Generation-Skipping Trust (GST) California

What Is a Generation-Skipping Trust?

A generation-skipping trust (GST trust) is an irrevocable trust designed to transfer wealth across multiple generations while minimizing estate and gift taxes at each generational level. Instead of leaving assets to your children (who would then leave them to their children, triggering estate tax at each generation), a GST trust holds the assets for the benefit of multiple generations — children, grandchildren, and great-grandchildren — with estate tax potentially imposed only once.

Generation-Skipping Transfer Tax

The generation-skipping transfer (GST) tax is a separate tax imposed on transfers to "skip persons" — individuals who are more than one generation below the transferor (typically grandchildren and more remote descendants). The GST tax rate is 40% — the same as the estate tax rate. Without proper planning, a large inheritance can be subject to both estate tax (at the parent's death) and GST tax (when it passes to grandchildren) — a combined effective rate of up to 64%.

GST Tax Exemption

Each person has a GST tax exemption equal to the estate tax exemption — $13.99 million per person (2025), permanently extended by the OBBBA. Allocating your GST exemption to a trust allows the trust assets to grow and be distributed to grandchildren and great-grandchildren free of GST tax, regardless of how much the assets have grown. KDA works with estate planning attorneys to ensure GST exemption is properly allocated on Form 709.

Dynasty Trusts

A dynasty trust is a long-term GST trust designed to hold assets for multiple generations — potentially in perpetuity. California limits the duration of trusts under the Rule Against Perpetuities, but California allows trusts to last up to 90 years. Some states (Nevada, South Dakota, Delaware) have abolished the Rule Against Perpetuities and allow perpetual trusts. California residents can use these states' trust laws by establishing the trust in those states with a trustee located there.

California GST Considerations

California does not have a separate state GST tax — only the federal GST tax applies. California's 90-year limit on trust duration is a consideration for clients who want to establish very long-term dynasty trusts. KDA works with clients who want to establish out-of-state dynasty trusts to ensure the California income tax implications are properly addressed — California taxes trust income if the trustee or beneficiary is a California resident.

When to Use a GST Trust

A GST trust is most valuable for: (1) Families with estates that significantly exceed the estate tax exemption — the GST trust allows wealth to pass to grandchildren without a second round of estate tax. (2) Families who want to provide for multiple generations while maintaining some control over how assets are used. (3) Families with young children or grandchildren who are not yet ready to manage significant wealth. KDA recommends GST planning for clients with estates over $5 million who want to provide for grandchildren and future generations.