Generation-Skipping Trust in California: How It Works

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Estate size this page covers: anyone giving to grandchildren or to a trust that will continue after your children die. The GST tax itself matters for estates over $15 million for a single person or $30 million for a married couple, and for any trust that wasn’t given enough exemption. This page covers the tax mechanics. For the planning side, including how long a trust can last and how California taxes a trust’s income, see my dynasty trust guide. If you’re asking whether you can leave things to grandchildren in the first place, the answer is yes, and the family-law side is in Can I skip my children and leave assets to my grandchildren? If you’re a trustee or beneficiary of an existing trust, see generation-skipping trust administration instead.

What the tax costs when no exemption is allocated

A transfer that skips a generation can draw the full 40 percent GST tax if no exemption covers it. Exemption allocated to the transfer lowers the inclusion ratio, and with it the rate. The rate is the top federal estate tax rate, 40 percent (the top bracket in § 2001(c), which applies on amounts over $1,000,000), multiplied by the transfer’s inclusion ratio (§ 2641).

Covering the whole transfer with exemption takes the tax to zero, and allocating nothing leaves the full 40 percent in place. The inclusion ratio is one minus the “applicable fraction,” which is the exemption allocated to the trust divided by the value transferred (§ 2642(a)).

Invented numbers show how far apart the results land, depending on how much exemption stands behind each transfer. They assume 2026 law and no earlier use of exemption, and they ignore gift tax, which is a separate calculation.

Scenario	Transfer	Exemption allocated	Inclusion ratio	Applicable rate	GST tax
A. Dana funds a GST trust	$5,000,000	$5,000,000	0	0%	$0
B. Lee gives a grandchild $20,000,000 outright	$20,000,000	$15,000,000	0.25	10%	$2,000,000
C. A trust with no exemption allocated makes a distribution to a grandchild	$1,000,000	$0	1	40%	about $400,000

Dana pays nothing in scenario A because she allocates the full $5,000,000 to her trust. That one allocation keeps all of the trust’s later growth outside the GST tax: at 5 percent a year for 40 years it grows to about $35,200,000, and Dana still has $10,000,000 of exemption left.

Lee pays $2,000,000 in scenario B because the exemption shelters only three quarters of his $20,000,000 outright gift. The $15,000,000 exemption covers three quarters of the gift, so the applicable fraction is 0.75, the inclusion ratio is 0.25, and the rate is 0.25 times 40 percent, which is 10 percent of $20,000,000.

The trust in scenario C owes about $400,000 on a $1,000,000 distribution to a grandchild because nothing was ever allocated to it, so the full 40 percent rate applies. The exact tax depends on who pays it and how the taxable amount is figured, so treat $400,000 as the order of magnitude.

Which transfers the tax reaches, and who pays it

A generation-skipping trust lets you hold wealth for people two or more generations below you, usually grandchildren, without it being taxed again when your children die. Congress created the GST tax so wealthy families couldn’t avoid one layer of estate tax by passing property straight to grandchildren (IRC § 2601). You fund the trust with a lifetime gift, a bequest in your living trust, or both, and a trustee manages the assets and makes distributions under rules you write. Your children can be beneficiaries too, and often are. Because the trust, not your child, owns the assets, they aren’t part of your child’s estate at death, and if exemption fully shelters the trust, later distributions to grandchildren carry no GST tax. The funding transfer is also a gift or estate tax event, so the gift tax rules still apply on top of the GST rules. See gift tax in 2026.

Your grandchildren are skip persons, so the GST tax can reach a transfer to them. A trust is a skip person too when every interest in it is held by skip persons (§ 2613). A skip person is a natural person two or more generations below the transferor, and your children are non-skip persons. Generations are counted by family line under § 2651. A spouse is placed in the same generation as the person they married, and someone with no family tie to you is placed by age difference under § 2651(d).

A generation-skipping transfer is a direct skip, a taxable termination or a taxable distribution, and which one it is decides who owes the tax. Section 2611 defines a generation-skipping transfer, and § 2612 defines each of those events.

Event	What it means
Direct skip	A transfer, already subject to estate or gift tax, straight to a skip person. A gift to a grandchild is the usual case.
Taxable termination	A trust interest ends (by death, lapse of time, release of a power, or otherwise) and afterward only skip persons hold interests. Your child’s death ending the child’s interest is the usual case.
Taxable distribution	Any distribution from a trust to a skip person that isn’t a direct skip or a taxable termination.

Who pays depends on the event, and unless the trust instrument says otherwise by specific reference to the GST tax, the tax is charged to the property being transferred (§ 2603(b)). The person receiving a taxable distribution pays, the trustee pays on a taxable termination or on a direct skip from a trust, and the transferor pays on any other direct skip (IRC § 2603(a)). On a taxable termination, the taxable amount is the value of all the property the termination covers, less deductions similar to estate administration expenses (IRC § 2622(a)).

Tuition you pay directly to a school and medical bills you pay directly to a provider on someone’s behalf carry no GST tax, because they’re excluded from gift treatment under § 2503(e) and carried through by § 2611(b).

A bequest from you to a grandchild whose parent has died falls outside the GST tax, because that grandchild moves up a generation. Under § 2651(e), a descendant whose parent (your child) is dead when the transfer is first subject to estate or gift tax is treated as one generation below you (or below the youngest living ancestor in that line, if that generation is lower). That makes the grandchild a non-skip person for that transfer. The rule applies to your descendants and, with a limit, to collateral heirs when you have no living lineal descendant.

Setting the inclusion ratio: how the exemption gets allocated

The exemption you allocate is what moves a trust from scenario C to scenario A, and in 2026 you have $15,000,000 of it. Every individual has an exemption that can be allocated to property the person transfers (§ 2631), and each allocation is a decision to make deliberately because it’s irrevocable once made (IRC § 2631(b)). Section 2631(c) ties the amount to the basic exclusion amount in § 2010(c), and § 2010(c)(3) sets that amount at $15,000,000, adjusted for inflation for deaths after 2026. The IRS confirms the 2026 figure on its What’s New: Estate and Gift Tax page. Each spouse has a separate exemption, so a married couple can shelter up to $30,000,000 if both use theirs. For the estate tax side of this number, see estate tax planning in 2026.

You can allocate until the estate tax return is due, and two automatic rules help

You can allocate any time up to the date your estate tax return is due, whether or not a return is required (§ 2632(a)), but a later allocation costs more exemption than a timely one, as the example below shows.

• Direct skips: unused exemption is automatically allocated to the extent needed to make the inclusion ratio zero (§ 2632(b)). You can elect out.
• Indirect skips to a “GST trust”: the same automatic allocation applies (§ 2632(c)). You can elect out of it, or elect to treat a trust as a GST trust.

Automatic allocation is why a gift tax return (Form 709) matters even when no gift tax is due. The IRS instructions for Form 709 tell filers that exemption may be automatically allocated to a gift to a GST trust.

Where automatic allocation misfires

Automatic allocation only protects a gift to a “GST trust,” and a trust for your children that gives each child a large share at 35 isn’t one. Gifts to it get no automatic allocation, so you have to allocate on Form 709 or the trust’s inclusion ratio stays at one. The statute lists the trusts that don’t qualify, among them a trust that must pay, or lets a non-skip person withdraw, more than 25 percent of the corpus before that person turns 46; a trust any part of which would be in a non-skip person’s estate if that person died right after the transfer; and charitable lead annuity trusts and charitable remainder trusts (IRC § 2632(c)(3)(B)). You can also elect out of automatic allocation, or elect to treat a trust as a GST trust, on a timely gift tax return (§ 2632(c)(5)).

A late allocation costs more exemption for the same trust

Timing changes what the exemption covers. A timely allocation locks in the gift-date value, while a late one is measured against whatever the trust has grown to. A late allocation takes more exemption to cover the same trust, because it uses the trust’s value on the date it’s filed and takes effect on that date (§ 2642(b)(3)), where an allocation on a return filed by its due date uses the gift’s value as finally determined for gift tax and takes effect on the date of the gift (IRC § 2642(b)(1)). The regulations let you elect to value a late allocation as of the first day of the month in which you make it (Treas. Reg. § 26.2642-2(a)(2)). A late allocation is made on a “Notice of Allocation” attached to Form 709, which identifies the trust, the year the gift was reported, the trust’s value at the allocation’s effective date, the amount allocated and the resulting inclusion ratio (Instructions for Form 709).

In this hypothetical, a parent gives $5,000,000 in 2026 to a trust for her two children, ages 25 and 27, and their descendants, and the trust isn’t a GST trust, so it gets no automatic allocation. It must pay each child 30 percent of that child’s share at age 40 and holds the rest for grandchildren, and because more than 25 percent must be paid to non-skip persons before age 46, it falls outside the definition (IRC § 2632(c)(3)(B)(i)). The trust grows 6 percent a year and pays nothing out before the older child turns 40 in 2039. If she allocates on her timely 2026 Form 709, $5,000,000 of exemption makes it fully exempt. If her advisers catch the problem four or ten years later, the late allocation has to cover the trust’s value on the filing date (IRC § 2642(b)(3)).

The late allocations still work. They use $1,312,385 or $3,954,238 more of her $15,000,000 exemption than a timely one would have, and that is exemption her other heirs can’t use. If no one ever allocates, the trust’s inclusion ratio stays at one, and every later distribution to a grandchild, and the final termination when the children’s interests end, carries the full 40 percent rate.

Keeping an interest in the property delays the allocation

A GRAT or a QPRT can’t take an exemption allocation when it’s funded. Any allocation waits until the “estate tax inclusion period” closes, and the property is valued then, at whatever it has grown to. GST exemption can’t be allocated to property you keep an interest in, such as the annuity from a GRAT or the right to live in a house held in a QPRT, if that interest would put the property back in your estate when you died right after the gift, until that period closes (IRC § 2642(f)). A direct skip is treated as happening at the close of the period. The period ends no later than your death or the first generation-skipping transfer of the property (§ 2642(f)(3)). The Form 709 instructions add that the GST transfer at the close of an ETIP is reported on Schedule D, Part 1, of the return for the year the ETIP closes.

Annual-exclusion gifts to grandchildren

An annual-exclusion gift made outright to one grandchild is GST-free without using any exemption, because it has an inclusion ratio of zero (IRC § 2642(c)(1), (3)). A gift to a pot trust for several grandchildren gets no automatic zero ratio (IRC § 2642(c)(2)).

What goes on Form 709 Schedule D

Check Schedule D before you file, because it’s where the GST tax is computed and where you confirm what was allocated. Reporting a direct skip on a timely Form 709 and paying the GST tax on it prevents automatic allocation to that gift. Part 1 lists the generation-skipping transfers reported on the return, Part 2 reconciles your GST exemption, starting with the maximum exemption you’re allowed and including what you allocate on this return, such as a late allocation, and Part 3 computes the tax (Instructions for Form 709). An allocation is irrevocable once made (IRC § 2631(b)).

Relief when an allocation was missed

A missed allocation can sometimes be fixed after the fact, but the IRS decides each relief request on its own facts, and getting the allocation right on the original return costs far less. Congress told Treasury to grant extensions of time to allocate GST exemption or make the automatic-allocation elections, taking into account all relevant circumstances, including the intent shown in the trust instrument (IRC § 2642(g)(1)). Under the general relief regulation, the IRS grants relief when the taxpayer acted reasonably and in good faith and relief won’t prejudice the government (Treas. Reg. § 301.9100-3). Reasonable reliance on a qualified tax professional who failed to make the election is one listed example. Separately, an allocation that shows an intent to reach the lowest possible inclusion ratio is treated as allocating the exemption needed to do that (§ 2642(g)(2)).

When a generation-skipping trust is worth the loss of control

Families whose combined wealth could exceed the $15,000,000 per-person exemption, or who want to keep family wealth in trust for several generations, are the main candidates. If your estate sits well under the exemption, GST tax is unlikely to touch you, and a simpler trust for your grandchildren may do the job. Other reasons people use these trusts are keeping assets out of a child’s divorce or creditor problems, controlling when grandchildren receive money, and holding family property together. Whether any of those is worth giving up control depends on your numbers. A consultation is the place to run them. See our irrevocable trust lawyer page, or our estate and inheritance tax guides.

You give up control with a generation-skipping trust. The trust is irrevocable, an exemption allocation can’t be undone (§ 2631(b)), and the trust itself is hard to change. See revocable vs. irrevocable trusts and changing an irrevocable trust. The trust also costs more to set up and run, and it requires tax filings for as long as it exists. The trustee tracks the inclusion ratio and reports distributions.

A transfer you meant to shelter but didn’t allocate to correctly can draw the full 40 percent rate. Income tax basis is a separate trade-off from the estate tax savings. Read step-up in basis for irrevocable trust assets before you decide.

A dynasty trust is a generation-skipping trust meant to last for many generations, and California limits how long a trust’s future interests can stay open, so a well-drafted California trust is built around a 90-year window. Our guide to dynasty trusts in California covers the structure. Under Prob. Code, § 21205, a nonvested interest is invalid unless it’s certain to vest or end within 21 years after the death of someone alive when it’s created, or it vests or ends within 90 years after creation.

Where California changes the plan

California has no generation-skipping transfer tax, no estate tax, and no inheritance tax. There’s no state tax to plan around, because the only California death tax was a “pick-up” tax under Rev. & Tax. Code, § 13302, set equal to the federal credit for state death taxes, and Congress repealed that credit (IRC § 2011 now shows as repealed), so the state tax collects nothing. The GST tax you may face is federal only. For more, see California estate tax in 2026 and the glossary entry on the generation-skipping transfer tax.

What California does change is whose exemption a married couple uses. A California couple’s community-property gift to a generation-skipping trust draws on both spouses’ exemptions, half each, while a separate-property gift does so only if the spouses elect it. The IRS treats a gift of community property as made one-half by each spouse, and each spouse files a gift tax return (Instructions for Form 709). For GST purposes the transferor of a gift is the donor (IRC § 2652(a)(1)). Gift-splitting under IRC § 2513 treats each spouse as giving half of a separate-property gift, and § 2652(a)(2) carries that into the GST tax, but only if the spouses elect it.

A reverse QTIP election protects the first spouse’s exemption. Many California couples leave the first spouse’s share in a QTIP trust for the survivor, and without more, the surviving spouse becomes the transferor of that trust for GST purposes. The first spouse’s estate can elect to treat the QTIP property as if the QTIP election hadn’t been made, for GST purposes only, so the first spouse stays the transferor and can allocate his or her own GST exemption to it (IRC § 2652(a)(3)). See QTIP trust administration for the trust side.

California taxes a generation-skipping trust’s income even though it has no GST tax. A trust that accumulates income owes California income tax on its entire taxable income if a trustee or a noncontingent beneficiary lives in California (R&T Code § 17742(a)). California-source income is taxed regardless of where the trustees live (Steuer v. Franchise Tax Bd. (2020) 51 Cal.App.5th 417). My dynasty trust page covers how to build around that.

Older trusts and the grandfather rule

Reported GST cases are few. The four below all concern the 1986 grandfather rule, which exempts transfers under a trust that was irrevocable on September 25, 1985, except to the extent of corpus added later. That rule still governs many older family trusts, and the circuits split over it.

The IRS won in the Second Circuit over a partial lapse of a general power over a pre-1985 trust. A widow in the Peterson case used her general power of appointment over a 1974 marital trust only to pay estate taxes and let it lapse as to the rest, which passed to grandchildren. The court upheld the regulation treating the lapse as an addition to the trust after the cutoff date, so the GST tax applied (E. Norman Peterson Marital Trust v. Commissioner (2d Cir. 1996) 78 F.3d 795).

Taxpayers won in the Eighth and Ninth Circuits. The Ninth Circuit said it expressed no opinion on the amended regulation. A widow in Simpson exercised a general power of appointment over a 1966 trust in favor of her grandchildren, and the court read the statute’s plain language to grandfather the transfer (Simpson v. United States (8th Cir. 1999) 183 F.3d 812). Bachler reached the same result for a 1976 trust under a will probated in San Mateo County, and the estate won its suit for a refund of the $2,043,357.55 of GST tax it had paid (Bachler v. United States (9th Cir. 2002) 281 F.3d 1078).

Bachler left the amended regulation untested. The Sixth Circuit upheld the regulation, which denies grandfathering when a general power over a pre-1985 trust is exercised, and the estate in Gerson owed $1,144,465 (Estate of Gerson v. Commissioner (6th Cir. 2007) 507 F.3d 435). The court deferred to Treasury under Chevron. Loper Bright Enterprises v. Raimondo (2024) 603 U.S. 369 overruled Chevron but said prior holdings that relied on it remain subject to statutory stare decisis.

Working with Ridley Law

If you’re funding a trust for grandchildren, or you’re a trustee who isn’t sure what was allocated to an older trust, I can review the returns and the trust terms. The first call is free and runs 30 minutes, by phone or Zoom. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts.

Book my 30-minute call or call 805-244-5291.

Frequently asked questions

What is the GST tax rate in 2026?

The rate is the top federal estate tax rate, 40 percent, multiplied by the trust’s inclusion ratio (IRC § 2641). A trust fully covered by exemption has an inclusion ratio of zero and pays nothing. A trust with no exemption pays the full 40 percent.

Do I have to file Form 709 to allocate GST exemption?

For lifetime gifts, yes. You allocate on Form 709, and an allocation on a timely return locks in the gift-date value (IRC § 2642(b)(1)). Automatic allocation covers direct skips and gifts to GST trusts, but it doesn’t cover every trust, and Schedule D is where you confirm what was allocated.

What happens if I forgot to allocate GST exemption?

You can make a late allocation on a Notice of Allocation attached to Form 709. It uses the trust’s value when you file, or on the first of that month if you elect it (Treas. Reg. § 26.2642-2(a)(2)). You can also ask the IRS for an extension of time under IRC § 2642(g) and Treas. Reg. § 301.9100-3, which turns on whether you acted reasonably and in good faith.

Can I allocate GST exemption to a GRAT?

Not effectively until the annuity term ends. The GRAT is subject to an estate tax inclusion period, and any allocation waits until it closes, at the value then (IRC § 2642(f)).

Who pays the GST tax?

The recipient pays on a taxable distribution, the trustee pays on a taxable termination or a direct skip from a trust, and the donor pays on other direct skips (IRC § 2603(a)).

Does the GST tax apply if my child has already died?

Usually not on a transfer to that child’s children. Under the predeceased parent rule in IRC § 2651(e), a grandchild whose parent died before the transfer moves up a generation and isn’t a skip person for that transfer.