Even though the GST rate for trust distributions to grandchildren in 2010 was 0%, these distributions are required to be reported on a Form 706-GS(D-1) or 706-GS(T). No tax will be due. However, a trustee who fails to file a return will be guilty of a misdemeanor and can be fined up to $25,000 (or $100,000 if it is a corporate trustee) and imprisoned for up to 1 year.

This reporting requirement applies even if the trust was entirely exempt from GST tax due to the allocation of GST exemption. No return needs to be filed for distributions from trusts that are “grandfathered” from GST tax due to having been established prior to 1985.

The only good news is that the deadline to report distributions made on or before December 16, 2010 has been extended until September 19, 2011. Distributions made in the last 2 weeks of December, 2010 must be reported by April 18, 2011.

The bottom line is that the IRS is requiring the filing of hundreds of thousands of tax returns that cannot possibly owe any tax. Furthermore, there is no information reported on the return that can ever lead to the collection of tax in the future. You’ve got to love our government.