Creating and preserving generational wealth is an aspiration for many families. However, one of the biggest concerns is how to pass it on without seeing it eaten up by taxes. At Allenby Law, we specialize in smart estate planning strategies that not only simplify the process for our clients but also ensure they can pass on their legacy efficiently and tax-effectively.
We’ll explore legal ways to transfer wealth across generations without unnecessary tax burdens, giving your family the best chance to grow and sustain financial security for years to come.
Understanding Generational Wealth and Taxes
Generational wealth refers to assets passed down from one generation to the next — such as real estate, investments, businesses, or even intellectual property. But when transferring significant wealth, two major taxes often come into play:
- Estate Tax – Levied at the federal level (and in some states) on the transfer of a deceased person’s estate.
- Gift Tax – Applies when a person gives another individual more than a certain amount in a year.
- Capital Gains Tax – Imposed when heirs sell inherited assets that have appreciated in value.
The good news is that smart planning can reduce or even eliminate these taxes entirely in many cases.
1. Use the Lifetime Estate and Gift Tax Exemption
As of 2025, the federal lifetime estate and gift tax exemption is $12.92 million per individual (scheduled to reduce to around $6 million in 2026 unless extended by Congress). That means you can give away up to that amount during your lifetime or upon death — tax-free.
For married couples, this amount doubles — offering nearly $26 million in tax-free transfer potential.
Tip: Strategic use of this exemption now, before the potential sunset in 2026, can lock in major tax savings.
2. Annual Tax-Free Gifting
Every year, individuals can give up to a certain amount per recipient without triggering the gift tax. In 2025, this amount is $18,000 per person.
If you’re married, you and your spouse can combine your gifts, giving up to $36,000 per recipient annually. By gifting to multiple family members each year, you can reduce your taxable estate substantially over time — all without using your lifetime exemption.
Example: A couple with three children and six grandchildren can gift over $300,000 annually — completely tax-free.
3. Establish an Irrevocable Trust
Irrevocable trusts are among the most powerful tools for shielding generational wealth from estate taxes. Once assets are transferred into an irrevocable trust, they are removed from your taxable estate — and future appreciation also escapes taxation.
Some common types include:
- Irrevocable Life Insurance Trusts (ILITs) – To pass large life insurance policies without taxes.
- Grantor Retained Annuity Trusts (GRATs) – To transfer appreciating assets with minimal gift tax impact.
- Dynasty Trusts – Designed to last multiple generations and avoid transfer taxes for decades or even centuries.
4. Take Advantage of Step-Up in Basis
One of the most underrated tax benefits of inherited assets is the step-up in cost basis. When your heirs inherit appreciated assets like real estate or stocks, they receive them at fair market value at the time of death — not at your original purchase price.
This can drastically reduce or eliminate capital gains taxes if the asset is sold soon after inheritance.
Example: You bought a home for $200,000. At your death, it’s worth $900,000. If your heirs sell it for $910,000, they are only taxed on the $10,000 gain — not the full $710,000 appreciation.
5. Set Up a Family Limited Partnership (FLP)
An FLP allows you to maintain control over family assets while transferring value to younger generations at a discount.
Here’s how it works:
- You create a limited partnership and transfer assets (e.g., real estate or investments) into it.
- You retain control as the general partner.
- You gift limited partnership shares to children or grandchildren — at a discounted value for tax purposes, because the shares lack control and marketability.
This strategy can significantly reduce the taxable value of gifts and your estate.
6. Charitable Giving for Tax Efficiency
If philanthropy is part of your legacy, you can structure charitable giving in a way that benefits your heirs and reduces estate taxes:
- Charitable Remainder Trusts (CRTs) provide lifetime income to heirs, then donate the remainder to charity — with a tax deduction up front.
- Donor-Advised Funds allow families to donate to a fund now (and get a deduction) while deciding later how to distribute the money.
Charitable strategies can also soften the tax blow if your estate exceeds the exemption limit.
7. Education and Healthcare Gifting
You can also pay tuition and medical expenses directly to providers on behalf of loved ones without using up your annual or lifetime gift exemption. This can be an excellent way to transfer value while supporting your family’s well-being.
8. Planning for the 2026 Sunset of Estate Tax Exemptions
The current estate tax exemption — at its historically high levels — is set to sunset in 2026, potentially cutting the exemption in half unless Congress acts.
If your estate may exceed $6 million (or $12 million as a couple) by 2026, now is the time to act. Locking in today’s exemption through gifting or trust strategies can result in millions in tax savings for your heirs.
9. Avoid Common Mistakes
Many people assume a will is enough — but relying solely on a will often triggers probate and potential taxes. Other common mistakes include:
- Failing to update beneficiary designations on retirement accounts or life insurance.
- Delaying planning until late in life, reducing your options.
- Not coordinating trusts, wills, and business succession strategies.
Smart generational planning means having a comprehensive estate plan in place well in advance.
How we can help
At Allenby Law, we specialize in estate planning that’s both smart and simple. Whether you’re looking to preserve family wealth, minimize taxes, or ensure your legacy is passed on according to your wishes, we tailor strategies that fit your unique needs.
Our San Diego based team understands the nuances of California and federal tax laws, and we work with you to implement tools like irrevocable trusts, family partnerships, and gifting strategies — all while simplifying the process so you can focus on what matters most: your family.
Let’s build a generational plan that protects your legacy and avoids unnecessary tax burdens. Contact Allenby Law today to schedule your consultation.
