What Form 706-GS(D) (2016) Is For
IRS Form 706-GS(D) serves as the official tax document for reporting any taxable distribution subject to the generation-skipping transfer tax (GSTT). The Internal Revenue Service requires skip persons, including grandchildren or unrelated persons more than 37½ years younger than the transferor, to file when they receive taxable distributions from a generation-skipping trust. These filings ensure proper reporting for transfers that may trigger estate or gift tax obligations and align with federal tax return requirements.
The GSTT applies to lifetime gifts, outright transfers, or indirect skips that transfer assets to younger generations. Each taxable gift, taxable termination, or outright gift must reflect equal value for accurate assessment. Filing Form 706-GS(D) ensures that the trust or the grantor pays any GSTT and maintains compliance for future generations.
When You’d Use Form 706-GS(D) (2016)
Form 706-GS(D) applies when a skip person receives a taxable distribution from a trust during the calendar year, even when transfers appear nontaxable. Taxpayers must file regardless of income tax treatment or federal estate tax when a generation-skipping transfer or direct skip occurs. The trustee provides Form 706-GS(D-1) containing essential information about trust assets, taxable income, and GSTT exemption details.
The filing deadline is April 15 of the year following the taxable event. Taxpayers may extend using Form 4868 or Form 7004 to file their estate tax return, although such extensions do not delay payment of their own taxes. Proper reporting ensures the person making the transfer avoids incurring additional penalties.
Timely submission helps taxpayers manage estate taxes while maintaining compliance with federal law. It ensures married couples and trust beneficiaries file accurately and protect future generations.
Key Rules or Details for 2016
The 2016 GST tax rate was 40 percent, matching the highest federal estate tax rate and gift tax rate applied to taxable transfers. The federal estate tax exemption and lifetime exemption amount totaled $5,450,000 per individual, while the annual gift tax exclusion was $14,000 per recipient. These limits determined whether the person transferring assets owed additional tax liability on a taxable gift or estate transfer.
Generation-skipping transfers follow automatic allocation rules that determine how the GST exemption applies to the entire trust. The inclusion ratio measures the taxable portion of the trust distribution and applies an equal tax calculation to all recipients. A ratio of zero means the transfer is exempt, while one indicates full taxation.
Valuations must reflect fair market value, including liens, restrictions, or medical expenses paid on behalf of others. These calculations ensure compliance with federal estate and gift tax rules.
Step-by-Step (High Level)
- Gather Documents: The preparer must gather all Forms 706-GS(D-1) from trustees, along with proof of trust income and valuation details for every transferred asset.
- Identify Information: The filer should enter the distributee’s name, taxpayer identification number, and trust details in the appropriate sections of the return.
- Compute Distributions: The preparer calculates the fair market value of each taxable distribution and applies the current GST tax rate to compute the total tax owed.
- Apply Exemptions: The taxpayer applies the lifetime exemption amount, GST tax exemption, and annual exclusion amount when applicable.
- Submit Filing: The filer signs and dates the return, attaches supporting documents, and mails the form to the IRS service center in Cincinnati.
Accurate completion prevents processing delays and errors. Taxpayers should consult legal advisors for guidance involving multiple trusts or generation-skipping transfers.
Common Mistakes and How to Avoid Them
Avoiding filing errors maintains accuracy when reporting generation-skipping transfer tax information. The following table lists common mistakes that taxpayers make and the correct steps to prevent them during preparation and filing.
Below is a list of common Form 706-GS(D) mistakes and how to avoid them:
1. Failed to file required return
- How to avoid it: Contact the trustee to confirm that all Form 706-GS(D-1) documents have been issued and properly included with the filing.
2. Used outdated valuation
- How to avoid it: Determine the fair market value as of the transfer date and include all supporting documentation, including appraisal evidence.
3. Miscalculated expenses
- How to avoid it: Prorate preparer fees and related costs by applying the appropriate inclusion ratio to each taxable distribution.
4. Missed the filing deadline
- How to avoid it: Record the April 15 deadline and file an official extension request using Form 7004 before the due date.
5. Applied the wrong tax rate
- How to avoid it: Verify the current GST tax rate on IRS.gov before calculating any taxes on taxable transfers.
Preventing these common mistakes ensures accurate filing, compliance with federal estate and gift tax law, and timely IRS processing.
What Happens After You File
The Internal Revenue Service reviews all filed Forms 706-GS(D) at its Cincinnati Service Center to verify gift or estate tax compliance. Processing generally takes eight to twelve weeks, depending on the complexity of the return and the accuracy of the attached documentation. Refunds may take longer when the trustee has prepaid GST taxes or when adjustments to transferred assets occur during the review.
If taxpayers owe tax, the IRS adds interest until the balance is paid in full. Those unable to pay may request an installment agreement that allows partial payments over time for the same amount owed. Any unpaid balance continues to accrue daily interest until resolved.
Accurate and timely filings help protect an estate plan, minimize errors, and prevent penalties. Educational institutions and charitable transfers follow limited exceptions under federal rules comparable to those applying to the parents’ generation.
FAQs
Who must file Form 706-GS(D)?
Skip persons, such as grandchildren or unrelated persons two or more generations younger than the transferor, must file when they receive taxable distributions from a trust. The form ensures the correct calculation of the generation-skipping transfer tax.
Do I need to file if my inclusion ratio is zero?
A zero inclusion ratio indicates the transfer is fully exempt from GST tax. Taxpayers do not need to file, but should retain documentation for future reference in case of IRS inquiries.
How does the GST tax exemption apply?
The GST tax exemption protects a certain amount of transferred wealth from additional taxation. It works alongside the lifetime exemption and annual exclusion to prevent duplicate taxation on the same assets.
What happens if the trustee fails to send Form 706-GS(D-1)?
Recipients should contact the trustee immediately to obtain the required information. Trustees are legally obligated to report distributions to skip persons through this form.
Can I correct a mistake on my return?
Filers use Form 843 to request a refund or correction when GST tax has been overpaid. The request must include detailed explanations and all supporting documentation to validate the amendment. Correcting errors through proper channels ensures accurate records and compliance with federal estate and gift tax regulations.
Taxpayers can use Federal Fillable Tax Forms to confirm which federal forms may apply to transfer tax recordkeeping.
