3 Smart Generation-Skipping Trust Strategies

You’ve worked for decades to build your estate. You want your grandchildren to benefit from that effort, not watch it shrink under two rounds of estate taxes. A generation-skipping trust (GST) is designed to solve exactly that problem. But it’s not a one-size-fits-all solution. Using the right generation skipping trust strategies is crucial, especially with major changes to the generation skipping transfer tax benefits looming after 2025. This guide details how a GST, or even a long-term dynasty trust, can secure your family’s financial future before this opportunity disappears.

Contact Lawvex today to schedule a strategy session and learn how a generation-skipping trust fits into your California estate plan.

California families with estates above the federal exemption threshold face a real risk: the same assets could be taxed at up to 40% when you pass them to your children, and again at up to 40% when your children pass them to your grandchildren. A well-structured generation-skipping trust removes that second tax event, keeping more of your wealth intact for future generations.

This guide walks through how generation-skipping trusts work, who should consider one, and what California-specific rules you need to know before setting one up.

What Is a Generation-Skipping Trust?

A generation-skipping trust is an irrevocable trust that transfers assets directly to beneficiaries who are at least two generations below the grantor, most commonly grandchildren. The trust “skips” the grantor’s children for estate tax purposes, though the children can still receive income or limited benefits from the trust during their lifetimes.

The key advantage is tax efficiency. Without a GST, your assets would be subject to estate tax when they pass to your children, and then subject to estate tax again when your children pass those same assets to your grandchildren. A generation-skipping trust removes one entire layer of taxation from the transfer.

Congress recognized this strategy and created the generation-skipping transfer tax (GSTT) to close the loophole. However, the federal government provides a generous exemption. In 2025, each individual can transfer up to $13.99 million free of the GSTT. Married couples can combine their exemptions to shelter up to $27.98 million.

For California families, this matters because the state does not impose its own generation-skipping transfer tax. Your planning only needs to account for the federal GSTT, which simplifies the structure compared to states that layer on additional transfer taxes.

Defining a “Skip Person”

So, what exactly makes someone a “skip person” in the eyes of the law? A skip person is a beneficiary who is at least two generations younger than you. The most common example is a grandchild, but it could also be a grandniece or grandnephew. This distinction is the cornerstone of how a generation-skipping trust works and why it’s so powerful. When you transfer assets to a skip person, whether during your lifetime or after your passing, special tax rules come into play. It’s not just about who gets your property, but also about how much of it is preserved after taxes are paid.

Any assets you give to a skip person above the federal exemption amount can be hit with two separate taxes. First, there’s the standard gift or estate tax. On top of that, the IRS imposes the Generation-Skipping Transfer Tax (GSTT), which is a flat 40%. This additional tax is specifically designed to prevent families from avoiding estate taxes for a full generation. Understanding this concept is the first step in creating an estate plan that effectively protects your legacy for your grandchildren and beyond, ensuring your hard-earned wealth supports them as you intended.

How a Generation-Skipping Trust Protects Your Legacy

Setting up a generation-skipping trust involves several moving parts. Here is how the process typically unfolds:

1. Choose the trust structure: You work with an estate planning attorney to create an irrevocable trust with generation-skipping provisions. The trust document names your grandchildren (or other skip persons) as the ultimate beneficiaries.
2. Fund the trust: You transfer assets into the trust. This can include cash, investments, real estate, or business interests. Once assets are in the trust, you no longer own them for estate tax purposes.
3. Allocate your GST exemption: Your estate planning attorney files IRS Form 709 (the gift tax return) to allocate your generation-skipping transfer tax exemption to the trust. Proper allocation is critical because it determines whether distributions from the trust will trigger the 40% GSTT.
4. Name a trustee: The trustee manages the trust assets according to the terms you set. This can be a family member, a professional trustee, or a combination of both.
5. Define distribution terms: You specify when and how beneficiaries receive distributions. Common approaches include distributions for health, education, maintenance, and support (known as HEMS distributions), or distributions at specific ages or milestones.

During your children’s lifetimes, the trust can provide income distributions or principal distributions for specific needs while keeping the underlying assets protected from their creditors, divorce proceedings, and estate taxes. When your children pass away, the remaining trust assets transfer to your grandchildren without being included in your children’s taxable estates.

Protecting Future Asset Growth from Taxes

A generation-skipping trust is a powerful tool designed to let you transfer wealth to younger generations, like your grandchildren, while sidestepping a layer of estate taxes. The primary objective is to avoid the double hit of taxes that can occur when assets first pass to your children and then again to your grandchildren. By using a GST, you ensure more of your hard-earned assets stay within the family. With strategic planning, you can significantly reduce or even eliminate the Generation-Skipping Transfer Tax (GSTT) by making sure to properly use your exemptions. This includes your lifetime GST exemption, a substantial amount that can shelter your legacy from a hefty 40% tax rate.

One of the most significant advantages of funding a GST is that not only are the initial assets you transfer protected, but all future appreciation on those assets is also shielded from the GSTT. For example, if you place $5 million of stock into a GST and it grows to $15 million over the next few decades, that entire $15 million can pass to your grandchildren without being subject to the GSTT. This makes the trust an incredible vehicle for preserving generational wealth, especially for assets expected to grow significantly over time. Proper estate planning ensures your exemption is allocated correctly to capture this future growth for your family.

Ensuring Privacy for Your Family’s Affairs

Beyond the significant tax advantages, a generation-skipping trust offers a crucial, non-financial benefit: privacy. When an estate passes through a will, it must go through the probate process, which is a public court proceeding. This means your will, a list of your assets, and the identities of your beneficiaries become public record. A trust, on the other hand, is a private agreement. The details of the trust, including its assets and distribution terms, are kept confidential. This privacy shields your family from the prying eyes of the public, opportunistic solicitors, and potential contests from disgruntled relatives in Clovis, Madera, or Solvang.

Keeping your family’s financial affairs private is a cornerstone of sound legacy planning. By using a trust, you control the narrative and protect your loved ones from unwanted attention during a difficult time. The administration of the trust happens outside of the court system, managed by the trustee you appointed. This streamlined process is not only more efficient than public probate but also maintains the dignity and confidentiality your family deserves. It ensures that the transfer of your wealth is a private family matter, just as you intended, allowing your beneficiaries to receive their inheritance without public disclosure or interference.

Is a Generation-Skipping Trust Right for Your Family?

Generation-skipping trusts are not just for the ultra-wealthy. Several types of California families benefit from this planning strategy:

• Families with estates approaching or exceeding the federal exemption: If your combined estate is worth more than $13.99 million (single) or $27.98 million (married), the GSTT exemption becomes a valuable planning tool. Even families below these thresholds may benefit because of potential future changes to exemption amounts.
• Grandparents who want to protect assets from their children’s creditors: Because assets in a generation-skipping trust are not owned by your children, those assets are generally protected from lawsuits, divorces, and other claims against your children.
• Families with blended family dynamics: If your children have remarried, a GST can help ensure that your wealth reaches your biological grandchildren rather than being redirected through a new spouse’s estate plan.
• Business owners with succession plans: Transferring business interests through a generation-skipping trust can keep a family business intact across multiple generations without repeated estate tax hits.
• Families concerned about the 2026 exemption sunset: The current elevated federal exemption is scheduled to drop to roughly half its current level after 2025, though Congress has signaled potential extensions. Families who want to lock in the higher exemption may benefit from acting now. For the latest on these changes, see our guide on the 2026 estate tax exemption.

Schedule a strategy session with Lawvex to find out if a generation-skipping trust makes sense for your family’s situation.

Potential Downsides and Risks to Consider

While a generation-skipping trust is a powerful tool for preserving wealth, it’s not the right fit for every family. Like any significant financial decision, it comes with trade-offs that you need to weigh carefully. Understanding the potential downsides is just as important as knowing the benefits, as it ensures you’re making a fully informed choice for your family’s future. These risks aren’t necessarily deal-breakers, but they do highlight the need for thoughtful and strategic planning from the very beginning. A well-crafted plan anticipates these challenges and builds in solutions from the start.

The main considerations revolve around the trust’s inflexibility, its potential impact on family relationships, and the complexities of ever-changing tax laws. Each of these factors requires a forward-thinking approach. For many families in Central California, from Clovis to Madera and Solvang, the key is working with an experienced team to structure a trust that aligns with both your financial goals and your family values. A comprehensive estate plan should address these issues head-on, ensuring your legacy is protected without creating unintended consequences for the people you love.

The Irrevocable Nature of a GST

One of the most significant aspects of a generation-skipping trust is that it is typically irrevocable. In simple terms, this means that once you create the trust and transfer assets into it, you generally cannot change your mind or easily alter its terms. This permanence is what allows the assets to be removed from your taxable estate, providing the core tax benefit. However, it also means you are giving up control. Life is unpredictable—family circumstances change, relationships evolve, and financial needs shift. An irrevocable trust doesn’t easily adapt to these changes, making it a serious commitment that shouldn’t be entered into lightly.

The Potential for Family Conflict

Money and family can be a complicated mix, and the structure of a GST can sometimes add to that complexity. The very name “generation-skipping” can create friction. Your children might feel overlooked or mistrusted when they learn that a significant portion of your wealth is being directed to their own children instead of to them. Even if your intentions are purely to maximize tax savings for the entire family, it can be perceived as a lack of faith in your children’s financial judgment. Open communication is essential. Explaining the “why” behind your decision can help manage expectations and prevent hurt feelings from damaging family harmony.

Navigating Changing Tax Laws Over Time

A generation-skipping trust is a long-term strategy, often designed to last for decades. Over that time, tax laws are almost certain to change. The federal estate and GSTT exemption amounts have fluctuated significantly over the years, and what seems like a perfect plan today might be less effective under future legislation. This is not a “set it and forget it” document. It’s crucial to work with legal and tax experts who can not only set the trust up correctly but also help you manage it over the long haul. Building in flexibility where possible and conducting regular reviews with your attorney will ensure your trust continues to meet its goals as the legal landscape evolves.

Choosing the Right Trust: GST vs. Other Options

Feature	Generation-Skipping Trust	Revocable Living Trust	Irrevocable Life Insurance Trust (ILIT)
Can be changed after creation	No	Yes	No
Avoids probate	Yes	Yes	Yes
Reduces estate taxes	Yes (skips a generation of tax)	No	Yes (removes life insurance from estate)
Asset protection from creditors	Yes	No	Yes
Primary beneficiaries	Grandchildren or later generations	Spouse, children, or any named beneficiary	Life insurance beneficiaries
Best for	Multi-generational wealth transfer	General estate management and probate avoidance	Keeping life insurance proceeds out of taxable estate

A generation-skipping trust is often used alongside other trust types rather than as a replacement. For example, you might have a revocable living trust for your primary estate plan and add a generation-skipping trust specifically for assets you want to pass to grandchildren. Similarly, an irrevocable life insurance trust might fund the generation-skipping trust with insurance proceeds.

Understanding Dynasty Trusts

Think of a dynasty trust as a generation-skipping trust built for the long haul. While a standard GST is designed to pass wealth to your grandchildren, a dynasty trust is structured to preserve that wealth for many generations to come—great-grandchildren and beyond. The core idea is to create a lasting legacy, allowing the assets inside the trust to grow and be distributed over an extended period without being eroded by estate taxes at each generational transfer. This makes it a powerful tool for families who want to ensure their financial foundation supports their descendants for centuries, not just decades. It’s a way to lock in your family’s security and provide opportunities for future generations you may never even meet.

State Law Limitations on Trust Duration

The effectiveness of a dynasty trust hinges on one critical factor: how long your state allows a trust to exist. This is governed by a legal concept called the “rule against perpetuities,” and every state has its own version. Some states have abolished the rule, allowing trusts to last indefinitely. In contrast, others impose strict limits. For families here in Central California, from Clovis and Madera down to Solvang, it’s important to know that California law generally limits a trust’s lifespan to 90 years. While a dynasty trust is still a valuable tool here, it won’t last forever. This makes strategic conversations about jurisdiction a key part of advanced estate planning, as setting up your trust in a state with more favorable laws can dramatically extend its benefits.

Understanding the Tax Rules and Benefits of a GST

The generation-skipping transfer tax is separate from the federal estate tax and the federal gift tax. All three can apply to the same transfer if you are not careful with your planning. Here are the key tax rules:

The GSTT rate: The current rate is a flat 40%, the same as the top estate tax rate. This tax applies on top of any estate or gift tax, making improper planning potentially devastating.

The GSTT exemption: For 2025, each person has a $13.99 million exemption. Married couples can use portability and allocation strategies to apply up to $27.98 million in combined exemptions. This exemption is separate from your estate and gift tax exemption, though the amounts are currently the same.

Three types of generation-skipping transfers:

• Direct skip: A transfer directly to a skip person (someone two or more generations below you). The GSTT is due at the time of the transfer.
• Taxable distribution: A distribution from a trust to a skip person. The beneficiary is responsible for paying the GSTT.
• Taxable termination: When the trust ends and all remaining assets pass to skip persons. The trustee pays the GSTT from trust assets.

Allocation is everything: The single most important step in generation-skipping trust planning is properly allocating your GSTT exemption. If your attorney fails to file Form 709 correctly, the trust could face the full 40% tax on every distribution. At Lawvex, we build GST exemption allocation into every generation-skipping trust plan we create.

California does not have a state-level GSTT: Unlike some states that impose additional transfer taxes, California does not have its own generation-skipping transfer tax. This is a meaningful advantage for California residents structuring multi-generational wealth transfers.

How the Generation-Skipping Transfer Tax (GSTT) Is Applied

The Generation-Skipping Transfer Tax (GSTT) is a federal tax that applies on top of estate and gift taxes, which is why careful planning is so important. The rate is a steep 40%, but there’s a significant exemption you can use. For 2025, each person can shield up to $13.99 million from this tax, and married couples can combine their exemptions for nearly $28 million. The tax is triggered by three types of transfers: a direct gift to a grandchild (a direct skip), a distribution from the trust to a grandchild (a taxable distribution), or the final payout of the trust to grandchildren (a taxable termination). Properly allocating your GSTT exemption is the key to ensuring these transfers happen tax-free. This is a critical step in any comprehensive estate planning, and thankfully for California residents, there is no additional state-level GSTT to worry about.

Income Tax Considerations for the Trust Itself

Beyond the GSTT, the trust itself has its own income tax obligations. Think of the trust as its own taxpayer. Any income it generates from assets—like dividends or interest—is subject to taxation. It’s important to know that trusts hit the highest federal income tax bracket much faster than individuals do, which can impact the trust’s growth if not managed well. When the trustee makes distributions to beneficiaries, that income is typically taxed to the beneficiary instead of the trust. This structure allows your children to receive support during their lifetimes while the bulk of the trust’s assets remain protected and continue to grow for your grandchildren. The management of these tax filings and distributions is a key part of ongoing trust administration.

Avoid These Common Generation-Skipping Trust Mistakes

Generation-skipping trusts involve complex tax rules, and errors can be expensive. Here are the most common mistakes families make:

• Failing to allocate the GSTT exemption on time: The exemption must be allocated on a timely filed gift tax return (Form 709). Late allocations are possible but use the exemption amount from the year of allocation, not the year of the original transfer. If exemption amounts decrease, a late allocation could cost your family millions.
• Not coordinating with your overall estate plan: A generation-skipping trust should work in concert with your broader estate plan, including your revocable trust, powers of attorney, and beneficiary designations. Isolated planning creates gaps.
• Choosing the wrong trustee: The trustee of a generation-skipping trust has significant power and responsibility. A family member without financial experience may struggle with investment management and tax compliance. A professional trustee adds cost but brings expertise.
• Ignoring the trust after creation: Generation-skipping trusts require ongoing trust administration, including annual tax filings (Form 1041), investment management, and distribution decisions. Neglecting these duties can erode the trust’s value and create legal liability for the trustee.
• Overfunding the trust: Transferring more than your available GSTT exemption into the trust exposes the excess to the 40% tax. Careful calculation is needed, especially when asset values fluctuate.

Talk to the Lawvex team about structuring your generation-skipping trust correctly from the start.

Not Preparing Beneficiaries for Their Inheritance

It’s easy to get so wrapped up in the legal and financial details of a trust that you forget about the people it’s meant to benefit. A sudden inheritance can be overwhelming, especially for younger family members who haven’t managed significant wealth before. Without some preparation, beneficiaries can feel lost and unready for the responsibilities that come with their inheritance, even with a trustee guiding the process. That’s why a crucial part of your plan should involve preparing your heirs. This means having open conversations about financial literacy, the purpose of the trust, and your family’s values. Equipping them with knowledge is just as important as leaving them the assets. We encourage families to use our educational workshops as a starting point for these important discussions.

Expert Generation-Skipping Trust Strategies for California Families

Lawvex has created over 6,400 estate plans for California families since 2009. Our team focuses exclusively on estate planning, trust administration, and probate, which means generation-skipping trust planning is part of our daily work, not a once-a-year specialty.

Here is what you can expect when you work with our team:

• Fixed-fee pricing: You will know the cost upfront. No hourly billing, no surprise invoices, no “meter running” during your planning sessions.
• California-specific guidance: Our attorneys understand California community property rules, state tax implications, and how generation-skipping trusts interact with California’s probate system.
• Virtual convenience: We handle most of the planning process through video conference. You meet with your attorney from home, review drafts online, and only visit our office for the final signing.
• Ongoing support: After your trust is created, our team is available for updates, amendments, and trust administration guidance as your family’s needs evolve.

Whether your estate is worth $1 million or $10 million, we will help you determine if a generation-skipping trust belongs in your plan and coordinate it with your existing estate planning documents.

Using Your Annual Gift Tax Exclusion

One of the most practical ways to fund a generation-skipping trust is by using your annual gift tax exclusion. Each year, you can give a certain amount of money to any number of individuals without having to pay gift tax or dip into your lifetime exemption. For 2024, that amount is $18,000 per person, meaning a married couple can jointly give $36,000 to each recipient. Instead of gifting directly to your grandchildren, you can make these annual gifts to the GST set up for their benefit. This strategy allows you to systematically build the trust’s value over many years, creating a substantial legacy fund without ever touching your primary GSTT exemption. It’s a patient, powerful approach to multi-generational estate planning that builds wealth incrementally and tax-efficiently.

Funding the Trust with a Life Insurance Policy

Using a life insurance policy to fund a generation-skipping trust is a sophisticated strategy that can create significant, tax-advantaged wealth for your grandchildren. The concept is straightforward: you establish an irrevocable trust, often an Irrevocable Life Insurance Trust (ILIT) with GST provisions, which then purchases a life insurance policy on your life. You make annual gifts to the trust to cover the premium payments. Upon your death, the policy’s death benefit—which is typically income-tax-free—is paid directly to the trust. Because the trust owned the policy, the proceeds are not part of your taxable estate. This allows you to turn relatively small premium payments into a large, liquid asset that can support your grandchildren for decades, all while bypassing estate taxes for two generations.

Leveraging 529 College Savings Plans

While not a trust, a 529 college savings plan offers a related way to provide for your grandchildren’s future without triggering the GSTT. These tax-advantaged accounts are designed specifically for education expenses. A unique rule allows you to “superfund” a 529 plan by contributing five years’ worth of annual gift exclusions at once. For 2024, this means an individual could contribute up to $90,000 ($18,000 x 5), and a married couple could contribute up to $180,000 per grandchild in a single year, all without gift or GST tax implications. This is an incredibly effective tool if your primary goal is to ensure your grandchildren’s educational needs are met. It’s a focused strategy that can work alongside a broader trust administration plan for other assets.

Breaking Down the Costs of a Generation-Skipping Trust

A generation-skipping trust is a powerful tool, but it’s also a sophisticated legal instrument. Understanding the associated costs from the outset helps you plan effectively and ensures there are no surprises down the road. The expenses generally fall into three categories: initial setup fees, ongoing administrative costs, and fees for managing the trust’s assets. Thinking through these costs is a key part of building a sustainable plan to protect your family’s wealth for the long haul, ensuring your legacy supports your loved ones exactly as you envision.

Attorney’s Fees for Drafting and Setup

The first cost you’ll encounter is the attorney’s fee for designing and drafting the trust document. Because generation-skipping trusts involve complex tax laws and require precise language to be effective, they are more intricate to create than a standard revocable trust. Many law firms bill for this work by the hour, which can create uncertainty about the final cost. At Lawvex, we do things differently. We believe in complete transparency, which is why we use a value-based, fixed-fee model for all our estate plans. You’ll receive a clear, upfront quote for the entire process, so you can move forward with confidence, knowing exactly what your investment will be.

Ongoing Trustee and Administrative Fees

Once your trust is established and funded, it needs to be managed. This is the job of the trustee you appoint. If you name a professional trustee, like a bank or trust company, they will charge an annual fee, typically calculated as a small percentage of the total assets held in the trust. This fee compensates them for handling distributions, filing tax returns, and managing the trust’s day-to-day operations. If you name a family member, they are also entitled to reasonable compensation for their work. These ongoing duties are why having access to professional trust administration guidance is so important for ensuring the trust runs smoothly for decades to come, a service we provide to families across Central California, including in Clovis, Madera, and Solvang.

Asset Management Fees

Separate from the trustee’s fee are the costs associated with managing the trust’s investments. If your trust holds assets like stocks, bonds, or income-producing real estate, the trustee will likely hire a financial advisor or investment manager to oversee them. These professionals also charge a fee, usually a percentage of the assets they manage. While this is an additional expense, their goal is to protect and grow the trust’s principal, ensuring the funds can support your grandchildren and future generations as you intended. This active management is crucial for preserving the purchasing power of your legacy against inflation and market changes over time.

Frequently Asked Questions

What is the generation-skipping transfer tax exemption for 2025?

The federal generation-skipping transfer tax exemption for 2025 is $13.99 million per individual. Married couples can combine their exemptions for a total of $27.98 million. This exemption is indexed for inflation and adjusts annually.

Can my children still benefit from a generation-skipping trust?

Yes. A generation-skipping trust can be structured to provide income distributions, principal distributions for health and education expenses, and other benefits to your children during their lifetimes. The “skipping” refers to estate tax treatment, not access. Your children can benefit from the trust without the assets being included in their taxable estates.

Is a generation-skipping trust revocable or irrevocable?

A generation-skipping trust is irrevocable. Once you transfer assets into the trust, you cannot take them back or change the trust terms. This irrevocability is what provides the estate tax and asset protection benefits. Learn more about the differences in our revocable vs. irrevocable trust guide.

What happens to the generation-skipping trust exemption in 2026?

The Tax Cuts and Jobs Act of 2017 doubled the federal exemption amount. Without further legislation, the exemption is scheduled to revert to roughly half its current level after December 31, 2025. Congress has discussed extending the current levels. For the latest information, read our article on the 2026 estate tax exemption changes.

Does California have a generation-skipping transfer tax?

No. California does not impose a state-level generation-skipping transfer tax. California residents only need to plan for the federal GSTT, which simplifies the process compared to states with their own transfer taxes.

How much does it cost to set up a generation-skipping trust?

The cost depends on the complexity of your estate and the trust structure. Lawvex uses fixed-fee pricing so you know the total cost before you begin. For a general overview of trust costs, see our guide on how much it costs to set up a trust.

What is the “5 by 5 rule” for trusts?

The “5 by 5 rule” is a specific clause that can be written into an irrevocable trust, including a generation-skipping trust. It gives a beneficiary the power to withdraw a certain amount of money each year—specifically, the greater of $5,000 or 5% of the trust’s total value. This provision offers a degree of flexibility, allowing a beneficiary to access funds without needing the trustee’s approval for that specific amount. If the beneficiary doesn’t use this withdrawal right in a given year, it simply lapses without causing gift tax problems. While it’s a great tool for providing beneficiaries with some liquidity, it’s important for the person creating the trust to know that it gives the beneficiary a clear right to pull money out annually, which could affect the long-term growth of the trust assets. Careful trust administration is key to managing these types of provisions correctly.

Key Takeaways

• Maximize Your Legacy with Tax Savings: A generation-skipping trust allows you to pass assets to your grandchildren while bypassing a full layer of estate taxes. This strategy preserves more of your wealth for future generations while still letting you provide for your children’s needs from the trust.
• Lock In the Current High Exemption: The generous federal tax exemption for generation-skipping transfers is scheduled to be cut in half after 2025. Establishing a trust now allows you to take advantage of the current rules and shelter a larger portion of your assets from future taxes.
• Avoid Costly and Irrevocable Mistakes: A generation-skipping trust is permanent and has complex tax rules. Simple errors, like failing to properly allocate your tax exemption, can have expensive consequences, making professional guidance essential for getting it right from the start.

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