7 Ways To Pass Generational Wealth Tax-Free
Written by
Caitlyn Moorhead
Edited by
Somnia Keesey
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Generational wealth — the various financial assets that are passed down through families to children, grandchildren and beyond — can come with pretty hefty tax burdens for heirs. Estate planning is key to transferring your generational wealth down to loved ones, as is understanding how to pass it down in a tax-free way — or at least in a manner that reduces the tax onus. Here are nine ways to do just that.
The Lifetime Gift Tax Exemption
Perhaps the best way to pass down generational wealth tax-free — up to $19,000 — is to leverage the lifetime gift tax exemption. Here are a few key takeaways:
- In 2025, you can give any number of people up to $19,000 each in a single year without incurring a taxable charge. This is an increase from $18,000 in 2024.
- For spouses “splitting” gifts, the limit is $38,000.
- The recipient typically owes no taxes and doesn’t have to report the gift if it comes from within the United States.
- The total lifetime gift/estate tax exemption is $13.99 million in 2025.
Irrevocable Life Insurance Trust (ILIT)
An ILIT is an irrevocable trust set up to own life insurance. Consider it a great tool in your box of ways to pass down generational wealth tax-free.
Simply put, when the insured passes away, the proceeds are paid to the ILIT, not the insured, which streamlines the process of distributing the money while keeping the proceeds out of the tax man’s reach.
Step-Up in Basis
Another powerful way to pass generational wealth tax-free is to use the step-up in basis tax provision at death. This provision adjusts the cost basis of an inherited asset to its fair market value on the date of the previous owner’s death instead of the current one, effectively erasing any tax on unrealized appreciation.
As many valuable assets can increase substantially over time, the tax implications can be significant. However, when a person dies, the tax basis of the assets they own are “stepped up” to the fair market value at the time of death. This means that the new tax basis for the person inheriting the asset is equal to the value of the assets on the date of the original owner’s death, not the amount the original owner initially paid for them.
Generation-Skipping Trusts (GSTs)
Generation-skipping trusts enable you to transfer assets directly to grandchildren or future generations — bypassing estate taxes that would typically apply to the intervening generation. This kind of tax-free inheritance can be an effective way to preserve wealth for multiple generations.
Grantor Retained Annuity Trusts (GRATs)
GRATs are useful estate planning tools that allow you to transfer assets to future generations with reduced tax consequences. When you place your assets in one, you retain an annuity payment for a specified period. That way, by the end of the term, any appreciation in the assets beyond the annuity payments goes to the beneficiaries completely tax-free.
529 Plans
If you have children with an academic future, consider a 529 plan as it can be a great way to pass on generational wealth without all the pesky taxes. Any parent knows that the cost of education seems to skyrocket every year, leaving many people shackled to large sums of debt upon graduation.
Funds from a 529 plan cover qualified educational expenses, and better yet, do so tax-free. It can potentially cover qualified expenses for college, trade school and even K-12. You can also change beneficiaries if your child decides to take another path down the line.
Family Limited Partnerships (FLPs)
Family Limited Partnerships (FLPs) can also be used to transfer wealth from generation to generation tax-free. You can maintain control while transferring wealth and take advantage of valuation discounts to reduce estate tax liability. This is done by putting assets into FLP and gifting limited partnership interests to family members while keeping general partnership interests.
Final Take To GO
While these are all great ways to pass down generational wealth with a lower tax burden — or tax-free — tax laws may vary depending on where you live. If you’re not sure of what tax implications you are dealing with locally, make sure to consult with tax professionals or estate planning attorneys who specialize in your local tax jurisdiction to ensure compliance and optimize your wealth-transfer strategy.
Nicole Spector contributed to the reporting for this article.
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