What is a generation skipping trust

As an estate planning attorney and CPA with over 35 years of experience, I’ve seen firsthand how critical it is to get these complex trusts right. I recently had a client, David, who thought he’d cleverly updated his trust with a handwritten codicil… only to discover it was improperly witnessed and invalidated by the court. That meant his grandchildren, the intended beneficiaries, faced a hefty estate tax bill – a cost that could have been entirely avoided with a properly structured generation-skipping trust (GST Trust).

A GST Trust, at its core, is an irrevocable trust designed to transfer assets to grandchildren (or even later generations) while bypassing the estate tax that would normally apply when assets pass from parent to child, then to grandchild. Think of it as a tax-efficient vehicle for long-term wealth preservation. However, it’s far more nuanced than simply naming grandchildren as beneficiaries. The devil, as always, is in the details.

How Does a GST Trust Differ From a Regular Trust?

The fundamental difference lies in the tax treatment. A typical revocable living trust avoids probate, but the assets within it are still subject to estate tax when the original grantor (you) passes away. The beneficiaries—usually your children—then inherit those assets, and their estates are subject to estate tax when they pass away. A GST Trust, if properly structured, removes a generation from this tax equation. By directly transferring assets to grandchildren, you effectively ‘skip’ the estate tax that would otherwise be due at your children’s generation.

What are the Key Requirements for a Valid GST Trust?

Several factors must align to ensure your GST Trust is valid and achieves its intended tax benefits. First and foremost, it must be irrevocable. Once established, you can’t simply change your mind and take the assets back. This is because the tax benefits are predicated on relinquishing control. The trust document also needs specific “skip” language, explicitly stating the intent to bypass assets to grandchildren and later generations. Failing to include this language is a common, costly mistake.

What About the Generation-Skipping Transfer (GST) Tax Exemption?

While a GST Trust bypasses estate tax at multiple generations, it doesn’t eliminate tax entirely. The IRS allows an exemption from the GST tax, which is currently substantial. Effective Jan 1, 2026, the OBBBA (One Big Beautiful Bill Act) permanently set the Federal Generation-Skipping Transfer (GST) Tax Exemption to $15 million per person; failing to allocate this exemption on Form 709 exposes the trust to a flat 40% tax on every distribution to grandchildren. Proper allocation of this exemption is critical, and I strongly recommend working with a CPA familiar with GST Trust tax implications. This is where my combined expertise as both an attorney and a CPA proves invaluable. Understanding the step-up in basis, capital gains implications, and proper valuation of assets transferred into the trust is paramount.

What Happens if the Trust Lasts Too Long? The 90-Year Rule

California, unlike ‘dynasty friendly’ states like South Dakota, is bound by the Uniform Statutory Rule Against Perpetuities (USRAP), which generally limits the trust’s lifespan to 90 years unless specific savings clauses are used. Simply put, the trust can’t exist indefinitely. We routinely incorporate provisions designed to extend the trust’s life as long as legally permissible, but you must be aware of this limitation.

What About Property Tax Implications?

Transferring assets like real estate into a GST Trust can have unforeseen property tax consequences. Under Prop 19, transferring a home to grandchildren via a GST Trust almost always triggers a property tax reassessment to current market value, as the ‘grandparent-grandchild’ exclusion is severely restricted compared to the old Prop 58 rules. This can significantly erode the benefits of the GST Trust, so we carefully analyze the property tax implications before making any recommendations.

What if Assets are Left Outside the Trust? The AB 2016 Solution

Sometimes, despite our best efforts, an asset intended for the GST Trust might be inadvertently left in the settlor’s name. For deaths on or after April 1, 2025, a home valued up to $750,000 qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). CRITICAL DISTINCTION: This is a “Petition” (Judge’s Order), NOT an “Affidavit.” While the Small Estate Affidavit provides a faster path for very small estates, AB 2016 allows for a court-supervised transfer of the property into the GST Trust even after death.

What About Business Interests and Digital Assets?

Don’t overlook the complexities of business interests held within the GST Trust. While domestic U.S. LLCs held in the trust are exempt from BOI reporting as of March 2025, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days to avoid federal fines. Furthermore, without specific RUFADAA language (Probate Code § 870) in the GST Trust, service providers can legally block your trustee from accessing crypto wallets or cloud accounts intended for future generations.

How do California trustee duties and funding rules shape the outcome for beneficiaries?

Success in trust administration depends on more than just the document; it requires active management of assets, precise accounting to beneficiaries, and careful navigation of tax rules. Whether dealing with a blended family or complex real estate, understanding the mechanics of trust law is the only way to ensure the grantor’s wishes survive scrutiny.

California trust planning is most effective when the structure is matched to the specific family goal and assets are fully funded into the trust name. When administration is handled with transparency and adherence to the Probate Code, the trust can fulfill its promise of privacy and efficiency.

Verified Authority on California Generation-Skipping Trust (GST) Administration

• GST Tax Exemption (OBBBA): IRS Estate & GST Tax Guidelines
  Reflects the OBBBA update effective January 1, 2026, which sets the GST Tax Exemption at $15 million per person. Proper allocation of this exemption is the only way to shield trust assets from the flat 40% tax on distributions to grandchildren.
• Trust Duration Limits (USRAP): California Probate Code § 21205 (90-Year Rule)
  California follows the Uniform Statutory Rule Against Perpetuities. This statute generally limits a Generation-Skipping Trust’s validity to 90 years, preventing “forever” trusts common in other jurisdictions.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Critical for GST planning. Prop 19 severely limits the “grandparent-grandchild” exclusion, meaning most real estate transfers to grandchildren will trigger a property tax increase to current market value.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  If a home intended for the GST trust was accidentally left out, this statute (effective April 1, 2025) allows a “Petition for Succession” for residences valued up to $750,000, avoiding a full probate.
• Digital Legacy (RUFADAA): California Probate Code § 870 (RUFADAA)
  The authoritative statute for digital assets. Without specific RUFADAA provisions in the trust, multi-generational access to cryptocurrency and digital files can be legally denied by custodians.
• Business Compliance (FinCEN): FinCEN – Beneficial Ownership Information (BOI)
  As of March 2025, domestic U.S. LLCs are exempt from mandatory BOI reporting. However, trustees managing foreign-registered entities must still comply with strict reporting windows to avoid penalties of $500/day.