If you've received money or property from a trust and you're a "skip person" (typically a grandchild or someone two or more generations younger than the person who created the trust), you might need to file Form 706-GS(D). This guide breaks down everything you need to know about this specialized tax form for 2017 in plain English.

What Form 706-GS(D) Is For

Form 706-GS(D) is the tax return you use to calculate and pay the Generation-Skipping Transfer (GST) tax on distributions you received from a trust during the 2017 calendar year. Think of it as a special tax the government imposes when wealth "skips" a generation—for example, when a grandparent's trust distributes money directly to a grandchild instead of going through the parent's generation first IRS.gov.

Who is a "skip person"? Generally, you're a skip person if you're:

• Two or more generations younger than the person who created the trust (like a grandchild receiving from a grandparent's trust)
• An unrelated person who is more than 37½ years younger than the person who created the trust
• Certain types of trusts where all beneficiaries are skip persons

The trustee's role: Before you file Form 706-GS(D), the trustee of the trust should send you Form 706-GS(D-1), which notifies you of the distribution and provides critical information you'll need, including the value of what you received and something called the "inclusion ratio" (more on this later). You'll attach this form to your return IRS.gov.

Important exception: If all the distributions you received have an inclusion ratio of zero (meaning the transfer was fully protected by the GST exemption), you don't need to file Form 706-GS(D) at all IRS.gov.

When You’d Use Form 706-GS(D)

Regular Filing Timeline

Form 706-GS(D) follows a calendar year reporting schedule, regardless of your personal income tax year. For distributions received during 2017, you must file the form between January 1, 2018, and April 15, 2018 IRS.gov.

Extensions

If you need more time to file, you have two options:

• Automatic 6-month extension: File Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns) by the original April 15 deadline. This extends your filing deadline to October 15, 2018.
• Income tax extension: Any extension you receive for your 2017 federal income tax return automatically extends your Form 706-GS(D) filing deadline as well IRS.gov.

Important: An extension to file is NOT an extension to pay. If you owe GST tax, interest will accrue from the original April 15 deadline even if you received an extension to file the return IRS.gov.

Late Returns

If you missed the deadline (and any extension), you should still file as soon as possible. The IRS will assess penalties for late filing unless you can demonstrate "reasonable cause" for the delay. After you receive a penalty notice, you can submit an explanation—but don't attach explanations to your original return IRS.gov.

Amended Returns

If you discover errors after filing, you can claim a refund by filing Form 843 (Claim for Refund and Request for Abatement). Common reasons for amendments include discovering additional allowable expenses or correcting valuation errors IRS.gov.

Key Rules or Details for 2017

Tax Rate

In 2017, the maximum GST tax rate was 40% IRS.gov. This is the same rate as the top estate and gift tax rate.

GST Exemption Amount

For 2017, each person had a lifetime GST exemption of $5.49 million (this was the basic exclusion amount for estate and gift tax purposes as well) IRS.gov. This exemption was typically allocated by the person who created the trust or made the transfer, not by you as the recipient.

Inclusion Ratio — The Key Concept

The "inclusion ratio" determines what portion of your distribution is subject to GST tax. It ranges from 0 to 1:

• Inclusion ratio of 0: The distribution is fully exempt from GST tax (no filing required)
• Inclusion ratio of 1: The entire distribution is subject to the 40% GST tax
• Inclusion ratio between 0 and 1: Only a portion is taxable

The trustee calculates this ratio based on how much GST exemption was allocated to the trust property. You'll find this number on Form 706-GS(D-1) that the trustee sends you IRS.gov.

Calculating the Tax

Your actual tax is calculated as: (Value of distribution) × (Inclusion ratio) × (40% tax rate)

But you can also deduct certain allowable expenses (see Step-by-Step below).

Step-by-Step (High Level)

Step 1: Gather Your Documents

Collect all Forms 706-GS(D-1) that trustees sent you for 2017 distributions. You'll need to attach copies to your return IRS.gov.

Step 2: Complete Part I (General Information)

• Enter your name, Social Security Number (or the trust's EIN if you're a trust)
• If someone is filing on your behalf (like a guardian), include their information
• Provide your current mailing address IRS.gov

Step 3: Complete Part II (Distributions)

List each taxable distribution received during 2017:

• Use the item numbers from Forms 706-GS(D-1) you received
• Enter the value of each distribution (fair market value on the date of distribution)
• Calculate the "tentative transfer" by multiplying the value by the inclusion ratio from Form 706-GS(D-1)

If you disagree with values the trustee reported, attach a statement explaining your position and showing your calculations IRS.gov.

Step 4: Complete Part III (Tax Computation)

• Line 4 (Adjusted allowable expenses): You can deduct expenses related to preparing this return or determining, collecting, or refunding the GST tax. If you have multiple distributions with different inclusion ratios, you must prorate expenses based on the relative values IRS.gov.
  Example: If you received three distributions totaling $60,000 with different inclusion ratios and paid $200 in preparation fees, you'd allocate those fees proportionally: a $10,000 distribution with 0.25 ratio = $8; a $20,000 distribution with 0.33 ratio = $22; a $30,000 distribution with 0.50 ratio = $50, totaling $80 in deductible expenses IRS.gov.
• Line 6: Enter the maximum tax rate (40% for 2017)
• Calculate your total tax owed

Step 5: Sign and File

• Sign the return (or have your authorized representative sign)
• Mail to: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999 (for returns filed after June 30, 2019; Cincinnati, OH 45999 for earlier filings) IRS.gov
• Enclose payment if tax is due (check payable to "United States Treasury")

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing When Required

Some distributees assume they don't need to file if the trust paid all the taxes. However, if you're the skip person who received a distribution with an inclusion ratio greater than zero, YOU are responsible for filing and paying the GST tax IRS.gov.
How to avoid: Review Form 706-GS(D-1) carefully. If any distribution shows an inclusion ratio above zero, you must file.

Mistake #2: Using Incorrect Values

Failing to properly value the distributed property or not adjusting for liens, mortgages, or consideration you provided can lead to underreporting or overreporting IRS.gov.
How to avoid: Use fair market value as of the distribution date. For real estate or business interests, obtain professional appraisals. Reduce values by outstanding liens and any consideration you provided.

Mistake #3: Incorrectly Calculating Adjusted Allowable Expenses

Many filers either claim too much or forget to prorate expenses among distributions with different inclusion ratios IRS.gov.
How to avoid: Use the proportional allocation method described in the instructions. Only deduct expenses that are clearly ascertainable at the time of filing.

Mistake #4: Missing Attachments

Failing to attach all Forms 706-GS(D-1) or required appraisals and explanations is a common processing error IRS.gov.
How to avoid: Create a checklist: Form 706-GS(D-1) copies, valuation appraisals, lien documentation, and any explanatory statements about value disagreements.

Mistake #5: Late Filing Without Requesting an Extension

Missing the April 15 deadline without filing for an extension triggers automatic penalties IRS.gov.
How to avoid: If you can't meet the deadline, file Form 7004 by April 15 to get an automatic 6-month extension. Remember: you still must pay any estimated tax owed by the original deadline.

What Happens After You File

Processing Timeline

The IRS processes Form 706-GS(D) at their Kansas City or Cincinnati processing center (depending on filing date). Processing typically takes 8-12 weeks, though complex returns may take longer IRS.gov.

Payment

If you owe GST tax, make your check payable to "United States Treasury" and write your Social Security Number, "2017," and "Form 706-GS(D)" on the check. Mail it with (but don't staple it to) your return IRS.gov.

Interest and Penalties

If you file or pay late without reasonable cause:

• Late filing penalty: Generally 5% of unpaid tax per month (up to 25%)
• Late payment penalty: Generally 0.5% of unpaid tax per month (up to 25%)
• Interest: Accrues on unpaid tax from the original due date IRS.gov

Audits and Examinations

The IRS may examine your return, particularly if:

• Values claimed differ substantially from trustee's Forms 706-GS(D-1)
• Large valuation discounts were claimed
• The return shows unusually high deductions

Statute of Limitations

Generally, the IRS has three years from the filing date to assess additional tax. However, this period doesn't begin until the transfer is "adequately disclosed" on the return IRS.gov.

Record Retention

Keep copies of your return, all Forms 706-GS(D-1), appraisals, and supporting documents for at least four years after filing. If you're ever audited, these records are essential.

FAQs

Q1: What's the difference between Form 706-GS(D) and Form 706-GS(D-1)?

Form 706-GS(D-1) is the notification form that the TRUSTEE sends to YOU, the distributee, reporting distributions from the trust. Form 706-GS(D) is the tax return that YOU file to calculate and pay the GST tax on those distributions. Think of 706-GS(D-1) as an information document (like a W-2) and 706-GS(D) as the actual tax return IRS.gov.

Q2: I received distributions from multiple trusts. Do I file separate Forms 706-GS(D)?

No. You file one Form 706-GS(D) that reports all distributions from all trusts you received during 2017. Part II of Schedule A provides space to list multiple distributions. If you need more room, attach additional sheets in the same format IRS.gov.

Q3: The trustee hasn't sent me Form 706-GS(D-1). What should I do?

Contact the trustee immediately and request the form. Trustees are required to file Form 706-GS(D-1) even if no tax is due. If the trustee refuses or can't be located, you should still file Form 706-GS(D) by the deadline using your best estimates of values and inclusion ratios, and attach an explanation of the situation IRS.gov.

Q4: Can I deduct state GST taxes I paid on the same distribution?

No. State GST taxes are not deductible on federal Form 706-GS(D). The only expenses you can deduct are those directly related to preparing this federal return or determining, collecting, or refunding the federal GST tax IRS.gov.

Q5: What if I discover the trustee made a mistake on Form 706-GS(D-1)?

If you disagree with the values or other information the trustee reported on Form 706-GS(D-1), you may use different amounts on your Form 706-GS(D). However, you MUST attach a statement explaining what you believe are the correct amounts and how you calculated them. Include supporting documentation like independent appraisals IRS.gov.

Q6: Is this tax in addition to income tax I might owe on trust distributions?

Yes. The GST tax is completely separate from income tax. You may owe income tax on trust distributions (reported on Schedule K-1 and your Form 1040) AND GST tax (reported on Form 706-GS(D)). These are two different taxes with different rates and rules IRS.gov.

Q7: What happens if I'm audited and the IRS determines I undervalued the distribution?

Valuation understatements trigger special penalties:

• Substantial understatement: If your reported value is 65% or less of the actual value, you may face additional penalties
• Gross understatement: If your reported value is 40% or less of the actual value, penalties increase further

This is why professional appraisals are crucial for significant distributions IRS.gov.

Final Thoughts

Form 706-GS(D) serves an important purpose in the federal tax system—ensuring that wealthy families can't avoid taxes indefinitely by skipping generations. While the form may seem daunting, understanding these basics will help you navigate the process. For 2017 returns with substantial distributions or complex situations, consulting a tax professional who specializes in estate and gift taxation is highly recommended.

Remember: the GST tax only applies to the portion of distributions that weren't protected by the GST exemption (as reflected in the inclusion ratio). Many distributions have inclusion ratios of zero and require no filing at all. Always check Form 706-GS(D-1) carefully to determine your filing obligation.

Sources: All information derived from official IRS publications available at IRS.gov, including Form 706-GS(D) instructions (Rev. June 2019) and 2017 Form 709 instructions.