What Form 706-GS(D) Is For

Form 706-GS(D) is a specialized tax form used to report and pay the generation-skipping transfer (GST) tax on distributions you received from a trust. Think of it as a way the IRS ensures that wealthy families can't avoid estate taxes by skipping generations—for example, a grandparent leaving money directly to grandchildren instead of to their children first.

If you're a "skip person" who received money or property from a trust during 2014, you might need to file this form. A skip person is typically someone who is two or more generations younger than the person who created the trust (the transferor). This usually means grandchildren, great-grandchildren, or non-relatives who are more than 37½ years younger than the transferor.

The form serves two main purposes: calculating how much GST tax you owe on the distributions you received, and reporting that tax to the IRS. The trustee of the trust should send you Form 706-GS(D-1), which provides the details you need to complete your Form 706-GS(D). This companion form tells you the value of each distribution, the date you received it, and something called an "inclusion ratio"—a number between zero and one that determines how much of the distribution is subject to tax.

For 2014, the maximum GST tax rate was 40 percent—the same as the highest estate tax rate. However, not all distributions are taxed at this full rate, depending on the inclusion ratio and whether the transferor had GST exemption available when the trust was funded.

When You’d Use It (Filing Timeline, Late Returns, and Amended Returns)

Normal Filing Deadline

Form 706-GS(D) must be filed annually, even though your regular income tax might follow a different schedule. You must file it between January 1 and April 15 of the year following the calendar year when you received the distributions. For example, distributions received anytime during calendar year 2014 needed to be reported on a Form 706-GS(D) filed by April 15, 2015.

Extensions

If you cannot file by the April 15 deadline, you can request an automatic 6-month extension. For the 2014 tax year, you would use Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns). The extension is automatic—you don't need to provide a reason or wait for IRS approval. However, this only extends the time to file the return, not the time to pay any tax due. Interest will accrue on unpaid taxes even if you have an extension.

Alternatively, if you request an extension for your federal income tax return using Form 4868 or Form 2350, that extension automatically extends the time to file your gift tax return as well.

Late Returns

If you miss the deadline and haven't filed for an extension, file as soon as possible. The IRS imposes penalties for late filing unless you can demonstrate "reasonable cause" for the delay. The late filing penalty can be substantial, so don't delay further once you realize you've missed the deadline.

Amended Returns

If you discover an error after filing your Form 706-GS(D), you'll need to file an amended return. Simply file another Form 706-GS(D), write "Amended Return" across the top, and attach an explanation of what you're changing and why. Include copies of any corrected Forms 706-GS(D-1) if the trustee also filed amendments.

Special Circumstance

If you received distributions from a trust but the inclusion ratio shown on all your Forms 706-GS(D-1) is zero, you don't need to file Form 706-GS(D) at all—there's no tax due. However, if even one distribution has an inclusion ratio greater than zero, you must file the form and report all taxable distributions.

Key Rules or Details for 2014

Tax Rate

The maximum GST tax rate for 2014 was 40 percent. This rate had been in effect since January 1, 2013. Previously, rates had varied significantly—from 0% in 2010 to 35% in 2011-2012 to rates as high as 49% before 2004.

GST Exemption Amount

For 2014, the lifetime GST exemption amount was $5,340,000 per person. This is the amount a transferor could shield from GST tax when creating or funding trusts. The exemption amount increased from $5,250,000 in 2013 due to inflation indexing. This exemption affects your return because it determines the inclusion ratio on distributions you receive—the more exemption the transferor allocated to the trust, the lower your inclusion ratio and tax liability.

Inclusion Ratio

This critical number appears on Form 706-GS(D-1) and ranges from 0 to 1. An inclusion ratio of 0 means the distribution is completely exempt from GST tax (no Form 706-GS(D) required). An inclusion ratio of 1 means you'll pay the full 40% GST tax rate. Ratios between 0 and 1 result in proportional taxation. For example, an inclusion ratio of 0.25 means you pay 25% of the maximum rate, or 10% effective GST tax.

Valuation

Distributions must be valued at their fair market value on the date of distribution. Fair market value means the price a willing buyer would pay a willing seller when neither is forced to transact and both have reasonable knowledge of relevant facts. If you received property rather than cash, you may need appraisals or other documentation to support the value you report.

Deductions

You can deduct certain expenses directly related to preparing Form 706-GS(D) and determining, collecting, or refunding GST tax. However, these deductions must be "adjusted" by multiplying them by the inclusion ratio. For example, if your tax preparer charges $500 to prepare your return and your inclusion ratio is 0.50, you can deduct $250 (50% of $500).

Documentation

You must attach copies of all Forms 706-GS(D-1) you received during 2014 to your return. Keep additional copies for your records. Without this documentation, the IRS cannot verify the distributions you're reporting.

Step-by-Step (High Level)

Completing Form 706-GS(D) involves several sections. Here's the process in plain language:

Step 1: Gather Your Documents

Collect all Forms 706-GS(D-1) you received from trustees during 2014. These notification forms contain the essential information you'll transfer to your return. You'll also want records of any expenses you incurred related to preparing the return or dealing with GST tax matters.

Step 2: Complete Part I (General Information)

This section identifies who you are. Enter your name (or the trust name if you're filing for a trust), your Social Security number or the trust's Employer Identification Number, and your current mailing address. If you're filing on behalf of a minor or someone unable to file, enter the guardian's or responsible person's information in the appropriate fields.

Step 3: Complete Part II (Schedule of Distributions)

This is where you list each distribution you received during 2014. The form provides a table with columns for:

• Item number (use the same numbers from your Forms 706-GS(D-1))
• Trust EIN
• Name of trust
• Inclusion ratio (from Form 706-GS(D-1))
• Tentative transfer amount (value of distribution multiplied by inclusion ratio)

If you need more space, attach additional sheets using the same format. Total all tentative transfer amounts and enter the sum on Line 3.

Step 4: Complete Part III (Tax Computation)

This section calculates your actual tax liability. Line 4 allows you to deduct adjusted allowable expenses (remember to multiply total expenses by the inclusion ratio). Line 5 shows your net GST transfers after deductions. Line 6 is where you enter the applicable tax rate—for 2014, this was 40% for distributions occurring after December 31, 2012. Multiply your net transfers by this rate to get your total GST tax (Line 8). Subtract any prepayments to determine your balance due (Line 9).

Step 5: Sign and Date

Either you (the distributee) or your authorized representative must sign the form under penalties of perjury. If you paid someone to prepare your return, they must also sign in the Paid Preparer section.

Step 6: Mail Your Return

For 2014 returns, mail Form 706-GS(D) to: Department of the Treasury, Internal Revenue Service Center, Cincinnati, OH 45999. If you're using a private delivery service (FedEx, UPS, or DHL), use the street address: Internal Revenue Submission Processing Center, 201 West Rivercenter Blvd., Covington, KY 41011. Make your check payable to "United States Treasury" and write your Social Security number, the year "2014," and "Form 706-GS(D)" on the check.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing When Required

Many recipients assume they don't need to file because they received Form 706-GS(D-1) late or the distribution seemed small. Solution: File if you received any distribution with an inclusion ratio greater than zero, regardless of amount. Even a small distribution can trigger filing requirements.

Mistake #2: Reporting Incorrect Values

Some filers simply use the value shown on Form 706-GS(D-1) without verification, or they disagree with the trustee's valuation but don't provide an alternative. Solution: If you believe the trustee's valuation is incorrect, attach a detailed statement showing your calculations, the method you used, and supporting documentation (appraisals, comparable sales, etc.). The IRS needs to understand how you arrived at your figures.

Mistake #3: Miscalculating Adjusted Allowable Expenses

When you have multiple distributions with different inclusion ratios, calculating deductible expenses becomes complex. Many filers forget to prorate expenses based on the relative value of distributions at each inclusion ratio. Solution: Follow the IRS example in the instructions carefully. Allocate total expenses to each distribution based on its proportional value, then multiply each allocation by that distribution's inclusion ratio. Sum these adjusted amounts for your total deduction.

Mistake #4: Using the Wrong Tax Rate

The GST tax rate changed several times in recent years, and using the wrong rate based on when the trust was created rather than when the distribution occurred is a common error. Solution: Always use the rate in effect on the date of distribution. For 2014, any distribution occurring after December 31, 2012, used the 40% rate.

Mistake #5: Forgetting to Attach Forms 706-GS(D-1)

The IRS requires copies of all notification forms from trustees to process your return. Without them, your return is incomplete. Solution: Make copies of all Forms 706-GS(D-1) before you start preparing your return. Attach them to the back of Form 706-GS(D) before mailing. Keep additional copies for your records.

Mistake #6: Missing the Deadline Without Requesting an Extension

Late filing penalties can be severe, yet many filers don't realize they can easily get an automatic 6-month extension. Solution: If you realize you won't meet the April 15 deadline, immediately file Form 7004 or use your income tax extension. Don't wait until after the deadline to act.

Mistake #7: Inadequate Documentation for Property Valuations

When you receive property rather than cash, proving fair market value requires solid documentation. Generic statements or unsupported estimates often lead to IRS challenges. Solution: Obtain qualified appraisals for real estate, closely-held business interests, and valuable personal property. For publicly traded securities, use closing prices on the distribution date. For other property, document your valuation method thoroughly.

What Happens After You File

IRS Processing

Once you mail your return, the IRS typically takes 6-8 weeks to process it. If you owe tax and paid with your return, the IRS will cash your check and credit your account. You won't receive an acknowledgment unless there's a problem.

Statute of Limitations

Generally, the IRS has three years from the date you file to audit your return and assess additional tax. However, this period can be extended to six years if you substantially undervalued property (reporting 65% or less of actual value). There's no statute of limitations if you never file a required return or if you file a fraudulent return.

Refunds

If you overpaid GST tax (perhaps through estimated payments or overwithholding), you'll receive a refund check, typically within 8-12 weeks of filing. If you haven't received your refund after 12 weeks, you can check its status by calling the IRS.

Penalties and Interest

If you filed or paid late, the IRS will send you a notice showing penalties and interest due. For late filing, the penalty is typically 5% of unpaid tax per month (maximum 25%). For late payment, it's 0.5% per month. Interest compounds daily at the federal short-term rate plus 3%. If you have reasonable cause for filing or paying late, respond to the notice with a detailed explanation—the IRS may abate penalties.

Audits and Inquiries

If the IRS has questions about your return, you'll receive a letter requesting additional information or documentation. Common audit issues include valuation of property distributions, calculation of adjusted allowable expenses, and verification of inclusion ratios. Respond promptly to all IRS correspondence and provide clear, complete documentation. If the IRS proposes changes you disagree with, you have appeal rights explained in the notice.

Record Retention

Keep copies of your Form 706-GS(D), all Forms 706-GS(D-1), payment records, and supporting documentation for at least four years after filing. If you deducted expenses that weren't paid when you filed, keep records showing when they were eventually paid—you may need to file Form 843 (Claim for Refund and Request for Abatement) if expenses exceed what you deducted.

State Tax Implications

Some states impose their own generation-skipping transfer taxes or treat GST distributions as taxable income. Check with your state tax authority or a local tax professional to understand state-level reporting requirements.

FAQs

Q1: What's the difference between Form 706-GS(D) and Form 706-GS(T)?

Form 706-GS(D) is filed by skip person distributees (the people who receive distributions from trusts). Form 706-GS(T) is filed by trustees when a trust terminates and distributes all its assets to skip persons. As a distributee, you typically only deal with Form 706-GS(D). The trustee handles Form 706-GS(T) if applicable.

Q2: I received distributions from multiple trusts in 2014. Do I file separate forms?

No. File one Form 706-GS(D) that reports all distributions from all trusts you received during the calendar year. Simply list each distribution as a separate item in Part II of the form. If you need more space, attach additional sheets using the same format.

Q3: The trustee never sent me Form 706-GS(D-1). What should I do?

Contact the trustee immediately and request the form. Trustees are legally required to provide Form 706-GS(D-1) to skip person distributees. If the trustee is unresponsive or you cannot locate them, consult a tax attorney or CPA who specializes in estate and trust taxation. You may need to estimate values and inclusion ratios, but this should be a last resort with professional guidance.

Q4: Can I include my Form 706-GS(D) with my regular income tax return?

No. Form 706-GS(D) is a separate return that must be filed independently. It goes to a different IRS address than your Form 1040. However, if you request an extension for your income tax return, that extension automatically extends your GST return deadline as well.

Q5: I'm a non-U.S. citizen who received a distribution from a U.S. trust. Do I still need to file?

Potentially yes, if the distribution is subject to U.S. GST tax. The rules for nonresident non-citizens are complex and depend on factors like the type of property transferred, the location of trust assets, and treaty provisions. Consult an international tax specialist to determine your filing obligations.

Q6: What happens if I undervalue property I received and the IRS discovers it during an audit?

The IRS can assess additional tax on the undervalued amount, plus interest from the original due date. If the undervaluation is substantial (you reported 65% or less of actual value) or gross (40% or less of actual value), you may face accuracy-related penalties of 20% or 40% of the additional tax. To avoid this, obtain qualified appraisals for non-cash property before filing.

Q7: I paid GST tax on distributions in 2014, but now the trust has been audited and the IRS determined the inclusion ratio should have been lower. Can I get a refund?

Yes. File Form 843 (Claim for Refund and Request for Abatement) within the statute of limitations period (generally three years from when you filed or two years from when you paid the tax, whichever is later). Attach documentation showing the revised inclusion ratio and recalculate your tax liability. You'll receive a refund for the overpayment plus interest from the date you paid.

For More Information

Visit IRS.gov/Form706GSD for the latest forms, instructions, and updates. For complex situations, consult a tax professional who specializes in estate and trust taxation.