Instructions for Form 706-GS(D-1) (1/2007)

Purpose of Form

A trustee uses Form 706-GS(D-1) to report certain distributions from a trust that are subject to the generation- skipping transfer (GST) tax and to provide the skip person distributee with information needed to figure the tax due on the distribution.

Who Must File

In general, the trustee of any trust that makes a taxable distribution must file a Form 706-GS(D-1) for each skip person. See Distributions Subject to GST Tax below for a discussion of what constitutes a taxable distribution. The trustee must file a return for each skip person even if the inclusion ratio applicable to the distribution is zero. See Column d. Inclusion Ratio on
page 4.

When To File

Generally, the trustee must file Copy A of Form 706-GS(D-1) with the IRS and send Copy B to the distributee by April 15th of the year following the calendar year when the distribution was made. If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.

Where To File

The trustee must send Copy A of Form 706-GS(D-1) to the following address:

Internal Revenue Service Center
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(D-1). If you are filing this return for a nonexplicit trust, see Line 2a. Trust's Employer Identification Number on page 3.

Separate trusts. You must treat the following 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.

You must report such separate trusts under different item numbers in column a of line 3, even if they have the same inclusion ratios.

Distributions Subject to GST Tax

In general, all taxable distributions are subject to the GST tax. A taxable distribution is any distribution from a trust to a skip person (other than a taxable termination or a direct skip).

If any GST tax imposed on a distribution is paid out of the trust from which the distribution was made, the amount of tax paid by the trust is also a taxable distribution.

A distribution is not considered a taxable distribution if, had it been made inter vivos by an individual, it would have been a nontaxable gift because of section 2503(e) (relating to transfers made for certain educational or medical expenses).

Also, a distribution (or any portion thereof) is not a taxable distribution to the extent that:

The property distributed was previously subject to GST tax and
The distributee in the prior distribution is assigned to a generation the same as or lower than the distributee in the current distribution.

This rule does not apply if the transfers have the effect of avoiding GST tax for any transfer.

Exceptions

Irrevocable trusts. The GST tax does not apply to any distribution from a trust that was irrevocable on September 25, 1985. Any trust in existence on September 25, 1985, will be considered irrevocable unless:

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 if the settlor had died on September 25, 1985, or
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).

Trusts containing qualified terminable interest property. If an irrevocable trust in existence on September 25, 1985, holds 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), the trust will be 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. To the extent that a distribution from a trust is from an addition to an irrevocable trust made after September 25, 1985, such distribution is subject to the GST tax. Additions include constructive additions described in Regulations section 26.2601-1(b)(1)(v). For purposes of figuring the inclusion ratio (defined on page 4), use only the value of the total additions made to the trust after September 25, 1985.

Distributions from trusts to which additions have been made. As described above, when an addition is made after September 25, 1985, to an irrevocable trust, only the portion of the trust resulting from the addition is subject to the GST tax. For distributions, this portion is the product of the allocation fraction and the value of the property distributed (including accumulated income and appreciation on that property). The allocation fraction is a fraction, the numerator of which is the value of the addition as of the date it was made (regardless of whether it was subject to gift or estate tax). The denominator of the fraction is the fair market value of the entire trust immediately after the addition, less any trust amount that is similar to expenses, indebtedness, or taxes that would be allowable as a deduction under section 2053. When there is more than one addition, the allocation fraction is revised after each addition. The numerator of the revised fraction is the sum of:

The value of the trust subject to the GST tax immediately before the last addition and
The amount of the latest addition.

The denominator of the revised fraction is the total value of the entire trust immediately after the latest addition. If the addition results from a generation-skipping transfer, reduce the numerator and denominator by the amount of any GST tax imposed on the transfer and recovered from the trust. Round off the allocation fraction to five decimal places (for example, “.00001”).

Transition Rule for Revocable Trusts

The GST tax will not apply to any distributions from 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 below, no addition was 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 above) 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 on page 1 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 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.

Addition 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 distributions from the trust will be subject to the GST tax, provided 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 if made to an irrevocable trust. See Regulations section 26.2601-1(b)(2)(vii) for examples demonstrating the operation of these rules.

Transition Rule in Case of Mental Disability

If the settlor was under a 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 details on the application of this rule.

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 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)(4)(ii).

Definitions

Skip persons. For GST tax purposes, skip person means:

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

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:

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.
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.
For this purpose, a relationship by adoption is considered a blood relationship. A relationship by half-blood is considered a relationship by whole blood.
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 the property, each individual who has a beneficial interest in the entity is treated as having an interest in the property. The individual is then assigned to a generation using the rules described above. Governmental entities and certain charitable organizations are assigned to the transferor's generation. Distributions to them 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 is also applied to your 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 ninety days after a transfer occurring by reason of the death of the transferor is treated as having predeceased the transferor. The ninety-day rule applies to transfers occurring on or after July 18, 2005. See Regulations section 26.2651-1 for more information.

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 distributions from the trust involving that property, the settlor 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.

Signature

The trustee, or an authorized representative of the trustee, must sign Form 706-GS(D-1).

If someone prepares your return and does not charge you, that person should not sign the return. Generally, anyone who is paid to prepare your return must sign it in the space indicated.

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