What Form 706-GS(D) Is For

Form 706-GS(D) is a specialized tax return used when you receive money or property from a trust that triggers something called the generation-skipping transfer (GST) tax. Think of it as the IRS's way of collecting taxes when wealth passes down through multiple generations—like from a grandparent directly to a grandchild, skipping over the parent's generation.

Here's the basic scenario: If you're a "skip person" (typically a grandchild or someone two or more generations below the person who created the trust), and you receive a distribution from that trust, you may owe GST tax on what you received. The trustee will send you Form 706-GS(D-1), which provides information about the distribution, and you'll use that information to complete your Form 706-GS(D) and calculate any tax owed.

The GST tax exists to prevent wealthy families from avoiding estate taxes by transferring assets directly to grandchildren or great-grandchildren. Without this tax, families could theoretically skip generations indefinitely and avoid multiple rounds of estate taxation.

IRS About Form 706-GS(D)

When You’d Use Form 706-GS(D) (Late/Amended Filings)

Normal Filing Deadline: You must file Form 706-GS(D) 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 distributions in 2023, your Form 706-GS(D) is due by April 15, 2024.

Extension of Time: If you can't meet the April 15 deadline, you can request an automatic 6-month extension by filing Form 7004 before the original due date. This extension gives you more time to file the paperwork but doesn't extend the time to pay any taxes owed—interest will accrue on unpaid taxes from the original due date.

Amended Returns: If you discover an error after filing, you'll need to file a supplemental Form 706-GS(D). Write "Supplemental Information" across the top of page 1, attach a detailed statement explaining what changed, and include a copy of your original return. Mail this to the IRS address in Florence, Kentucky (333 W. Pershing Road, Kansas City, MO 64999 for regular mail; use the street address if using a private delivery service).

When You Don't Need to File: Good news—if all the distributions you received have an "inclusion ratio" of zero (shown on the Form 706-GS(D-1) you received from the trustee), you don't need to file Form 706-GS(D) at all. An inclusion ratio of zero means no GST tax applies to those distributions.

Instructions for Form 706-GS(D)

Key Rules for 2023

Tax Rate: The generation-skipping transfer tax rate for 2023 is 40%—the same as the top estate tax rate. This has been the rate since January 1, 2013 (it was temporarily 0% in 2010 and 35% from 2011-2012).

GST Exemption: For 2023, the GST exemption amount was $12,920,000 per person. This is the amount that can be allocated to protect transfers from GST tax. However, as the distributee filing Form 706-GS(D), you're typically dealing with distributions where exemption has already been allocated (or not allocated) by the person who created the trust.

Who Is a Skip Person: You're considered a skip person if you're:

• A natural person assigned to a generation that is two or more generations below the person who created the trust (the settlor), or
• A trust where all beneficiaries are skip persons

For family members, this typically means grandchildren, great-grandchildren, or more remote descendants. The IRS uses specific rules to determine generational assignments for non-family members based on age differences.

Annual Exclusion: The 2023 annual gift exclusion of $17,000 doesn't directly apply to Form 706-GS(D) (it's relevant for the initial gift tax return), but it's part of the broader transfer tax system you should understand.

What Gets Taxed: The GST tax applies to the fair market value of the distribution you received on the date of distribution, reduced by any consideration you provided and any allowable expenses related to preparing the return or dealing with the tax.

Instructions for Form 709 (2023)

Step-by-Step (High Level)

Step 1: Gather Your Documents

Collect all Forms 706-GS(D-1) you received from trustees during the tax year. These notification forms provide essential information about each distribution: the date, value, and inclusion ratio. Keep copies for your records and attach originals to your Form 706-GS(D).

Step 2: Complete Part I (General Information)

Fill in your personal information including name, address, Social Security number, legal residence, and citizenship. If you're filing for a minor or someone under a disability, include the guardian's information.

Step 3: Fill Out Part II (Distribution Information)

List each taxable distribution (those with inclusion ratios greater than zero) in the table. For each distribution, you'll calculate the "tentative transfer" by multiplying the distribution value by its inclusion ratio. If you need more space, attach additional sheets following the same format.

Step 4: Complete Part III (Tax Calculation)

• Line 4: Deduct any adjusted allowable expenses. These are costs incurred in preparing the return or dealing with the GST tax, multiplied by the inclusion ratio. For example, if you paid an accountant $500 and your inclusion ratio is 0.50, your allowable deduction is $250.
• Line 5: Calculate the total taxable amount by subtracting line 4 from line 3.
• Line 6: Enter the applicable GST tax rate (40% for 2023).
• Line 7: Multiply line 5 by line 6 to get your total GST tax due.

Step 5: Calculate Interest and Penalties (If Applicable)

Lines 8 and 9 account for any interest on late payments and penalties for late filing.

Step 6: Sign and Date

Either you (the distributee) or your authorized representative must sign the return. If someone prepares the return for a fee, they must also sign in the "Paid Preparer Use Only" section.

Step 7: Mail Your Return

Send your completed Form 706-GS(D) with all attached Forms 706-GS(D-1) to: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999. If you owe tax, enclose (but don't attach) your payment made out to "United States Treasury" with your SSN, the year, and "Form 706-GS(D)" written on it.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing When Required
Some distributees mistakenly believe that because they received Form 706-GS(D-1), the trustee has already handled all tax obligations. Wrong! The trustee only reports the distribution; you must file Form 706-GS(D) if any distributions have inclusion ratios greater than zero. Check every Form 706-GS(D-1) carefully—the inclusion ratio is shown in Part II, line 3, column d.

Mistake #2: Incorrect Valuation
Use the fair market value of the property on the distribution date, not when you received the Form 706-GS(D-1) or when you file your return. If you disagree with the valuation the trustee provided, attach a statement showing your calculations and reasoning. For unusual assets like closely-held business interests or real estate, you may need a professional appraisal.

Mistake #3: Forgetting to Reduce by Consideration Paid
If you paid anything to receive the distribution (rare, but possible), reduce the distribution value by what you paid. Many people forget this adjustment, resulting in overpayment of tax.

Mistake #4: Miscalculating Adjusted Allowable Expenses
If you received distributions with different inclusion ratios, you must prorate your preparation expenses among them based on the relative value of each distribution. The instructions provide a detailed example: if you have three distributions with different inclusion ratios, you can't simply multiply your total expenses by one ratio. You must calculate the weighted average properly.

Mistake #5: Missing the Deadline and Not Requesting an Extension
Filing late without reasonable cause triggers penalties of up to 25% of the unpaid tax, plus interest. If you know you'll miss the April 15 deadline, file Form 7004 before that date to get an automatic 6-month extension.

Mistake #6: Not Keeping Copies
Always keep copies of everything: your completed Form 706-GS(D), all Forms 706-GS(D-1), and proof of mailing. The statute of limitations for GST tax assessments doesn't begin until you adequately disclose the transfer, so good records are essential.

What Happens After You File

IRS Processing: After you file, the IRS will process your return at their Kansas City Service Center. Processing typically takes several months. You'll receive notices if the IRS needs additional information or finds discrepancies.

Statute of Limitations: Generally, the IRS has three years from when you file to assess additional GST tax. However, if you substantially undervalue property (reporting 65% or less of actual value), the IRS has six years. If you never file, there's no time limit.

Penalties and Interest: If you file late without reasonable cause, you'll face penalties of 5% of the unpaid tax per month, up to 25% total. Interest accrues on unpaid taxes from the original due date (not the extended due date if you got an extension). The IRS will send you a notice explaining any penalties and giving you an opportunity to show reasonable cause.

Audits and Examinations: GST tax returns can be selected for examination. If audited, you'll receive a notice explaining what information the IRS needs. Common audit triggers include high-value distributions, unusual assets, or discrepancies between your Form 706-GS(D) and the Form 706-GS(D-1) filed by the trustee.

Refund Claims: If you discover you overpaid, file Form 843 (Claim for Refund and Request for Abatement) within three years of filing the original return or two years from when you paid the tax, whichever is later. Attach documentation supporting your claim.

Payment Plans: If you can't pay the full tax amount immediately, contact the IRS to request an installment agreement. While extensions give you more time to file, they don't extend the payment deadline, so interest continues accruing.

FAQs

Q1: What's the difference between Form 706-GS(D) and Form 706-GS(D-1)?

Form 706-GS(D-1) is what the trustee files to notify you and the IRS about distributions from the trust. Think of it as an information form, like a 1099. Form 706-GS(D) is your tax return where you actually calculate and pay any GST tax owed. You'll use the information from Form 706-GS(D-1) to complete your Form 706-GS(D).

Q2: Do I need to file if the inclusion ratio is zero?

No. If all distributions you received have an inclusion ratio of zero (shown on Form 706-GS(D-1), Part II, column d), you don't need to file Form 706-GS(D) at all. Zero inclusion ratio means the trust's GST exemption fully protects those distributions from tax.

Q3: Who pays the GST tax—me or the trust?

You, as the skip person distributee, are primarily responsible for paying the GST tax on distributions. This is different from other GST tax scenarios where the trustee might be responsible. However, in practice, some trusts are structured to gross up distributions to cover the tax, or pay the GST tax on behalf of beneficiaries. Check your trust documents or ask the trustee.

Q4: What if I'm filing for multiple trusts?

You must file one Form 706-GS(D) that includes all taxable distributions you received during the calendar year from all trusts. Don't file separate returns for each trust. List each distribution separately in Part II, using the item numbers from each Form 706-GS(D-1) you received. If you receive distributions from multiple trusts, item numbers may repeat—that's fine.

Q5: How does the 40% GST tax rate interact with income tax?

The GST tax is separate from and in addition to income tax. If the distribution includes income (rather than principal), you'll also owe income tax on that portion reported on your Form 1040. The GST tax is not deductible for income tax purposes. So potentially, you could face both income tax on the distribution and GST tax on the same amount—a significant combined tax burden.

Q6: What if I disagree with the valuation the trustee provided on Form 706-GS(D-1)?

You have the right to use a different valuation if you believe the trustee's valuation is incorrect. Attach a detailed statement to your Form 706-GS(D) explaining your alternative valuation method and how you calculated it. For significant assets or complex valuations, include a professional appraisal. Be prepared to defend your position if the IRS questions it.

Q7: Can married couples file a joint Form 706-GS(D)?

No. Just like gift tax returns (Form 709), GST tax returns must be filed individually. Even if you and your spouse both received distributions from the same trust as co-beneficiaries, each person files their own Form 706-GS(D) reporting their respective distributions. There's no joint filing option for transfer taxes.

Additional Resources

About Form 706-GS(D)
Instructions for Form 706-GS(D)
Form 706-GS(D)

Note: This summary provides general information for educational purposes. Generation-skipping transfer tax situations can be complex, and you should consult with a qualified tax professional or estate planning attorney for advice specific to your situation.