Generation-Skipping Considerations for Business-Owning Families

For a family that has spent decades building a successful business, succession planning involves much more than deciding who will take over when the current owners retire or pass away. The ownership of the business, the value it creates, and the wealth generated from it may continue through several generations.

For families with substantial business and investment assets, this makes generation-skipping transfer (GST) planning an important part of long-term wealth planning. The federal GST tax rules can apply when wealth is transferred to grandchildren or more remote generations, including through certain trusts.

For business owners, this issue can become particularly significant because a successful company may appreciate substantially over time. Planning decisions made while the business is still privately held can therefore have consequences well beyond the first generation of successors.

What Is the Generation-Skipping Transfer Tax?

The generation-skipping transfer tax, commonly called the GST tax, is a federal tax designed to address certain transfers of wealth to people who are two or more generations below the person making the transfer.

A grandchild will generally be considered a “skip person” in relation to a grandparent. Certain trusts can also be treated as skip persons depending on how the trust is structured and who has interests in it.

The rules are separate from the ordinary estate and gift tax rules. A transfer can therefore require consideration of more than one type of federal transfer tax.

The GST rules generally address three types of transfers:

• Direct skips — property transferred directly to a skip person.
• Taxable distributions — certain distributions from a trust to a skip person.
• Taxable terminations — situations in which a non-skip person’s interest in a trust ends and the remaining property passes to skip persons.

The specific tax treatment depends heavily on the structure of the transfer and the trust involved.

Why This Matters for Business Owners

A family business can create wealth in several different ways.

The business itself may become more valuable. Owners may receive distributions over many years. Real estate or investment assets may accumulate alongside the company. In some families, the proceeds from a future sale of the business may eventually become the family’s primary source of investment wealth.

That means succession planning cannot always stop with the transfer of the company to the children.

Consider a family that has operated a successful manufacturing company for several decades. The founders transfer ownership to their children, while trusts or other arrangements are used as part of the family’s broader estate plan. Years later, the company’s value has increased substantially and the family’s wealth has expanded.

At that point, the tax consequences of transfers involving grandchildren and later generations may become an important part of the overall planning picture.

The original business succession decision may therefore affect the family’s wealth-transfer position for many years afterward.

Business Succession and Multi-Generational Wealth Planning

Business succession and estate planning are closely connected, but they are not necessarily the same thing.

A succession plan may focus primarily on questions such as:

• Who will manage the company?
• Who will own the company?
• How will ownership be divided among family members?
• Will the business remain privately held?
• What happens if one family member wants to sell?
• How will the retiring generation receive value from the business?

Multi-generational planning adds another layer.

The family may need to consider what happens to the business interests, investment assets, and other wealth after the next generation eventually transfers those assets again.

This is where trusts, gifting strategies, ownership structures, valuation considerations, and GST exemption planning can become relevant.

The objective is not simply to move an asset from one generation to another. The structure needs to work with the family’s broader financial, tax, and succession objectives.

Trusts Can Make GST Planning More Complex

Trusts are commonly used in sophisticated estate planning because they can provide a framework for holding and transferring wealth over time.

However, the existence of a trust does not automatically eliminate GST considerations.

A transfer to a trust may involve GST considerations immediately or may create potential GST consequences later, depending on the trust’s beneficiaries and distribution provisions. IRS guidance specifically recognizes that certain transfers to trusts may become subject to GST tax when distributions occur or when a trust interest terminates.

For business-owning families, this can become particularly important when a trust holds a significant business interest.

The trust may continue to own the interest while different family members receive income, management rights, or other economic benefits at different stages. As those interests change, the tax consequences can become considerably more complicated than a simple transfer of stock from a parent to a child.

GST Exemption Is an Important Part of the Planning

Federal law provides each individual with a lifetime GST exemption.

For 2026, the GST exemption is $15 million. The IRS explains that GST exemption can be allocated to certain lifetime transfers and can also be relevant to transfers occurring at death.

However, simply knowing the exemption amount is not enough.

The timing, value, type of transfer, trust structure, prior transfers, and previous exemption allocations can all affect the analysis. GST exemption allocations can also have long-term consequences because they affect how future transfers from certain trusts may be treated.

The IRS requires GST exemption allocations and related transfers to be properly reported, including through Form 709 for certain lifetime transfers and Form 706 for applicable transfers at death.

For a family with substantial business interests, these calculations should be reviewed as part of the larger estate and business plan rather than treated as an isolated tax-return issue.

Business Appreciation Can Change the Planning Picture

One of the most important characteristics of a privately held business is that its value can change dramatically.

A company that is worth several million dollars today could be worth substantially more after years of growth, an expansion into new markets, an acquisition, or a successful sale.

That appreciation can affect estate and gift planning as well as the potential GST exposure associated with future transfers.

This is one reason business succession planning should not be postponed until the owner is ready to retire.

Early planning may provide more opportunities to evaluate ownership and wealth-transfer structures before significant additional appreciation occurs.

The appropriate approach depends on the family’s circumstances, existing estate plan, business structure, valuation, and long-term objectives.

Ownership and Management Are Not the Same

Another important consideration is the difference between owning a business and managing a business.

A family may want the next generation to benefit economically from the company without requiring every family member to participate in day-to-day operations.

For example, one child may have the experience and interest necessary to run the company, while other family members may have different careers. A well-designed succession plan may need to address these different roles without treating ownership, management, and economic benefits as identical concepts.

This becomes even more important when trusts or multiple generations are involved.

The family may need to coordinate business governance with the estate plan so that the company’s management structure remains practical while ownership and wealth-transfer objectives are addressed separately.

Valuation Becomes Particularly Important

Privately held businesses do not have a readily available public-market price.

When business interests are transferred for estate or gift tax purposes, valuation can therefore become an important part of the planning process.

The value of a privately held company may depend on factors such as:

• Revenue and profitability
• Business assets and liabilities
• Industry conditions
• Customer concentration
• Management structure
• Future growth expectations
• Ownership rights associated with the interest being transferred
• Restrictions associated with the ownership interest

For significant transfers, tax planning, legal documentation, and valuation should be coordinated rather than handled independently.

A business valuation that is appropriate for one purpose may not automatically answer every question involved in a broader estate or gift tax plan.

GST Planning Is Connected to the Larger Tax Picture

GST planning should generally be considered alongside other areas of the family’s tax and financial structure.

Depending on the circumstances, the analysis may involve:

• Estate and gift tax
• GST tax
• Income tax
• Business entity structure
• Trust taxation
• Business valuation
• Ownership transfers
• Charitable planning
• Retirement and investment assets
• Liquidity and cash-flow needs
• Business succession

A strategy that appears attractive from one tax perspective may create a different issue somewhere else.

For example, transferring a business interest may affect control, valuation, future income, liquidity, and the family’s ability to manage the company. The tax analysis therefore needs to be considered together with the economic and business consequences.

Common Issues Business-Owning Families Should Watch

Several issues can create problems in multi-generational planning.

Treating the Estate Plan as a One-Time Project

Business values, family circumstances, ownership structures, and tax laws change.

An estate plan created years ago may no longer reflect the family’s current situation.

Focusing Only on the Children

A succession plan may successfully transfer the business to the next generation while leaving later-generation transfers largely unaddressed.

For families with significant wealth, that can leave an important part of the planning incomplete.

Failing to Review Existing Trusts

Older trusts may contain provisions that were appropriate when they were created but no longer fit the family’s business or wealth structure.

Existing trusts should be reviewed in the context of current business values and family objectives.

Ignoring Prior Transfers

GST exemption and other transfer-tax planning cannot always be evaluated based solely on today’s assets.

Previous gifts, trust transfers, exemption allocations, and estate-planning decisions may affect the current analysis.

Separating Business Planning From Estate Planning

A business succession plan that does not account for the family’s broader estate structure may create problems later.

Business ownership, management, trusts, and tax planning should be considered together when the family’s wealth is concentrated in a privately held company.

When Should a Business Owner Review the Plan?

A review may be appropriate when:

• The value of the business has increased substantially.
• A child or other family member is preparing to take over management.
• Ownership is being transferred to the next generation.
• A trust already owns part of the business.
• The family is considering a significant gift.
• The company is preparing for a sale or recapitalization.
• A major change has occurred in the family’s estate plan.
• Grandchildren or future generations are becoming part of the wealth-transfer discussion.
• Existing estate documents have not been reviewed for several years.

These events can change the assumptions underlying an existing plan.

The Importance of Coordinated Professional Planning

Generation-skipping planning is rarely just a matter of completing a tax form.

The IRS uses Form 709 to report certain lifetime transfers subject to gift and GST taxes and to allocate GST exemption to property transferred during life. Form 706 can also be used to calculate GST tax on applicable direct skips occurring at death. Separate reporting requirements can apply to certain trust distributions and terminations.

For a business-owning family, the underlying planning is often much more important than the filing itself.

The CPA, estate-planning attorney, valuation professional, investment advisers, and other advisers may each have a different role. Coordinating those areas can help ensure that the tax structure supports the family’s actual business and wealth-transfer objectives.

Final Thoughts

For families that have spent decades building a successful company, wealth may extend far beyond the business itself. The company’s value, investment assets, trusts, and other property may continue to benefit the family for generations.

That makes multi-generational planning an important consideration for business owners with significant wealth.

Generation-skipping transfer tax rules can be complex, particularly when privately held businesses and trusts are involved. The right planning approach depends on the family’s assets, ownership structure, existing estate plan, prior transfers, and long-term objectives.

A periodic review can help identify whether the current structure still reflects the family’s goals and whether business appreciation or changes in family circumstances require adjustments.

Need Help Reviewing Your Business and Estate Tax Planning?

If your family owns a closely held business or substantial business interests, generation-skipping considerations may be an important part of your overall tax and succession planning. For more information about our tax planning and tax compliance services, contact Velin & Associates, Inc. today.

Velin & Associates, Inc.

8159 Santa Monica Blvd STE 198/200
West Hollywood, CA 90046
📞 323-902-1000
📧 dmitriy@losangelescpa.org

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We work with business owners and families on tax planning, business structures, succession-related tax considerations, and complex tax matters involving closely held businesses.

This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Estate, gift, and generation-skipping transfer tax rules are highly fact-specific. Business owners should consult qualified tax and legal professionals before implementing a transfer or succession strategy.