What Form 706-GS(D) Is For

Form 706-GS(D) is the IRS tax form used by individuals (called "skip person distributees") who receive certain distributions from trusts that are subject to the generation-skipping transfer (GST) tax. Think of it as the tax return you need to file when you receive money or property from a trust that's designed to skip a generation—for example, when a grandparent leaves assets in a trust that distributes directly to grandchildren, bypassing the parents' generation.

The generation-skipping transfer tax exists to prevent wealthy families from avoiding estate taxes by transferring wealth directly to grandchildren or more remote descendants. When structured this way, the wealth would otherwise skip the middle generation (like children) and avoid being taxed at their level. The GST tax ensures the government still collects tax revenue comparable to what it would have received if the assets had passed through each generation normally.

You'll receive Form 706-GS(D-1) from the trustee of the trust, which notifies you of the distribution and provides the information you need to complete your Form 706-GS(D). Not every distribution requires filing—if the "inclusion ratio" shown on Form 706-GS(D-1) is zero for all your distributions, you don't need to file Form 706-GS(D) at all. The inclusion ratio essentially measures what portion of the distribution is subject to GST tax.

When You’d Use Form 706-GS(D)

Regular Filing Timeline

You must file Form 706-GS(D) based on a calendar year schedule, regardless of your personal income tax accounting period. The form is due 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 taxable distributions from a trust during 2022, your Form 706-GS(D) would be due by April 15, 2023.

Extensions

If you can't meet the April 15 deadline, 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 provide a reason or wait for IRS approval. However, an extension to file is not an extension to pay; interest will accrue on any unpaid taxes from the original due date.

Late Filing

If you file after the deadline without having requested an extension, the IRS may impose penalties under Section 6651 for late filing and late payment, unless you can demonstrate reasonable cause for the delay. The late filing penalty is calculated based on how long the return is overdue and the amount of tax owed. Interest also accumulates on unpaid taxes from the due date until payment is received.

Amended Returns

If you discover errors after filing your original Form 706-GS(D), the IRS instructions don't specify a dedicated amended version of this form. However, if you need to claim a refund for overpaid GST tax or correct understated expenses, you would typically file Form 843 (Claim for Refund and Request for Abatement). For adjustments involving additional tax owed, contact the IRS or a tax professional to determine the appropriate correction procedure. Keep thorough documentation of any changes and the reasons for amendments.

Key Rules or Details for 2022

Tax Rate

For distributions made during 2022, the generation-skipping transfer tax rate was 40%. This rate has remained constant since January 1, 2013, matching the highest estate and gift tax rate.

GST Exemption Amount

While Form 706-GS(D) itself doesn't directly claim the GST exemption (that's typically handled by the trustee when the trust is established or funded), it's helpful to understand the context. For 2022, the GST tax exemption amount was $12,060,000 per individual. This exemption is allocated by the donor (the person who created the trust) or their estate, and it determines the inclusion ratio that appears on your Form 706-GS(D-1).

Who Qualifies as a “Skip Person”

You're considered a skip person if you're assigned to a generation that's two or more generations below the generation of the person who transferred the property to the trust (the transferor). Typically, this means grandchildren, great-grandchildren, or more remote descendants. However, the rules can be complex when dealing with non-family members or certain age-based assignments.

Valuation Rules

The value of your distribution is its fair market value (FMV) on the date of distribution. Fair market value is defined as the price at which property would change hands between a willing buyer and willing seller, when neither is forced to transact and both have reasonable knowledge of relevant facts. You must reduce the reported value by any consideration you provided to receive the distribution. For real estate, reduce the value by outstanding liens. For closely held business interests or inactive stock, valuation should consider net worth, earnings capacity, dividend history, and other relevant factors—attach balance sheets and financial statements to support these valuations.

Deductible Expenses

You can deduct "adjusted allowable expenses" related to preparing Form 706-GS(D) or determining, collecting, or refunding the GST tax. These expenses must be adjusted by the inclusion ratio. If you have distributions with multiple inclusion ratios, you must prorate expenses based on the relative value of each distribution. Importantly, you can deduct expenses even if they haven't been paid yet, as long as the amount is clearly ascertainable when you file. If additional allowable expenses arise after filing, you can file Form 843 to claim a refund.

Filing Location

For 2022 returns, Form 706-GS(D) should be filed at: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999. If using a private delivery service, the address is: Internal Revenue Submission Processing Center, 333 W. Pershing, Kansas City, MO 64108.

Step-by-Step (High Level)

Step 1: Gather Your Forms 706-GS(D-1)

Collect all Forms 706-GS(D-1) you received from trust trustees during the tax year. These forms contain critical information including the distribution date, value, and inclusion ratio for each distribution. Check whether any distributions have an inclusion ratio of zero; those don't need to be reported on your Form 706-GS(D).

Step 2: Complete Part I (General Information)

Enter your name, Social Security Number (or EIN if you're a trust), and contact information. If someone else is filing on your behalf (such as a parent or guardian for a minor), include their name and relationship to you.

Step 3: Complete Part II (Distribution Details)

List all taxable distributions with inclusion ratios greater than zero. Use the same item numbers from your Forms 706-GS(D-1) for consistency. For each distribution, report the value and calculate the "tentative transfer" by multiplying the distribution value by the applicable inclusion ratio. If you disagree with values reported by the trustee or if the trustee didn't complete certain sections, attach a statement explaining your position and calculations. Attach copies of all Forms 706-GS(D-1) to your return.

Step 4: Complete Part III (Tax Computation)

Calculate your total tentative transfers from Part II. Deduct any adjusted allowable expenses (remember to adjust by the inclusion ratio if you have multiple inclusion ratios). Multiply the net amount by the applicable rate—40% for 2022—to determine your GST tax liability.

Step 5: Sign and Submit

Sign and date the return. If someone prepares the return for you and charges a fee, they must also sign in the Paid Preparer section. Make your check payable to "United States Treasury" and write your SSN, "2022," and "Form 706-GS(D)" on the check. Enclose (but don't staple) your payment with the return. Mail everything to the Kansas City IRS center.

Common Mistakes and How to Avoid Them

Mistake #1: Filing When Not Required

Many people file Form 706-GS(D) unnecessarily. If all distributions shown on your Forms 706-GS(D-1) have an inclusion ratio of zero, you don't need to file at all. Always check column d of Part II on Form 706-GS(D-1) before preparing your return.

Mistake #2: Forgetting to Attach Forms 706-GS(D-1)

The instructions explicitly require you to attach copies of all Forms 706-GS(D-1) to your Form 706-GS(D). Without these supporting documents, the IRS cannot verify the distributions you're reporting, which may trigger correspondence or delays.

Mistake #3: Incorrectly Calculating Adjusted Allowable Expenses

This is particularly tricky when you have multiple distributions with different inclusion ratios. You can't simply deduct 100% of your preparation fees; you must prorate expenses among the different inclusion ratios based on relative distribution values, then adjust each portion by its applicable inclusion ratio. The IRS instructions provide a detailed example—study it carefully.

Mistake #4: Using Incorrect Valuation Methods

Fair market value determinations must follow IRS guidelines. Common errors include failing to reduce real estate values by outstanding liens, not obtaining proper appraisals for unique property, or using inappropriate valuation methods for closely held businesses. When in doubt, hire a qualified appraiser and document your valuation approach.

Mistake #5: Missing the Filing Deadline Without Requesting an Extension

Late filing penalties can add up quickly. If you realize in early April that you can't complete the return by the 15th, immediately file Form 7004 for an automatic extension. Don't wait until after the deadline to request the extension—it must be filed by April 15.

Mistake #6: Paying Taxes Late Even With a Filing Extension

Remember, an extension to file is not an extension to pay. Even if you've extended your filing deadline to October 15, you still owe any GST tax by April 15. Interest accrues on unpaid amounts from the original due date, and you may face late payment penalties if the underpayment is substantial.

What Happens After You File

Processing Time

The IRS will process your Form 706-GS(D) and apply any payment you submitted. Because this is a specialized form with relatively few filers compared to individual income tax returns, processing times can vary. Generally, you can expect the IRS to process the return within several weeks to a few months, assuming there are no issues requiring additional review.

Payment Processing

If you enclosed a check, the IRS will deposit it and credit the payment to your account. Make sure you wrote your Social Security Number, "2022," and "Form 706-GS(D)" clearly on the check to ensure proper posting.

Refunds

If you overpaid or are entitled to a refund based on deductible expenses, the IRS will process your refund after reviewing the return. Refund timing depends on when you filed and whether the IRS needs to verify any information.

IRS Correspondence

If the IRS has questions about your return, you'll receive a letter requesting additional information or clarification. Common reasons for correspondence include missing Forms 706-GS(D-1), unclear valuation calculations, or discrepancies between your return and information the IRS received from the trustee. Respond promptly to any IRS notices and keep copies of all correspondence.

Record Retention

Keep copies of Form 706-GS(D), all attached Forms 706-GS(D-1), supporting documentation for valuations, expense receipts, and proof of payment indefinitely. These records may be needed if you're ever audited or if questions arise in later years. The IRS generally has three years from the filing date to audit a return, but this period can be extended under certain circumstances.

Potential Audits

While GST tax returns are less commonly audited than individual income tax returns, the IRS may select your return for examination, especially if it involves large distributions, complex valuations, or claims for substantial deductible expenses. During an audit, you'll need to substantiate the values reported and any deductions claimed.

FAQs

Q1: I received a Form 706-GS(D-1) with an inclusion ratio of zero. Do I still need to do anything?

No. If all your distributions have an inclusion ratio of zero, you don't need to file Form 706-GS(D) at all. The inclusion ratio of zero means the distribution is fully exempted from GST tax. Keep the Form 706-GS(D-1) for your records, but no filing or payment is required.

Q2: Can I e-file Form 706-GS(D)?

As of 2022, Form 706-GS(D) could not be electronically filed. You must file a paper return by mail to the IRS address in Kansas City, Missouri. Check the IRS website for current information, as e-filing capabilities may be added in future years.

Q3: What if the trustee made an error on Form 706-GS(D-1)?

Contact the trustee immediately and request a corrected Form 706-GS(D-1). Don't file your Form 706-GS(D) based on incorrect information. If you can't resolve the issue with the trustee and believe their figures are wrong, attach a statement to your return explaining the discrepancy and showing your alternative calculations with supporting documentation.

Q4: I'm the beneficiary of multiple trusts. Do I file separate Forms 706-GS(D) for each trust?

No. You file one Form 706-GS(D) that reports all taxable distributions you received during the year from all trusts. In Part II, list each distribution separately and attach copies of all Forms 706-GS(D-1) from all the trusts.

Q5: How is the 40% GST tax rate applied to my distribution?

It's not a flat 40% of the entire distribution. The GST tax equals 40% of your "tentative transfer," which is calculated by multiplying the distribution value by the inclusion ratio. For example, if you received a $100,000 distribution with an inclusion ratio of 0.50, your tentative transfer is $50,000, and your GST tax would be $20,000 (40% of $50,000).

Q6: Can I deduct state taxes paid on the distribution?

No. The instructions for Form 706-GS(D) limit deductible expenses to those incurred in preparing the form itself or in determining, collecting, or refunding the federal GST tax. State income or inheritance taxes aren't deductible for GST tax purposes, though they may be deductible on your income tax return.

Q7: What penalties apply if I don't file or file late?

Section 6651 imposes penalties for both late filing and late payment unless you have reasonable cause. The late filing penalty is typically 5% of unpaid taxes for each month the return is late, up to 25%. Late payment penalties are generally 0.5% per month. Additionally, Section 6662 imposes substantial penalties (20-40%) for valuation understatements—when property is reported at 65% or less of its actual value. Interest accrues on all unpaid amounts from the due date.

Sources

All information in this guide comes from official IRS resources:

• IRS Form 706-GS(D)
• Instructions for Form 706-GS(D)
• IRS Estate and Gift Tax Information

This guide is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or attorney for guidance specific to your situation.