What Form 706-GS(D) (2020) Is For
IRS Form 706-GS(D) (2020) is used to report the generation-skipping transfer tax on taxable distributions made to skip persons from certain trusts. This federal tax form ensures that the IRS collects the proper tax when wealth is transferred to younger generations, such as grandchildren or great-grandchildren, instead of passing through to the next immediate generation.
The form applies to individuals who receive money, property, or other assets transferred from a trust that has already been subject to gift or estate tax. The taxpayer, not the trustee, is responsible for filing and paying any GST tax due. Filing this form helps ensure compliance with federal estate and gift tax laws and prevents future generations from avoiding taxation through direct skips or taxable distributions.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions for IRS Form 706-GS(D) (2020)—Generation-Skipping Transfer Tax, see our comprehensive guide.
When You’d Use Form 706-GS(D)
IRS Form 706-GS(D) (2020) is used when a skip person, such as a grandchild or great-grandchild, receives a taxable distribution from a trust. This form reports the generation-skipping transfer tax owed on assets transferred to younger generations, rather than passing through the child’s estate.
The taxpayer, not the grantor, is responsible for paying any additional tax on these distributions. Married couples and surviving spouses may each use an exemption amount to reduce their GST tax. Filing the form ensures compliance with federal tax laws covering estate tax, gift tax, and transfer taxes.
Key Rules or Details for 2020
For 2020, the GST tax rate was 40 percent, and the lifetime exemption amount was $11.58 million. This exemption shields some wealth transfers from federal tax and helps limit double taxation on estates and gifts. Married couples could use the same amount to protect more assets transferred to future generations.
Any taxable gift or taxable distribution not covered by the GSTT exemption was subject to GST tax. All payments were required to be sent to the IRS, and any unpaid taxes could result in penalties and interest. The rules ensured that assets transferred through trusts were taxed relatively under federal estate laws.
For complete details on wage reporting, withholdings, and unemployment tax filings, see our guide for estate, gift, and trust forms.
Step-by-Step (High Level)
Step 1: Gather the Necessary Documents
Taxpayers must collect all Forms 706-GS(D-1) received from trustees for the year. These forms contain essential details such as the date of distribution, the value of property or money transferred, and the inclusion ratio. Supporting records, such as appraisals or account statements, should also be kept.
Step 2: Complete Part I – General Information
Enter personal details, including the taxpayer’s name, Social Security number, and address. If filing for a trust, include the trust’s Employer Identification Number (EIN). This section must be completed accurately, as missing information can cause delays in the processing of your application.
Step 3: Complete Part II – Taxable Distributions
List each distribution received during the year. For each one, include the name and EIN of the trust, the date of distribution, the fair market value of assets, and the inclusion ratio. Use these figures to determine the tentative transfer amount, which represents the value subject to the GST tax.
Step 4: Report Allowable Deductions
Taxpayers may deduct expenses related to preparing the return or determining the GST tax, such as fees for accountants or appraisers. These expenses must be prorated based on the inclusion ratio. For example, if half of the distribution is taxable, only half of the cost may be deducted.
Step 5: Calculate and Pay the Tax
Add all tentative transfer amounts, subtract allowable deductions, and multiply the remainder by the 40 percent GST tax rate. The result is the amount of tax due for 2020. Payment must be made in cash, even if the taxpayer received property or other non-cash assets as compensation. Checks should be payable to the United States Treasury.
Step 6: Sign, Date, and Mail
The taxpayer or their authorized representative must sign and date the form. If a paid preparer completed the return, they must also sign. Attach all supporting Forms 706-GS(D-1), valuations, and explanations. Mail the completed return to the IRS address provided in the official instructions.
Common Mistakes and How to Avoid Them
Filing Form 706-GS(D) requires accuracy and attention to detail. Several errors frequently cause IRS notices or penalties.
- Some taxpayers fail to file when required. Any taxable distribution with an inclusion ratio greater than zero must be reported, even if no tax is owed.
- Filers sometimes deduct expenses without adjusting for the inclusion ratio. All deductions must be prorated according to the ratio before calculating the total tax.
- Late filing is another issue. Failing to meet the April 15 deadline without requesting an extension results in late-filing penalties and interest.
- Many returns are incomplete because the required Forms 706-GS(D-1) were not attached. The IRS uses these forms to verify reported amounts and inclusion ratios.
Careful preparation, accurate documentation, and timely filing help taxpayers avoid these issues and ensure compliance with federal transfer taxes.
What Happens After You File
After filing, the IRS reviews the tax return to verify that all taxable distributions and assets transferred are reported correctly. Most taxpayers will not hear back unless there are errors or unpaid taxes.
If more tax is owed, the IRS will send a notice with the amount due. Taxpayers can pay by check or request a payment plan if needed. Keeping copies of all forms, payments, and valuations helps avoid problems and ensures proper handling of generation-skipping transfer taxes.
FAQs
Who must file IRS Form 706-GS(D) (2020)?
Any skip person who receives a taxable distribution from a trust must file IRS Form 706-GS(D) (2020). The form reports the generation-skipping transfer tax owed when assets are transferred to younger generations through taxable distributions.
What is the purpose of the generation-skipping transfer tax?
The generation-skipping transfer tax ensures that wealth transfers to grandchildren or other skip persons are not used to avoid estate tax or gift tax. It applies when assets are transferred directly to future generations rather than to immediate heirs.
How does the lifetime exemption affect taxable distributions?
The lifetime exemption determines how much a transferor can shield from federal tax before the generation-skipping transfer tax applies. If properly allocated, this exemption can reduce or eliminate GSTT taxes for eligible trust beneficiaries or married couples.
Can a surviving spouse or married couple share the GSTT exemption amount?
A surviving spouse cannot file jointly for this form, but each married couple member may use the same amount of lifetime exemption to reduce their individual GST tax liability. This helps minimize transfer taxes on wealth passed to younger generations.
What is considered a direct skip under federal estate and gift tax rules?
A direct skip occurs when property or money is transferred directly to a skip person, such as a grandchild, without passing through the child’s estate. This transaction triggers the GST tax because it bypasses one generation and reduces estate taxes.
