CA Dynasty Trusts: Benefits Guide 2026

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

Estate size this page covers: estates of $15 million and up for a single person, or $30 million and up for a married couple, where the federal estate and GST tax apply, and every estate above $100 million. Below that line a dynasty trust can still protect heirs from creditors and divorce, but the tax case is thin. This page is the planning guide. The tax mechanics (direct skips, taxable terminations, the inclusion ratio and Form 709 reporting) are on my generation-skipping trust page.

Law verified against 26 U.S.C. §§2001, 2010, 2613, 2631, and 2641; Probate Code §§15300, 15301, 15304, 15400, 15403, 16047, 19521, 21205, and 21225; and Revenue and Taxation Code §§13301 and 13302, 2026. The page is general information and gives no legal advice for your situation.

What 90 years of growth is worth inside a dynasty trust

A fully exempt dynasty trust funded with $15,000,000 in 2026 holds about $2.84 billion at year 90 if it earns 6 percent a year, while the same money held outright holds about $1.02 billion after a 40 percent estate tax at each of two deaths. At year 90 the trust holds about 2.78 times what the outright path holds, and the whole gap is the two estate taxes the trust never pays.

The result depends on assumptions that are deliberately simple. A parent puts $15,000,000 in a fully exempt dynasty trust in 2026 and allocates $15,000,000 of GST exemption. The same $15,000,000 could instead go to a child outright. Both pools earn 6 percent a year after income tax, in nominal dollars with no inflation adjustment. A generation is 30 years. Outside the trust, the child dies at year 30 and the grandchild at year 60, and each estate pays a flat 40 percent on the inherited amount. That assumes each heir’s own exemption was already used on other assets, which overstates the outside-trust tax for any family whose heirs have exemption left. Inside the trust, nothing is taxed at those deaths because the trust, not the heir, owns the assets. Both columns are measured at the end of each 30-year period, right before the next death.

Change any assumption and the dollar figures move, but the ratio does not, as long as the outright path pays two 40 percent estate taxes and the trust pays none (0.6 times 0.6 leaves 36 percent). Real results also depend on what the trust spends on beneficiaries, on income tax inside the trust (California’s rules are below), and on Congress, which can change the exemption and the rate.

Trading a living trust’s flexibility for growth outside every estate

A dynasty trust gives up the flexibility of a revocable living trust in exchange for keeping assets, and their growth, out of your taxable estate and out of your children’s and grandchildren’s estates. It is an irrevocable trust that keeps assets in trust across generations, with a trustee managing them and making distributions under standards you write. In California a trust is revocable unless the trust instrument expressly makes it irrevocable (Prob. Code §15400), so the document has to say so.

The living trust most families use avoids probate and can be changed while you’re alive and competent. The dynasty trust can’t be changed that way. It does protect heirs through a spendthrift clause if the instrument includes one, though not you as the settlor.

How the GST exemption shelters the trust

A dynasty trust works by allocating GST exemption to it when you fund it. Federal law taxes transfers that skip a generation, and a “skip person” is someone two or more generations below the transferor, such as a grandchild, or a trust whose interests are all held by skip persons (IRC §2613(a)). The GST tax rate is the maximum federal estate tax rate multiplied by the transfer’s inclusion ratio (IRC §2641(a)), and the top estate tax rate is 40 percent (IRC §2001(c)).

In 2026 you can allocate $15,000,000 of GST exemption, and the allocation is irrevocable once made (IRC §2631(b)). Every individual gets a GST exemption to allocate to property they transfer (IRC §2631(a)), equal to the basic exclusion amount under §2010(c) for that year (IRC §2631(c)), and the basic exclusion amount is $15,000,000 for 2026, indexed for inflation after 2026 (IRC §2010(c)(3)).

When the exemption fully covers the transfer, the trust can grow and pay out to grandchildren and great-grandchildren without GST tax at each generation. A married couple can each allocate their own exemption. My glossary entry on the generation-skipping transfer tax covers the terms, and the direct skips, taxable terminations, inclusion ratio and Form 709 reporting are on my generation-skipping trust page.

Allocating the exemption when you fund the trust

Allocate the exemption yourself, on a gift tax return filed on time for the year you fund the trust, because a late allocation can cost more exemption for the same trust. You can allocate any time up to the due date of your estate tax return (IRC § 2632(a)), but an allocation on a timely filed Form 709 uses the gift’s value as finally determined for gift tax and takes effect on the date of the gift, while an allocation filed late uses the trust’s value on the date you file it (IRC §2642(b)(1), (b)(3)). If the trust grew in the meantime, a late allocation uses up more exemption to reach an inclusion ratio of zero.

Don’t rely on the automatic allocation without checking the trust terms. Congress built an automatic allocation for gifts to a “GST trust,” and you can elect out of it or elect into it (IRC § 2632(c)). Many dynasty trusts meet that definition, but the statute carves out trusts where, for example, more than 25 percent of the trust must be paid to, or can be withdrawn by, a non-skip person before age 46. Relying on a default you didn’t check is how families find out years later that a trust is partly taxable. Report the gift and the allocation on Form 709 every time you add money.

Funding a dynasty trust from a GRAT delays the allocation. If you put property in trust while you keep an interest that would pull it back into your estate if you died right then, such as the annuity in a GRAT, no GST exemption can be allocated until that “estate tax inclusion period” ends, and the property is valued at that later date (IRC §2642(f)). A GRAT is a poor way to fund a dynasty trust when the goal is a small, fixed exemption allocation at the start.

Where California limits the plan

California adds no transfer tax of its own, so the estate tax planning here is federal. Revenue and Taxation Code §13301 bars the state from imposing any gift, inheritance, or estate tax. The one exception, §13302, only picks up a share of the federal credit for state death taxes when a federal estate tax is payable. See California estate tax in 2026 for more.

Income tax is often the biggest California issue for a trust built to accumulate income for decades, because California does tax a trust’s income.

Trust income is taxed by the residence of the trustee and the beneficiaries

Where the trustee and the beneficiaries live decides how much of a dynasty trust’s income California taxes. A trust owes California tax on its entire taxable income if a fiduciary, or a beneficiary whose interest isn’t contingent, is a California resident, regardless of where the settlor lived (R&T Code § 17742(a)). When a trust has several trustees and only some live in California, the income is apportioned by the number of resident fiduciaries (R&T Code § 17743). When it has several beneficiaries and only some live here, it’s apportioned by the number and interest of the resident beneficiaries (R&T Code § 17744). A beneficiary who can receive income only at the trustee’s discretion holds a contingent interest. Many dynasty trusts for California families use a trustee outside California and fully discretionary distributions for that reason.

That choice doesn’t buy a clean escape, because income from California sources is taxed no matter where the trustees live. In Steuer v. Franchise Tax Bd. (2020) 51 Cal.App.5th 417, a trust with one California trustee and one Maryland trustee tried to tax only half of a California-source capital gain. The Court of Appeal held the Revenue and Taxation Code reaches the entire amount of trust income derived from California sources, regardless of the trustees’ residency. The same court agreed that the beneficiary, whose distributions were in the trustees’ absolute discretion, was a contingent beneficiary. Accumulated income doesn’t stay untaxed forever either. When it’s later distributed to a California-resident beneficiary whose interest was contingent, it becomes taxable to that beneficiary (R&T Code § 17745(b)), computed as if received ratably over the year of distribution and the five preceding years, or the accumulation period if shorter (§ 17745(d)).

The Supreme Court has limited how far a state can tax a trust by the residence of its beneficiaries, which helps trusts here. A state can’t tax trust income based only on the in-state residence of beneficiaries who received no distributions, had no right to demand income and couldn’t count on receiving it (North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019) 588 U.S. 262). The Court limited that holding to those facts. My page on whether a Nevada trust can avoid California income tax goes deeper into the residency rules.

California’s 90-year limit, and the states that allow longer trusts

California kept a rule against perpetuities by adopting the Uniform Statutory Rule Against Perpetuities, under which a nonvested property interest is valid if, when created, it’s certain to vest or terminate within 21 years after the death of someone then alive, or if it vests or terminates within 90 years after its creation (Prob. Code § 21205).

Management powers don’t count against the 90 years, but the beneficial interests do. The rule doesn’t apply to a fiduciary’s powers to manage assets, such as the power to sell, lease, or mortgage, or to a power to appoint a fiduciary (Prob. Code §21225(b), (c)), but the beneficial interests have to satisfy §21205. In practice, a California dynasty trust is drafted to run for a measured period, often keyed to the 90-year limit or to lives in being plus 21 years, with a plan for what happens when it ends.

Other states allow far longer trusts. Delaware says no interest in personal property held in trust is void under any perpetuities rule, and applies a 110-year limit to real property held in trust (25 Del. C. § 503). South Dakota says the common-law rule against perpetuities is not in force there (SDCL 43-5-8), and its separate limit on suspending the power of alienation doesn’t apply to a trust whose trustee has a power to sell (SDCL 43-5-4). Nevada uses a 365-year wait-and-see period (NRS 111.1031). Wyoming lets a trust holding property other than real estate run up to 1,000 years if it’s governed by Wyoming law, has a Wyoming trustee or Wyoming administration, and its terms require everything to vest within that period (W.S. 34-1-139(b)).

A California family can create a trust governed by one of those states’ laws, with a trustee there, but two cautions apply. A longer trust term does nothing for California income tax if a trustee or a noncontingent beneficiary lives here. And plan for the possibility that a California court won’t honor a term longer than 90 years for a California settlor’s trust.

Community property splits the gift between spouses

A California couple funding a dynasty trust with community property uses half of each spouse’s GST exemption on the gift, so each spouse’s Form 709 should report the allocation for that spouse’s half. 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).

Keeping the trust workable for decades

Spendthrift protection reaches heirs but not you

A spendthrift clause can protect heirs from creditors and divorce. If the trust instrument says a beneficiary’s interest in income or principal can’t be voluntarily or involuntarily transferred, the interest can’t be transferred, and no money judgment can reach it until it’s paid to the beneficiary (Prob. Code §§15300, 15301(a)). Once principal is due and payable, though, a judgment creditor can petition the court to reach it (Prob. Code §15301(b)).

The protection stops at the person who creates the trust. A spendthrift restraint on the settlor’s own interest is invalid against the settlor’s creditors (Prob. Code §15304(a), (b)), so a settlor who is a discretionary beneficiary of her own dynasty trust gets no protection from her creditors. A dynasty trust protects descendants and doesn’t work as a self-settled asset protection trust. My page on spendthrift trusts and creditor protection goes further.

Adjusting a trust when circumstances change

The facts a long trust was written for will change over decades, and California gives some ways to adjust it. If all beneficiaries consent, they can petition the court to modify or terminate an irrevocable trust. If continuing the trust is necessary to a material purpose, the court may still refuse, and a trust with a valid spendthrift restraint can’t be terminated without good cause (Prob. Code §15403).

Decanting is the other route. Under California’s Uniform Trust Decanting Act, an authorized fiduciary may exercise the decanting power to move assets into a new trust with updated terms, whether or not the fiduciary would have made a principal distribution at the time (Prob. Code §§19501, 19521). A trustee with expanded discretion to distribute principal can decant into a second trust, and that second trust may be created or administered under the law of any jurisdiction (Prob. Code § 19511(b), (d)). A trustee whose discretion is limited to a standard like HEMS can decant too, but the new trusts must give each beneficiary substantially similar interests (Prob. Code § 19512). See my glossary entry on trust decanting.

A trust protector or trust director, named in the instrument, keeps a long trust useful by holding limited powers such as replacing trustees or changing the trust’s governing law. California adopted the Uniform Directed Trust Act, effective 2024, which lets the trust instrument give a person other than the trustee, a “trust director,” power over part of the administration, and a directed trustee is liable only for its own breach, except for willful misconduct (Prob. Code § 16600). The trust protector role fits inside that statute. See my page on trust protectors in California.

When a child or grandchild is trustee of his or her own share, limit distributions to that trustee-beneficiary to health, education, support and maintenance. A power limited to that standard is not a general power of appointment (IRC § 2041(b)(1)(A)), so the share stays out of that beneficiary’s taxable estate. My page on the HEMS standard shows which words qualify and which don’t.

Choosing a trustee who can run it for generations

The trustee will run this trust long after you’re gone, so plan for successors from the start. A trustee must invest and manage the assets as a prudent investor would, considering the trust’s purposes, terms, and distribution requirements, and judge the portfolio as a whole (Prob. Code §16047(a), (b)). Over several generations, that usually means building in successor trustees, a way to replace a trustee without going to court, and often a professional trustee alongside family members. Long-running trusts also need regular trust administration, and generation-skipping trusts carry their own reporting issues, covered in generation-skipping trust administration.

Who should build one

A dynasty trust belongs on top of a plan that already works. The families who use one have a funded living trust, more wealth than they’ll need in their own lifetimes, and a clear idea of what they want to control two or three generations out.

Families whose combined estates are near or above the federal exclusion, or who expect large growth, get the most from one, because the GST exemption shelters both the gift and its future appreciation. Families who want grandchildren provided for but don’t face estate tax may be better served by simpler planning.

If you don’t yet have a basic plan, start there. A funded living trust, powers of attorney, and health care directives come first. See my estate planning page and my page on irrevocable trusts for how a dynasty trust fits with those documents. Coordinate any funding decision with your CPA, because the exemption you allocate is based on the amount in effect the year you fund the trust.

Where dynasty trusts go wrong

Only a few reported cases touch dynasty trust design directly, and the ones that matter for California families turn on state income tax and on how far the GST grandfather rule reaches. In Steuer the FTB won on California-source income, which is taxed in full regardless of where the trustees live, and the trust won on the beneficiary, because one who receives only at the trustees’ absolute discretion is contingent. In Kaestner the taxpayer won, because a state can’t tax undistributed trust income based only on the residence of beneficiaries with no right to it.

A California trustee with a Nevada or South Dakota governing-law clause fails for income tax, because a resident fiduciary makes the trust taxable here (R&T Code § 17742). An out-of-state trustee with fully discretionary distributions defers California tax on non-California-source income, but the accumulated income is taxed when it’s paid to a California beneficiary (§ 17745). A settlor who is a discretionary beneficiary of her own dynasty trust fails against her creditors (Prob. Code § 15304(a), (b)), and a trust funded from a GRAT waits to receive its exemption until the GRAT term ends (IRC § 2642(f)).

The GST grandfather rule covers trusts that were irrevocable before September 25, 1985. In Bachler v. United States (9th Cir. 2002) 281 F.3d 1078, a widow exercised a general power over a trust created under her husband’s will, probated in San Mateo County in 1976. The Ninth Circuit held the transfer to her grandchildren fell within the grandfather rule, but it didn’t rule on the later-amended regulation. The Sixth Circuit upheld that regulation, which denies grandfathering when a general power over a pre-1985 trust is exercised, and the estate in Estate of Gerson v. Commissioner (6th Cir. 2007) 507 F.3d 435 owed $1,144,465 of GST tax.

Working with Ridley Law

If your estate is over the exemption, or will be once a business sells, I can tell you whether a dynasty trust fits and how to fund it. 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

How much can I put in a dynasty trust in 2026?

As much as you like, but only $15,000,000 per person, or $30,000,000 for a married couple, can be sheltered with GST exemption in 2026 (Rev. Proc. 2025-32). Anything above the exemption gives the trust an inclusion ratio above zero, and later distributions to grandchildren carry GST tax at that fraction of 40 percent.

Can a California dynasty trust last forever?

Not under California law. Interests must vest or terminate within 90 years (Prob. Code § 21205). Some states allow far longer terms, and a California family can create a trust governed by one of those states’ laws with a trustee there, but California income tax still follows California trustees and noncontingent California beneficiaries.

Does moving the trust to Nevada or South Dakota avoid California income tax?

Only for income that isn’t from California sources, and only if no trustee and no noncontingent beneficiary lives in California (R&T Code § 17742). Accumulated income paid out later to a California beneficiary is taxed to that beneficiary when distributed (§ 17745(b)).

Can my children be trustees of a dynasty trust?

Yes. Limit a child-trustee’s distributions to herself to health, education, support and maintenance, and leave broader discretion to an independent trustee. That keeps her share out of her estate under IRC § 2041(b)(1)(A).

What does a trust protector do in a dynasty trust?

Whatever the trust instrument gives the protector power to do, often replacing trustees, changing governing law or fixing administrative terms. California’s Uniform Directed Trust Act (Prob. Code § 16600 et seq.) governs a person other than the trustee who holds those powers.

Is a dynasty trust the same as a generation-skipping trust?

A dynasty trust is a generation-skipping trust built to last as long as the law allows. The tax rules that apply to both, including direct skips, taxable terminations and the inclusion ratio, are on my generation-skipping trust page.

Do I have to file a gift tax return to fund one?

Yes, in practice. File Form 709 for the year you fund it and allocate GST exemption on that timely return, so the allocation uses the gift-date value (IRC § 2642(b)(1)). A late allocation uses the value on the date you file it (§ 2642(b)(3)).