Building Generational Wealth: The Tax Strategy Most Families Miss

Most conversations about building wealth focus on accumulation: earning more, saving more, investing more. These are important. But they address only half of the equation.

The other half is transfer — moving wealth from one generation to the next in a way that preserves as much of it as possible. And this is where most families, even wealthy ones, leave significant value on the table.

The tax code contains powerful tools for transferring wealth efficiently. Understanding them — and using them deliberately — is the difference between wealth that compounds across generations and wealth that is substantially reduced at each transfer.

Before discussing strategies, it helps to understand the three tax events that most commonly erode wealth as it passes between generations.

Estate tax. The federal estate tax applies to estates above the exemption threshold — $13.61 million per individual in 2024, or $27.22 million for married couples. Above that threshold, the tax rate is 40%. The current exemption is scheduled to sunset at the end of 2025, potentially reverting to approximately $7 million per individual (adjusted for inflation) unless Congress acts.

Gift tax. The gift tax is unified with the estate tax — gifts made during your lifetime reduce your estate tax exemption dollar-for-dollar. The annual gift tax exclusion ($18,000 per recipient in 2024) allows tax-free gifts up to that amount per recipient per year without affecting the lifetime exemption.

Capital gains tax. Assets that have appreciated in value are subject to capital gains tax when sold. The rate is 0%, 15%, or 20% for long-term gains, depending on income level, plus the 3.8% Net Investment Income Tax for high earners. How assets are transferred — during life or at death — dramatically affects the capital gains tax owed by the recipient.

When you inherit an asset, your cost basis for capital gains purposes is "stepped up" to the fair market value at the date of death. This means that all the appreciation that occurred during the decedent's lifetime is permanently excluded from capital gains tax.

The practical impact is enormous.

Example: Your parent purchased stock for $50,000 in 1990. At their death in 2024, the stock is worth $500,000. If they had sold the stock before death, they would have owed capital gains tax on $450,000 of gain — approximately $90,000 at a 20% rate. If you inherit the stock and sell it immediately, your basis is $500,000 and you owe nothing.

The step-up in basis is one of the most powerful wealth transfer tools in the tax code — and it is available to everyone, not just the ultra-wealthy.

Strategic implication: Highly appreciated assets are generally better transferred at death (to capture the step-up) than during life (where the donor's low basis transfers to the recipient). Conversely, assets with little appreciation or assets likely to decline in value may be better gifted during life.

The annual gift tax exclusion allows you to give $18,000 per recipient per year (2024) without using any of your lifetime exemption. For a married couple, this doubles to $36,000 per recipient.

For families with multiple children and grandchildren, this can represent substantial annual wealth transfer:

• 2 children + 4 grandchildren = 6 recipients
• $36,000 per recipient (married couple) × 6 = $216,000 per year
• Over 10 years: $2.16 million transferred completely free of gift and estate tax

The key is consistency and documentation. Gifts should be made annually, documented properly, and not conditioned on the recipient's behavior (which could cause them to be treated as incomplete gifts).

529 college savings plans offer a unique gift tax provision: you can "superfund" a 529 plan by contributing up to five years' worth of annual exclusion gifts in a single year — $90,000 per beneficiary ($180,000 for married couples) — without using your lifetime exemption, as long as you make no additional gifts to that beneficiary for five years.

For grandparents with multiple grandchildren, superfunding 529 plans is one of the most tax-efficient ways to transfer wealth while ensuring it is used for education.

Additionally, 529 plans now allow unused balances to be rolled over to a Roth IRA for the beneficiary (subject to annual limits and a 15-year holding period), eliminating the concern about overfunding.

Life insurance proceeds are generally income-tax-free to the beneficiary. But if you own the policy at death, the proceeds are included in your taxable estate.

An Irrevocable Life Insurance Trust (ILIT) removes the policy from your estate while preserving the income-tax-free nature of the proceeds. The trust owns the policy; you fund it with annual gifts (using the annual exclusion); the trust pays the premiums; and at your death, the proceeds pass to your beneficiaries free of both income tax and estate tax.

For high-net-worth families with taxable estates, an ILIT can preserve millions of dollars that would otherwise be subject to the 40% estate tax.

A GRAT is an irrevocable trust that allows you to transfer appreciation on assets to your heirs with minimal gift tax cost.

Here is how it works: You transfer assets to the GRAT and receive an annuity payment back for a fixed term (typically 2–10 years). At the end of the term, any remaining assets — including all appreciation above the IRS hurdle rate (the Section 7520 rate) — pass to your heirs free of gift tax.

If the assets appreciate faster than the hurdle rate, the excess appreciation passes to heirs tax-free. If the assets do not outperform the hurdle rate, the GRAT simply returns the assets to you — no harm done.

GRATs are particularly effective for:

• Business interests expected to appreciate significantly
• Pre-IPO stock
• Real estate in appreciating markets
• Investment portfolios in low-interest-rate environments

As discussed in our business owner playbook, Qualified Opportunity Zone investments allow you to defer capital gains and potentially exclude future appreciation from income entirely.

For generational wealth planning, QOZ investments held for 10 or more years can generate substantial tax-free appreciation — appreciation that can then be transferred to heirs through the estate, potentially with a step-up in basis.

The strategies above do not operate in isolation. The optimal approach depends on:

• The size and composition of your estate
• Your income level and tax bracket
• The ages of your children and grandchildren
• Your state's estate and inheritance tax laws
• Your charitable intentions
• Your business succession plans

A strategy that is optimal for one family may be counterproductive for another. The step-up in basis strategy, for example, requires holding appreciated assets until death — which may conflict with investment diversification goals or liquidity needs.

Generational wealth planning requires coordination between your tax advisor, estate planning attorney, and financial advisor. The tax implications of estate planning decisions are significant, and they should be analyzed before documents are signed — not after.

The current federal estate tax exemption — $13.61 million per individual — is scheduled to sunset at the end of 2025. If Congress does not act, the exemption will revert to approximately $7 million per individual (adjusted for inflation from the pre-2018 level of $5.49 million).

For families with estates between $7 million and $13.61 million per individual, this creates a planning window. Gifts made before the sunset that use the current higher exemption are not "clawed back" even if the exemption later decreases — under current IRS regulations.

This window may close at the end of 2025. Families in this range should be reviewing their estate plans now.

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