What Form 706-GS(D) (2023) Is For
IRS Form 706-GS(D) (2023) is the official federal tax return used to report and pay the generation-skipping transfer tax on taxable distributions. This tax is imposed when transferring assets such as property, money, or other wealth from a trust to skip persons—usually grandchildren, great-grandchildren, or younger generations—thereby bypassing the immediate heirs. The form ensures that estate tax, gift tax, and other federal transfer taxes apply fairly across generations and prevent families from avoiding taxation on large inheritances.
This tax return applies to any taxable distribution or direct skip where the grantor pays or transfers assets to a beneficiary two or more generations younger. The GST tax works in conjunction with the estate tax and gift tax for estate planning and gift tax purposes. Taxpayers benefit from a lifetime exemption and GSTT exemption amount that determines whether assets transferred are subject to GSTT taxes, additional tax, or qualify as exempt under federal estate and transfer tax law.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions for IRS Form 706-GS(D) (2023)—Generation-Skipping Transfer Tax, see our comprehensive guide.
When You’d Use Form 706-GS(D)
Form 706-GS(D) is required when a skip person receives a taxable distribution from a trust subject to the generation-skipping transfer tax. It applies to transfers that bypass a generation, such as those from grandparents to grandchildren. The form must be filed by April 15 of the year following the distribution. If additional time is needed, taxpayers may request a six-month filing extension using Form 7004, though interest on any unpaid tax will still accrue.
Key Rules or Details for 2023
For 2023, the generation-skipping transfer tax rate remains at 40 percent, matching the top federal estate tax rate. The GSTT exemption amount is $12,920,000 per person, allowing taxpayers to transfer assets to younger generations without paying additional tax up to that limit. A skip person is defined as an individual two or more generations younger than the grantor or a trust where all beneficiaries are skip persons. The generation-skipping transfer tax applies to the fair market value of the assets transferred, reduced by any amounts paid or allowable deductions related to filing the tax return.
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)
Filing Form 706-GS(D) involves gathering documents, calculating taxable amounts, and sending the completed return to the IRS. The following steps outline the process.
Step 1: Gather Documents
Collect all Forms 706-GS(D-1) received from trustees. Each form lists the value, inclusion ratio, and date of each taxable distribution.
Step 2: Complete Part I (General Information)
Provide identifying details, including the filer’s name, address, and Social Security number. If someone files on behalf of another, such as a guardian, include their information as well.
Step 3: Complete Part II (Distribution Information)
Enter each taxable distribution with its corresponding value and inclusion ratio. Attach additional sheets if necessary. Each taxable distribution must be listed separately.
Step 4: Complete Part III (Tax Computation)
- Deduct allowable expenses related to preparing the return.
- Subtract any amounts already paid by the file.
- Apply the 40 percent GST tax rate to the remaining taxable amount.
Step 5: Sign and Submit the Return
Sign the return and include the date. Paid preparers must also complete their section. Mail the completed form and attachments to the IRS Service Center in Kansas City, Missouri. Payments should be made payable to the United States Treasury with the taxpayer’s name, year, and “Form 706-GS(D)” written on the check or money order.
Common Mistakes and How to Avoid Them
Filing errors can result in penalties, additional tax, or processing delays. The following are the most common mistakes and how to avoid them:
- Failing to file when required: Receiving Form 706-GS(D-1) does not mean the tax has been paid. If any distribution has a nonzero inclusion ratio, the distributee must file Form 706-GS(D).
- Using incorrect property valuations: Always use the fair market value on the distribution date to determine the taxable amount.
- Forgetting to deduct consideration paid: Subtract any amount the recipient paid for the distribution from the taxable value.
- Miscalculating expenses: When distributions have different inclusion ratios, prorate allowable expenses to match each distribution accurately.
- Missing the filing deadline: File on time to avoid penalties of up to 25% of the unpaid tax plus interest. Use Form 7004 before the due date to request an extension.
Reviewing each entry for accuracy, meeting deadlines, and maintaining proper records help ensure timely and compliant filing of Form 706-GS(D).
What Happens After You File
After filing Form 706-GS(D), the IRS reviews and processes the tax return at its Kansas City Service Center, a process that can take several months to complete. The IRS has three years to assess additional tax, with extensions possible if the property is undervalued or the return is missing. Interest and penalties apply to unpaid taxes; however, taxpayers may request refunds using Form 843 or arrange for installment payments if needed.
FAQs
What is IRS Form 706-GS(D) (2023) used for?
IRS Form 706-GS(D) (2023) reports and pays the generation-skipping transfer tax on taxable distributions made to skip persons. This federal tax applies when transferring assets, money, or property to younger generations, such as grandchildren or great-grandchildren.
How does the generation-skipping transfer tax differ from the estate tax or the gift tax?
The generation-skipping transfer tax is an additional tax separate from estate and gift taxes. It ensures that wealth transferred to future generations through direct skips or taxable distributions does not avoid normal transfer taxes imposed at each generation.
Who is considered a skip person for generation-skipping transfer tax purposes?
A skip person is a beneficiary two or more generations younger than the grantor. This includes grandchildren, great-grandchildren, or specific trust beneficiaries who receive assets transferred through direct skips or taxable terminations under federal law.
What is the GSTT exemption amount for 2023?
For 2023, the GSTT exemption amount is $12,920,000 per person. This lifetime exemption helps reduce taxes owed on taxable gifts, distributions, and transfers made to skip persons, ensuring fair treatment under federal estate and transfer tax rules.
How does the GST tax affect married couples or spouses?
Each spouse must file separately when paying generation-skipping transfer taxes. Married couples cannot combine their exemption amounts for GST tax purposes, though each spouse may claim their own lifetime exemption and report taxable distributions independently.
Are distributions to trust beneficiaries always subject to GSTT taxes?
Not always. Distributions may be exempt if they qualify under the lifetime exemption or meet the inclusion ratio rules. Only taxable distributions to skip persons are subject to GSTT taxes, depending on how the assets and trusts function properly under federal taxation.
How can a taxpayer determine if payments or transfers are subject to the generation-skipping transfer tax?
Taxpayers must review all assets transferred, distributions received, and inclusion ratios on Form 706-GS(D-1). If any taxable distribution, indirect skip, or direct skip exceeds the exemption amount, GST tax is imposed and must be reported on Form 706-GS(D).
