What Form 706-GS(D) Is For

Form 706-GS(D) is the tax form you file when you receive money or property from a trust and you're what the IRS calls a "skip person"—typically a grandchild or someone two or more generations younger than the person who set up the trust. Think of it as a specialized tax return that ensures the government collects what's known as the Generation-Skipping Transfer (GST) tax on distributions that "skip" a generation.

The generation-skipping transfer tax exists to prevent wealthy families from avoiding estate taxes by transferring assets directly to grandchildren instead of to their children. When you receive a taxable distribution from a trust, you—not the trust or the person who created it—are responsible for reporting it and potentially paying the tax.

You'll know you need this form when you receive Form 706-GS(D-1) from the trustee. This notification form tells you about the distribution and includes crucial information like the "inclusion ratio"—essentially a number between 0 and 1 that determines how much of the distribution is taxable. If the inclusion ratio is zero for all your distributions, you're in luck: you don't need to file Form 706-GS(D) at all.

When You’d Use Form 706-GS(D)

Form 706-GS(D) operates on a calendar year basis, regardless of your personal tax filing 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 2020 must be reported on a 2020 Form 706-GS(D) filed by April 15, 2021.

Need more time? You can request an automatic 6-month extension using Form 7004. This extension is truly automatic—you don't need to explain why you need it or wait for IRS approval. However, understand that 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 file under an extension.

If you filed your 2020 income tax return using Form 4868 or Form 2350 to get an extension, that extension automatically applies to your gift tax return as well—a convenient feature that simplifies the process if you're dealing with both.

Amended Filings

Amended returns work differently than original filings. If you discover an error after filing—perhaps the trustee provided incorrect values or you miscalculated the tax—you must file another complete Form 706-GS(D) with "Amended" written across the top of page 1. Attach copies of pages 1, 2, and 3 from your original return and mail it to the special processing center at: Internal Revenue Service Center, Attn: E&G, Stop 824G, 7940 Kentucky Drive, Florence, KY 41042-2915 (or the same address if using a private delivery service).

Key Rules or Details for 2020

Tax Rate: The maximum GST tax rate for 2020 was 40%. This rate has remained steady since 2013, after declining from rates as high as 49% in earlier years. The rate applies to the "tentative transfer" amount calculated on your form—essentially the value of your distribution multiplied by the inclusion ratio.

GST Exemption Amount: For 2020, the GST exemption was $11,580,000. While this exemption is primarily used by the person who created the trust (the "transferor"), it's important to understand because it affects whether distributions to you are taxable. If the transferor allocated enough GST exemption to the trust, your distributions may have an inclusion ratio of zero, meaning no tax is due.

Filing Threshold: There's no minimum dollar amount that triggers filing—if you received any distribution with an inclusion ratio greater than zero, you must file. Even small distributions require reporting if they're taxable.

Where to File: For 2020 returns, file at: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999. If using a private delivery service, use: Internal Revenue Service, 333 W. Pershing Road, Kansas City, MO 64108. This filing address changed in mid-2019, so don't use old addresses from prior years.

Step-by-Step (High Level)

Step 1: Gather Your Documentation

Collect all Forms 706-GS(D-1) received from trustees during 2020. These forms contain the essential information you'll need: the date of distribution, the value of property received, and critically, the inclusion ratio for each distribution. Keep copies for your records—you'll attach the originals to your Form 706-GS(D).

Step 2: Complete Part I (General Information)

Enter your personal information: name, Social Security number, and address. If you're filing on behalf of a trust that received the distribution, use the trust's EIN instead. This section is straightforward but must be complete—incomplete returns won't be processed.

Step 3: Fill Out Part II (Report Each Distribution)

List every taxable distribution you received during 2020. For each item, you'll report the name and EIN of the trust, the date you received it, the inclusion ratio (from Form 706-GS(D-1)), the fair market value on the date of distribution, and the "tentative transfer" (value multiplied by inclusion ratio). If you received distributions from multiple trusts or multiple distributions from one trust, list each separately.

Step 4: Calculate Deductions in Part III

You can deduct certain expenses related to preparing this form or determining your GST tax liability. These "adjusted allowable expenses" must be multiplied by the inclusion ratio—you can't deduct 100% if your inclusion ratio is less than 1.0. For example, if you paid a tax preparer $300 and your inclusion ratio is 0.50, you can only deduct $150.

Step 5: Compute Your Tax

Add up all tentative transfers from Part II, subtract your allowable deductions, and multiply by the 40% tax rate applicable in 2020. This gives you the total GST tax owed.

Step 6: Sign, Date, and Mail

Either you or your authorized representative must sign the form. If you paid someone to prepare it, they must also sign in the "Paid Preparer" section. Mail your completed form with all attached Forms 706-GS(D-1) to the Kansas City address. If you owe tax, enclose (but don't staple) your check payable to "United States Treasury" with your SSN, "2020," and "Form 706-GS(D)" written on it.

Common Mistakes and How to Avoid Them

Mistake #1: Failing to File When Required

Many people assume they don't need to file if the distribution was "small" or if no tax is owed. Wrong. If you received Form 706-GS(D-1) showing an inclusion ratio greater than zero, you must file regardless of the distribution amount. The IRS can impose substantial penalties—up to 25% of unpaid tax plus interest—for failure to file.

How to avoid it: File whenever you receive Form 706-GS(D-1), even if the calculated tax is zero after deductions.

Mistake #2: Using Incorrect Values

Some filers use the trust's original asset values rather than the fair market value on the distribution date. Others accept the trustee's valuation without question. If the trustee leaves value fields blank or you disagree with their assessment, you must determine the fair market value yourself and attach an explanation.

How to avoid it: For real estate, obtain a professional appraisal. For stocks, use the actual trading price on the distribution date. For closely-held business interests, consult a qualified business valuator. Always document your valuation method.

Mistake #3: Miscalculating Adjusted Allowable Expenses

When you have multiple distributions with different inclusion ratios, you can't simply deduct all preparation expenses. You must prorate expenses based on each distribution's relative value, then multiply by the respective inclusion ratio.

How to avoid it: Follow the formula in the instructions carefully. If you have three distributions worth $10,000, $20,000, and $30,000 with different inclusion ratios, allocate your $200 tax prep fee proportionally ($33.33, $66.67, and $100), then multiply each by its inclusion ratio before adding them up.

Mistake #4: Missing the Deadline

Late filing triggers automatic penalties of 5% of unpaid tax per month, up to 25%, plus interest. The penalty applies even if you eventually owe nothing.

How to avoid it: File Form 7004 before April 15 if you need more time. It takes just minutes and eliminates late-filing penalties.

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

Your return won't be complete without copies of every Form 706-GS(D-1) you received. The IRS uses these to verify your reported distributions.

How to avoid it: Create a checklist before mailing. Required attachments include: signed Form 706-GS(D), all Forms 706-GS(D-1), any valuation explanations, and payment if applicable.

What Happens After You File

Once mailed, your Form 706-GS(D) goes to the IRS processing center in Kansas City. Processing typically takes several weeks to a few months, though complex returns may take longer.

If You Owe Tax and Paid It With Your Return

The IRS will cash your check and process the return. You should receive no further communication unless there's a problem. Keep your canceled check as proof of payment.

If You’re Due a Refund

GST tax refunds are rare (since distributions rarely result in overpayment), but if you're owed money, expect processing time similar to other tax refunds.

If the IRS Finds an Issue

You'll receive a letter explaining the discrepancy. This might be a simple math error, missing information, or a question about valuations. Respond promptly to avoid additional penalties and interest. You typically have 30–60 days to reply depending on the type of notice.

Statute of Limitations

Generally, the IRS has three years from when you filed to audit your return. However, if you substantially undervalued assets (reporting 65% or less of actual value), the IRS gets six years. There's no statute of limitations if you never filed.

Audit Risk

Form 706-GS(D) returns have relatively low audit rates compared to income tax returns, but large distributions or unusual valuations increase scrutiny. Keep all documentation for at least four years: Forms 706-GS(D-1), appraisals, valuation explanations, and evidence of deductible expenses.

Payment Plans

If you filed but can't pay the tax owed, contact the IRS immediately. You may qualify for an installment agreement under section 6161. Interest will continue to accrue, but you can avoid more severe collection actions.

FAQs

Q1: Do I have to file Form 706-GS(D) if I received multiple small distributions totaling less than $15,000?

Yes, if any distribution has an inclusion ratio greater than zero. The $15,000 annual exclusion that applies to gifts doesn't apply to GST tax on trust distributions. The GST tax and gift tax are separate systems with different rules, and distributions from trusts are already completed gifts—the exclusion was (or wasn't) applied when assets went into the trust, not when they came out to you.

Q2: What if the trustee never sent me Form 706-GS(D-1)?

Contact the trustee immediately and request the form. Trustees are legally required to file Form 706-GS(D-1) with the IRS and provide you a copy by April 15 following the distribution year. If the trustee refuses or can't be located, you must still file Form 706-GS(D), but you'll need to determine the values and inclusion ratio yourself. Attach a statement explaining the situation and showing your calculations. Consider consulting a tax professional—incorrect assumptions could lead to penalties.

Q3: I received distributions in 2020, but the trust assets are still subject to an Estate Tax Inclusion Period (ETIP). Do I file now or later?

File now for the gift tax portion if the distribution was a completed gift, but delay reporting the GST portion until the ETIP closes. An ETIP occurs when the transferor retained some control over the assets (like a life estate). The GST tax on such distributions is calculated when the ETIP ends, not when you receive the distribution. Mark "ETIP" at the top of your form and complete only specific sections as detailed in the instructions.

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

No. The only deductible expenses are those directly related to preparing Form 706-GS(D) or determining your GST tax liability—things like accountant fees, attorney fees for GST tax advice, or appraisal costs. State inheritance taxes are a separate matter and not deductible on this federal form.

Q5: 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, but you must attach a detailed statement explaining your reasoning and showing how you calculated the correct fair market value. Include supporting documentation like appraisals or comparable sales data. The IRS may question either valuation, so make sure your position is well-supported. Undervaluation can trigger penalties, but so can overvaluation if it appears intentional.

Q6: My spouse and I both received distributions from the same trust. Can we file one joint Form 706-GS(D)?

No. Unlike income tax returns, there's no joint filing option for Form 706-GS(D). Each recipient must file their own separate return reporting only their own distributions. Even if you're married and received distributions from the same trust, you're each individually responsible for your own GST tax liability.

Q7: The trust distributed property instead of cash. How do I pay the GST tax I owe?

You must pay the tax in cash, even if you received property. This can create a liquidity problem—you might owe significant tax on property that hasn't been sold. Options include: selling part of the distributed property, using other personal funds, or requesting an IRS payment plan. Plan ahead: if you know you'll receive property distributions, discuss the tax implications with the trustee in advance. Some trusts make provisions to pay GST tax on behalf of beneficiaries, though this itself can create additional tax issues.

Sources

Sources: All information is derived from official IRS sources:

• About Form 706-GS(D)
• Instructions for Form 706-GS(D)
• 2020 Instructions for Form 709
• Estate Tax Information