Generation-Skipping Trust: How to Pass Wealth to Grandchildren

You have worked decades to build your estate. You want your grandchildren to benefit from that effort, not watch it shrink under two rounds of estate taxes as it passes from you to your children and then to them. A generation-skipping trust (GST) is designed to solve exactly that problem.

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.

How Does a Generation-Skipping Trust Work?

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.

Who Should Consider a Generation-Skipping Trust?

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.

Generation-Skipping Trust vs. Other Trust Types

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.

Tax Rules You Need to Know

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.

Common Mistakes to Avoid

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.

How Lawvex Helps California Families Set Up Generation-Skipping Trusts

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.

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.