Can a GST trust be part of a comprehensive estate tax plan

I recently had a client, Randall, who meticulously crafted a codicil to his Revocable Living Trust, intending to fund a GST trust for his grandchildren. He was confident he’d ‘beat the estate tax.’ Unfortunately, the codicil was improperly witnessed – a simple error that cost his estate over $2.3 million in unanticipated taxes and penalties. Randall’s story isn’t unique; it underscores the critical importance of not only having an estate plan, but ensuring its flawless execution and integration with evolving tax laws.

What is a Generation-Skipping Transfer (GST) Trust and Why Consider One?

A GST trust is an irrevocable trust designed to transfer assets to grandchildren (or more remote descendants) without incurring estate or gift tax at each generation. It’s a powerful tool, but it isn’t a standalone solution. Its effectiveness hinges on coordinating it within a broader estate tax plan addressing potential gift tax, estate tax, and even property tax implications. For over 35 years, I’ve helped clients navigate these complexities, leveraging my unique background as both an Estate Planning Attorney and a CPA to provide truly holistic advice.

How Does a GST Trust Fit into a Comprehensive Estate Plan?

The first step is understanding the federal estate tax exemption. Currently, it’s high – but it’s scheduled to revert to a lower amount in 2026 unless Congress acts. A GST trust allows you to utilize your lifetime gift tax exemption (which is unified with the estate tax exemption) to transfer assets out of your estate, shielding them from future estate tax. However, simply creating the trust isn’t enough. You need to actively fund it, and that funding requires careful consideration of the current tax landscape.

For example, under current law, and importantly, 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. This allocation is crucial, and a missed filing can quickly negate the intended benefits.

Property Tax Pitfalls with GST Trusts

Many clients are surprised to learn that a GST trust doesn’t automatically shield assets from property tax reassessment. In California, Prop 19 dramatically changed the rules. 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 create a significant tax burden for the beneficiaries and diminish the overall value of the inheritance.

What Happens if a Property Isn’t Properly Transferred?

Occasionally, clients intend to transfer a property into a GST trust but, for various reasons, it remains in their name at death. Thankfully, we have options. For deaths on or after April 1, 2025, a home intended for the GST trust but left in the settlor’s name (valued up to $750,000) qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). It’s vital to understand the distinction: this is a “Petition” (Judge’s Order), NOT an “Affidavit.” This provides a streamlined process for transferring the asset to the trust without triggering a full probate, but it has specific requirements.

Addressing Business Interests and Digital Assets

GST trusts aren’t just for tangible assets. They can also hold business interests, such as LLCs. However, you must be aware of the Beneficial Ownership Information (BOI) reporting requirements. 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.

And don’t overlook digital assets. 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. This could leave significant assets inaccessible to your beneficiaries.

The 90-Year Rule and Trust Duration

Finally, in California, it’s critical to understand the limits on trust duration. Unlike ‘dynasty friendly’ states like South Dakota, California 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. This is outlined in USRAP (Probate Code § 21205), and failing to address it can lead to the trust terminating prematurely, defeating its purpose.

As a CPA, I always emphasize the importance of maximizing the “step-up in basis” for assets held within the GST trust. This can significantly reduce capital gains taxes when those assets are eventually sold by the beneficiaries. Careful valuation of assets at the time of transfer is also critical to ensure accurate tax reporting.

What determines whether a California trust settlement remains private or erupts into public litigation?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

To ensure the plan actually works, you must move assets correctly using funding and assets, and ensure all players understand their roles by identifying the key participants in trusts to prevent confusion when authority transfers.

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.