business interests, professional valuation is essential.

Additional Resources

• Sources: All information in this guide comes from official IRS publications, including the 2013 Instructions for Form 706-GS(D), Form 706-GS(D) (Rev. August 2013), and the IRS Form 706-GS(D) information page.

Disclaimer

This guide provides general information only and should not be considered legal or tax advice. Generation-skipping transfer tax issues can be complex, and the rules may have changed since 2013. Always consult with a qualified tax professional or estate planning attorney for guidance specific to your situation.