Wealth Transfer and Inheritance Planning Strategies

The two main vehicles for transferring wealth are gifting while you are alive and leaving an inheritance after your death. However, the process of shifting financial assets from one generation to the next can have significant tax implications. Wealth transfer and inheritance planning strategies can help mitigate these taxes.

The 2017 Tax Cuts and Job Act (TCJA) increased the exclusions for lifetime gifting, estate, and generation-skipping transfer taxes. For 2025, that means you can exclude up to $13.99 million in your lifetime from these taxes. However, unless Congress acts to extend these provisions, they are scheduled to sunset at the end of 2025, reverting to a base level of $5.49 million. As the exclusion level resets to baseline, more of your estate will be subject to a flat 40% federal tax, making tax efficiency an increasingly important consideration for your inheritance and wealth transfer planning.¹ In this article, you’ll learn:

• The most common vehicles for transferring wealth

• The pros and cons of different strategies

• Tax-efficient inheritance planning tips

Common vehicles for transferring wealth

The most common methods for transferring wealth to another person are via gifts, trusts, and wills. A fourth option, Family Limited Partnership, allows family members to buy shares in a family holding company and transfer assets that way, often income tax-free.²

Gifts

A gift is when you give assets to a recipient without expecting anything of equal value in return. Gifts can be cash, stocks, real estate, life insurance policies or other property, and they can be given to family members or people unrelated to you.³

The IRS allows individuals to gift up to $19,000 in 2025; gifts over that amount will count against the lifetime exclusion.⁴

Two unique types of gifts apply to family wealth, especially gifting to children and grandchildren, in the form of custodial accounts:

• UTMA: This is a type of account created by the Uniform Transfers to Minors Act (UTMA). UTMA accounts allow you to transfer assets to a minor, usually irrevocably, for the minor's benefit. Once you transfer the assets to the minor, they (or, more precisely, the account's custodian) gain control over the asset. When the minor becomes of age, they gain full control. Transfers to UTMA accounts are typically unlimited, though you'd owe gift tax on amounts over the annual exclusion.⁵

• 529: A 529 account is a type of savings account designed to hold funds for a child’s education. A 529 account offers tax advantages, including gifting up to $95,000 in one year, per beneficiary, without affecting your lifetime gift tax exclusion.⁶ There’s also a relatively new benefit, which went into effect in 2024: Unused funds in a 529 plan can be rolled over into a beneficiary’s Roth IRA, subject to limitations.⁷

Trusts

A trust is a way to hold assets on behalf of another person. With a trust, there is the beneficiary, or the person who receives the assets; the grantor, who gifts them; and the trustee, who guards and controls the assets with a fiduciary responsibility toward the beneficiary.

There are many different types of trusts, which are often used for estate planning purposes thanks to their various tax treatments.

• Revocable living trust: This is a common type of trust that you (the grantor) can change and control after it is established. So unlike “irrevocable” trusts (see below) it doesn’t remove assets from your taxable estate; however it can offer other estate planning advantages, starting with the fact that assets in the trust bypass the probate process. This helps save time and money, allowing for speedier distribution of assets to your heirs.

• Irrevocable LI trust: An irrevocable life insurance trust (ILIT) holds and controls a life insurance policy. It can be used to shield the policy's death benefit from estate taxes. Because it is irrevocable, it cannot be changed once established.

• Grantor retained annuity trust: A grantor retained annuity trust (GRAT) is an irrevocable trust that can significantly reduce gift taxes owed. As the grantor, you can transfer assets into the trust and receive annuity-like payments for a specified term. The amount remaining when the payments end goes to your beneficiary. GRATs are useful for shielding appreciation, as the grantor is responsible for paying income tax on trust income.⁸

• Intentionally defective grantor trust: The “defective” component of this type of trust refers to income tax; this is an irrevocable trust where the grantor pays income tax on income generated from trust assets, but it is shielded from estate tax.

• Spousal lifetime access trust: This irrevocable trust type allows one spouse to gift assets to the other spouse, who is the beneficiary. The assets in the trust, which the beneficiary may access, are excluded from their taxable estate.⁹

• Generation transfer trust: Also called a generation-skipping trust (GST), this irrevocable trust was created to provide a vehicle for grantors to skip their children and gift assets to their grandchildren. Generation transfer trusts aim to avoid estate taxes; they are still subject to generation-skipping transfer tax (GSTT) on assets beyond the exclusion amount of $13.99 million for individuals and $27.98 million for couples.

Note that trusts are not suitable for everyone, as they are complex and can require a significant investment of time and money to set up. Ongoing administration fees can eat into your assets, while the terms of a particular trust may restrict your decision-making. Your estate planning advisors can help you decide whether a trust is right for you, and which type could be most suitable.

Wills

Creating a will lets you assign how you want your assets distributed after death. Whereas a trust takes effect immediately after it is created, a will doesn't go into effect until after your death. Wills are public documents subject to the probate process, which verifies that your wishes are carried out accordingly. They can even be used to create trusts (testamentary trusts) or contribute assets to an existing trust.¹⁰

Using a will to transfer wealth doesn’t have tax advantages. Your estate will be taxed if it exceeds the estate tax exclusion amount.

Family Limited Partnership

A family limited partnership is similar to a limited partnership, except that the partners are family members. Family limited partnerships operate like a business, with limited partners purchasing shares of the partnership and general partners managing operations. Shares can be gifted to others up to the annual gift exclusion amount, per person. In other words, you could gift up to $19,000 per child or grandchild (or $38,000 if you're married) in 2025 without needing to file a gift tax form for the IRS. Anything above the exclusion amount counts toward your lifetime exclusion. Plus, the IRS considers the assets placed in the FLP to have left your estate, shielding any returns from estate taxes.¹¹

However, like a trust, a family-limited partnership can be complex and costly to set up and maintain.

How to inheritance plan in a tax-advantaged way

When you’re creating your inheritance plan, it’s important to determine your goals and the best way to get there. Working with a trusted estate planning attorney and other financial and tax professionals can help you identify your assets and liabilities, determine the beneficiaries you would like to bequeath assets and craft the best possible plan for your needs. (Remember that a beneficiary doesn't have to be a child, grandchild, or other family member; it can be a charitable organization, too.)

Your professional team will guide you through collecting the various legal documents you’ll need to establish your plan. These may include beneficiary designations for your trusts and accounts, power of attorney forms, health care proxies, HIPAA release forms, a living will, and others, each with careful attention to the tax implications specific to your situation.

After your plan is drafted, they will help you execute the necessary steps, such as setting up an irrevocable trust or naming beneficiaries. It’s also advisable to schedule a family meeting to bring everyone up to speed on your plans, so they know what to expect.

Taking the next step

Understanding how to plan for a wealth transfer and inheritance can help mitigate unwanted tax implications later. To determine the appropriate strategy for your long-term planning, enlist the help of your tax advisor and a dedicated estate planning professional.