Instructions for Filing Form 706-GS(T)

Form 706-GS(T), the Generation-Skipping Transfer (GST) Tax Return for Terminations, is an Internal Revenue Service (IRS) document. Trustees use this form to report and pay the GST tax due when a trust experiences a “taxable termination.” This tax is levied in addition to any federal estate or gift taxes that may apply, and its purpose is to ensure that wealth transferred across multiple generations does not escape taxation at each level.

Understanding the Taxable Termination Event

A taxable termination is the event that triggers the requirement to file Form 706-GS(T). This occurs when a trust beneficiary’s interest ends, and the trust property is then held for or distributed to a “skip person.” A skip person is a beneficiary who is two or more generations younger than the trust’s creator, known as the grantor. A “non-skip person” is a beneficiary who is not more than one generation younger than the grantor, such as the grantor’s child.

For instance, consider a trust established by a grandparent for the benefit of their child. The trust documents state that upon the child’s death, the remaining assets will be distributed to the grandchildren. The child is a non-skip person, while the grandchildren are skip persons. The death of the child is the taxable termination because it ends the interest of the non-skip person and directs the assets to skip persons.

This event is distinct from other types of generation-skipping transfers, such as a direct skip where a grandparent gifts property directly to a grandchild, or a taxable distribution where a trustee makes a discretionary payment to a skip person while a non-skip person still holds an interest. The filing of Form 706-GS(T) is exclusively for the termination scenario. Even if no tax is ultimately due because of available exemptions, the occurrence of a taxable termination still requires the trustee to file the return.

The Trustee’s Filing Obligations

The responsibility for preparing and filing Form 706-GS(T) rests with the trustee of the trust. The trustee is also liable for paying the calculated GST tax from the trust’s assets. The return must be filed in a timely manner to avoid potential penalties and interest charges.

The standard deadline for filing Form 706-GS(T) and paying the tax is April 15th of the year following the calendar year in which the taxable termination occurred. If the termination is the result of a death, the due date may be different. The trustee must verify the correct filing date based on the specific circumstances.

Should more time be needed to prepare the return, a trustee can request an automatic six-month filing 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. An extension to file is not an extension to pay. The trustee must still remit an estimate of the tax due by the original April 15th deadline to avoid late-payment penalties.

Required Information and Tax Calculation

Before completing Form 706-GS(T), a trustee must gather specific information and perform several calculations. The necessary details include:

• The trust’s name and Employer Identification Number (EIN)
• The trustee’s name and address
• A description of the property subject to the termination
• The name and Social Security number of each skip person receiving assets

All assets being distributed must be valued at their fair market value as of the date the taxable termination occurred. This requires determining what a willing buyer would pay a willing seller for each asset. In some cases, particularly when the termination is caused by a death, the trustee may elect alternate valuation, which allows for valuing the property six months after the date of death, but this choice has specific rules and must be elected on the return.

The amount of GST tax owed is influenced by the lifetime GST exemption. This is a substantial amount, indexed for inflation, that every individual can allocate to shield transfers from the GST tax. The grantor may have allocated some or all of their exemption to the trust when it was created or when contributions were made. The trustee must determine the amount of exemption allocated to the trust, as this figure is needed to calculate the tax.

The first step in the calculation is to determine the “inclusion ratio.” This ratio, ranging from zero to one, represents the portion of the trust’s assets subject to the GST tax.

If the grantor allocated an exemption amount equal to the value of the property transferred into the trust, the inclusion ratio is zero, and no tax is due. If no exemption was allocated, the inclusion ratio is one, and the entire value is subject to tax.

Once the inclusion ratio is established, it is multiplied by the maximum federal estate tax rate in effect for the year of the termination to find the “applicable rate.” For example, if the maximum estate tax rate is 40% and the trust’s inclusion ratio is 0.6, the applicable rate would be 24%. The final tax due is then calculated by multiplying this applicable rate by the fair market value of the trust property subject to the termination, after subtracting any allowable expenses.

Step-by-Step Guide to Completing and Filing

Once all information is gathered and calculations are complete, the trustee can fill out Form 706-GS(T) by transferring the figures into the appropriate sections.

The form is organized into several parts. Part I is for general information like the trust’s name and EIN. Part II, Tax Computation, is where calculated figures like the inclusion ratio and final GST tax liability are entered. Schedule A, Taxable Terminations, requires a detailed list of each skip person, their identifying information, and the value of the property they are receiving.

After the form is completed and signed, it must be mailed to the IRS. The filing address can change, so it is best to confirm the location in the most recent version of the form’s instructions before mailing.

Payment of the tax can be made electronically through the Electronic Federal Tax Payment System (EFTPS) or by a check or money order. If paying by mail, the check should be made payable to the “United States Treasury” and sent with the completed form.

After filing, the trustee must retain a complete copy of the return and all supporting documents for the trust’s records. The IRS does not issue closing letters for these returns, so maintaining thorough records is the best way to address future inquiries.