General Instructions

Purpose of Form

Form 706-GS(T) is used by a trustee to figure and report the tax due from certain trust terminations that are subject to the generation-skipping transfer (GST) tax.

Who Must File

In general, the trustee of any trust that has a taxable termination (defined below) must file Form 706-GS(T) for the tax year in which the termination occurred.

When To File

Generally, the trustee must file Form 706-GS(T) by April 15th of the year following the calendar year in which the termination occurs. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.

If you are not able to file the return by the due date, you may request an extension of time to file by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. The extension is automatic, so you do not have to sign the form or provide a reason for your request. You must file Form 7004 on or before the regular due date of Form 706-GS(T). See Form 7004 for more information.

Where To File

File Form 706-GS(T) at the following address:

Department of the Treasury 
Internal Revenue Service 
Cincinnati, OH 45999

Trusts

Nonexplicit trusts.   An arrangement that has substantially the same effect as a trust will be treated as a trust even though it is not an explicit trust. Examples of such arrangements are insurance and annuity contracts, arrangements involving life estates and remainders, and estates for years.

  In general, a transfer of property in which the identity of the transferee is conditioned on the occurrence of an event is a transfer in trust. This rule does not apply to a testamentary trust, however, if the event is to occur within 6 months of the transferor's date of death.

  Nonexplicit trusts do not include decedents' estates.

  In the case of a nonexplicit trust, the person in actual or constructive possession of the property involved is considered the trustee and is liable for filing Form 706-GS(T).

  If you are filing this return for a nonexplicit trust, see the instructions for line 1b.

Separate trusts.   You must treat as separate trusts:
  • Portions of a trust that are attributable to transfers from different transferors and

  • Substantially separate and independent shares of different beneficiaries in a trust.

  If you are the trustee for separate trusts as described above, you must file a single Form 706-GS(T) but separate Schedules A for each separate trust, as that term is used here.

Terminations Subject to GST Tax

A termination may occur by reason of death, lapse of time, release of a power, or any other means.

In general, all taxable terminations are subject to the GST tax. A taxable termination is the conclusion of an interest in property held in trust unless:

  • Immediately after the termination, a non-skip person has an interest in the property or

  • At no time after the termination may a distribution be made from the trust to a skip person.

Exceptions

Irrevocable trusts.   Except as described under Additions to irrevocable trusts below, the GST tax does not apply to any termination of an interest in a trust that was irrevocable on September 25, 1985. Any trust in existence on September 25, 1985, will be considered irrevocable unless:
  1. On September 25, 1985, the settlor held a power with respect to such trust that would have caused the value of the trust to be included in the settlor's gross estate for federal estate tax purposes by reason of section 2038 (regarding revocable transfers) if the settlor had died on September 25, 1985; or

  2. Regarding a policy of life insurance that is treated as a trust under section 2652(b), the insured possessed an incident of ownership on September 25, 1985, that would have caused the insurance proceeds to be included in the insured's gross estate for federal estate tax purposes if the insured had died on September 25, 1985.

  For more information, see Regulations section 26.2601-1(b)(i) and (ii).

Trusts containing qualified terminable interest property.   Irrevocable trusts in existence on September 25, 1985, that hold qualified terminable interest property (QTIP) (as defined in section 2056(b)(7)) as a result of an election under section 2056(b)(7) or 2523(f), are treated for purposes of the GST tax as if the QTIP election had not been made. Thus, transfers from such a trust will not be subject to the GST tax.

Additions to irrevocable trusts.   If an addition has been made after September 25, 1985, to an irrevocable trust, the termination of any interest in the trust may be subject in part to the GST tax. Additions include constructive additions described in Regulations section 26.2601-1(b)(1)(v).

Medical and educational exclusion.   If all of the property to which the termination applied has been distributed and used for medical or educational expenses of the transferee such that if the transfer had been made inter vivos by an individual, it would not have been subject to gift tax by reason of the medical and educational exclusion, then the termination is not a generation-skipping transfer, and you do not have to file this form to report the termination.

Transition Rule for Revocable Trusts

The GST tax will not apply to any termination of an interest in a revocable trust, provided:

  • The trust was executed before October 22, 1986;

  • The trust as it existed on October 21, 1986, was not amended after October 21, 1986, in any way that created or increased the amount of a generation-skipping transfer;

  • Except as provided in Exceptions to Additions Rule later, no additions were made to the trust; and

  • The settlor died before January 1, 1987.

A revocable trust is any trust that on October 22, 1986, was not an irrevocable trust, as defined previously, and would not have been an irrevocable trust had it been created before September 25, 1985.

The instructions under Trusts containing qualified terminable interest property, previously, apply also to revocable trusts covered by these transition rules.

Amendments to revocable trusts.   An amendment to a revocable trust in existence on October 21, 1986, will not be considered to result in the creation of, or an increase in the amount of, a generation-skipping transfer where:
  • The amendment is administrative or clarifying in nature, and it only incidentally increases the amount transferred to a skip person (defined below), or

  • It is designed to perfect a marital or charitable deduction for an existing transfer, and it only incidentally increases the amount transferred to a skip person (defined later).

See Regulations section 26.2601-1(b)(2)(vii) for examples demonstrating these rules.

Additions to revocable trusts.   If an addition (including a constructive addition) to a revocable trust is made after October 21, 1986, and before the death of the settlor, all subsequent terminations of interests in the trust will be subject to the GST tax if the other requirements of taxability are met. For settlors dying before January 1, 1987, any addition made to a revocable trust after the death of the settlor will be treated as made to an irrevocable trust.

Transition Rule in Case of Mental Disability

If the settlor was under a mental disability on October 22, 1986, the GST tax may not apply. See Regulations section 26.2601-1(b)(3) for a definition of the term “mental disability” and additional details.

Exceptions to Additions Rule

Do not treat as an addition to a trust any addition that is made pursuant to an instrument or arrangement that is covered by the transition rules discussed above under Transition Rule for Revocable Trusts and Transition Rule in Case of Mental Disability. This also applies to inter vivos transfers if the same property would have been added to the trust by such an instrument. For examples illustrating this rule, see Regulations section 26.2601-1(b)(5)(ii).

Definitions

Skip Persons

For termination purposes, skip person means a trust beneficiary who is either:

  1. A natural person assigned to a generation that is two or more generations below the settlor's generation, or

  2. A trust that meets either of the following conditions:

    1. All interests in the trust are held by skip persons, or

    2. No person holds an interest in the trust, and at no time after the transfer to the trust may a distribution be made to a non-skip person.

Interest

A person holds an interest in the trust if, at the time the determination is made, the person:

  1. Has a current right to receive income or corpus from the trust,

  2. Is a permissible current recipient of income or corpus from the trust (other than charitable entities), or

  3. Is a charitable or other entity described in section 2055(a) and the trust is a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund.

Any interest that is created primarily to postpone or avoid the GST tax is disregarded.

Non-Skip Person

A non-skip person is any person who is not a skip person.

Generation Assignment

A generation is determined along family lines as follows:

  1. Where the beneficiary is a lineal descendant of a grandparent of the transferor (for example, the donor's cousin, niece, nephew, etc.), the number of generations between the transferor and the descendant is determined by subtracting the number of generations between the grandparent and the transferor from the number of generations between the grandparent and the descendant.

  2. Where the beneficiary is the lineal descendant of a grandparent of a spouse (or former spouse) of the transferor, the number of generations between the transferor and the descendant is determined by subtracting the number of generations between the grandparent and the spouse (or former spouse) from the number of generations between the grandparent and the descendant.

  3. For this purpose, a relationship by adoption is considered a blood relationship. A relationship by half-blood is considered a relationship by whole blood.

  4. The spouse or former spouse of a transferor or lineal descendant is considered to belong to the same generation as the transferor or lineal descendant, as the case may be.

A person who is not assigned to a generation according to the rules above is assigned to a generation based on his or her birth date as follows:

  1. A person who was born not more than 12½ years after the transferor is in the transferor's generation.

  2. A person born more than 12½ years, but not more than 37½ years, after the transferor is in the first generation younger than the transferor.

  3. Similar rules apply for a new generation every 25 years.

If more than one of the rules for assigning generations applies to a beneficiary, the beneficiary is generally assigned to the youngest of the generations that apply.

If an entity such as a partnership, corporation, trust, or estate has an interest in property, each individual who has a beneficial interest in the entity (for example, partners, shareholders, and beneficiaries) is treated as having an interest in the property. The individual is then assigned to a generation using the rules described above.

Government entities and certain charitable organizations are assigned to the transferor's generation. Terminations in their favor will never be generation-skipping transfers.

Generation Assignment Where Intervening Parent is Deceased

If you made a gift or bequest to your grandchild and at the time you made the gift or bequest, the grandchild's parent (who is your or your spouse's or your former spouse's child) is deceased, then for purposes of generation assignment, your grandchild will be considered to be your child rather than your grandchild. Your grandchild's children will be treated as your grandchildren rather than your great-grandchildren.

This rule governs generation assignment of lineal descendants below the level of grandchild. For example, if your grandchild is deceased, your great-grandchildren who are lineal descendants of the deceased grandchild are considered your grandchildren for purposes of the GST tax.

This rule also applies to other lineal descendants. For example, if property is transferred to an individual who is a descendant of a parent of the transferor, and that individual's parent (who is a lineal descendant of the parent of the transferor) is deceased at the time the transfer is subject to gift or estate tax, then for purposes of generation assignment, the individual is treated as if he or she is a member of the generation that is one generation below the lower of:

  • The transferor's generation or

  • The generation assignment of the youngest living ancestor of the individual, who is also a descendant of the parent of the transferor.

The same rules apply to the generation assignment of any descendant of the individual.

This rule does not apply to a transfer to an individual who is not a lineal descendant of the transferor if the transferor has any living lineal descendants.

If any transfer of property to a trust would have been a direct skip except for this generation assignment rule, then the rule also applies to transfers from the trust attributable to such property.

Ninety-day rule.    For purposes of determining if an individual's parent is deceased at the time of a testamentary transfer, an individual's parent who dies no later than 90 days after a transfer occurring by reason of the death of the transferor is treated as having predeceased the transferor. The 90-day rule applies to transfers occurring on or after July 18, 2005. See Regulations section 26.2651-1(a)(2)(iii).

Multiple Skips

If after a generation-skipping transfer, the property transferred is held in trust, then for the purpose of determining the taxability of subsequent transfers from the trust involving that property, the transferor of the property is assigned to the first generation above the highest generation of any person who has an interest in the trust immediately after the initial transfer.

Penalties and Interest

Section 6651 provides for penalties for both late filing and for late payment unless there is reasonable cause for the delay. The law also provides penalties for willful attempts to evade payment of tax.

The late filing penalty will not be imposed if the taxpayer can show that the failure to file a timely return is due to reasonable cause.

Reasonable Cause Determinations.   If you receive a notice about penalties after you file Form 706-GS(T), send an explanation and we will determine if you meet reasonable cause criteria. Do not attach an explanation when you file Form 706-GS(T). Explanations attached to the return at the time of filing will not be considered.

Section 6662 provides penalties for underpayments of GST taxes which are over $5,000 and are due to valuation understatements. A substantial valuation understatement occurs when the reported value of property on Form 706-GS(T) is 65% or less of the actual value of the property. A gross valuation understatement occurs when the reported value of the property listed on Form 706-GS(T) is 40% or less of the actual value of the property.

Interest will be charged on taxes not paid by their due date, even if an extension of time to file is granted. Interest is also charged on any additions to tax imposed by section 6651 from the due date of the return (including any extensions) until the addition to tax is paid.

Return preparer.   The Small Business and Work Opportunity Act of 2007 extended return preparer penalties to all return preparers. Under 6694 and its regulations, tax return preparers who prepare any return or claim for refund which reflects an understatement of tax liability due to willful or reckless conduct can be penalized $5,000 or 50% of the income earned (or income to be earned), whichever is greater, for the preparation of each return.

Signature

Form 706-GS(T) must be signed by the trustee or by an authorized representative.

If you fill in your own return, leave the Paid Preparer Use Only space blank. If someone prepares your return and does not charge you, that person should not sign the return.

Generally, anyone who is paid to prepare the return must sign the return in the space provided and fill in the Paid Preparer Use Only area. See section 7701(a)(36)(B) for exceptions.

In addition to signing and completing the required information, the paid preparer must give a copy of the completed return to the taxpayer.

Note.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.


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