The third in a three-part series on building generational wealth. First-part. Second-part.
Over the next 25 years, it is estimated that $84 trillion[i] of wealth will be passed down to a next generation. Transferring wealth efficiently involves careful planning and consideration of many factors, including tax implications, legal structures, and family dynamics. It also requires open communication and transparency within the family to ensure an understanding of the goals and intentions behind the transfer of the accumulated resources. By taking a proactive approach, families can minimize taxes, avoid legal issues, and create a legacy that offers both financial security and peace of mind for future generations.
Basic Estate Planning
Estate planning is about making certain your wealth reaches the people or charitable causes that matter to you most. In its simplest terms, estate planning is transitioning what you want to who you want in the manner you want, while minimizing taxes, avoiding conflict, and ensuring your heirs’ financial security.
Estate planning is not just for the elderly or the ultra-wealthy. Everyone needs basic estate planning documents that provide clear instructions for how to handle your assets in a way that minimizes tax burdens and prevents family disputes. In order to create an airtight estate plan, certain documents are crucial. Each document plays a different role in ensuring that your wishes are honored—and ensuring your family is taken care of if you are no longer around.
CORE ESTATE PLANNING DOCUMENTS
Understanding Estate Taxes
A big part of estate planning involves understanding the impact of federal gift and estate taxes. The government taxes the transfer of wealth above a certain threshold at a tax rate of 40 percent. That threshold amount is determined each year by the federal estate and gift tax exemption. In 2025, the exemption amount is set at $13.99 million per person, meaning you can transfer, either upon death or during life, up to that amount without incurring taxes. There is also a separate annual gift tax exclusion, which allows you, currently, to gift up to $19,000 per person per year without using any of your $13.99 million exemption. To the extent you use any of your exemption during your life, the exemption available upon your death is correspondingly reduced. Under current law, the estate and gift tax exemptions are scheduled to be reduced by half, adjusted for inflation, in 2026[ii].
In addition to gift and estate taxes, there is also a generation-skipping transfer tax (GSTT) imposed on transfers to beneficiaries who are more than one generation beyond the transferor. This is separate from, and in addition to, an estate taxes and is at the highest estate tax rate of 40 percent in 2025. Once again, each individual has an exemption from the GSTT, which in 2025 is $13.99 million. This amount is also scheduled to be reduced in half, adjusted for inflation, beginning in year 2026.
Finally, spousal transfers are treated favorably by the IRS, allowing you to transfer assets to each other without paying federal estate or gift taxes. Surviving spouses can even use any unused portion of their deceased spouse’s exemption due to portability. As such, married couples can think of the exemptions as a combined amount. Hence, due to portability, a married couple would have $27.98 million ($13.99 million each) of federal estate tax exemptions along with $38,000 ($19,000 each) of annual gift tax exclusion. These exemptions translate as additional planning flexibility and tax savings for married couples.
Minimizing Taxes and Maximizing Inheritance
When it comes to planning for the transfer of wealth, not all assets are created equal— especially when it comes to their income tax implications. Some assets, like a Roth IRA, can offer significant tax advantages to heirs, while others, such as a traditional IRA, may trigger hefty tax bills. Understanding which assets are the most tax-efficient to inherit is crucial for maximizing the financial benefits for your loved ones and minimizing their tax burden.
Tax-Free Benefits of a Roth IRA
A Roth IRA stands out as one of the most powerful retirement accounts for both individuals and their beneficiaries, thanks to its unique tax advantages. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, meaning that while you don’t get an immediate tax break when you contribute, you do later: All earnings within the account grow tax-free and qualified withdrawals are also tax-free. For heirs, inheriting a Roth IRA is especially advantageous since they can take distributions without paying income tax, making it a highly efficient way to transfer wealth.
Charitable Giving: A Tax-Efficient Strategy
If you’re inclined to leave a portion of your wealth to charity at death, consider using your retirement accounts, such as an IRA or 401(k), through a beneficiary designation. Charitable organizations don’t pay taxes on retirement account distributions, so leaving those assets to charity can help avoid unnecessary taxes. Meanwhile, your heirs can benefit from other, more tax-preferred assets like non-qualified investments that get a step-up in basis. The step-up in basis rule allows for the adjustment of an asset’s value for tax purposes when it is inherited. Instead of using the original purchase price (the “basis”) of the asset, the value is “stepped up” to its fair market value on the date of the decedent’s death. This means that heirs may pay lower capital gains taxes if they sell the asset, as they are taxed on any gains above the stepped-up value rather than the original purchase price providing for potential significant tax savings.
Additionally, if you are making current gifts to charity and are over the age of 70½, consideration should be given to making those gifts with your IRA through a qualified charitable distribution (QCD). In 2025, you can make a QCD to a qualified charity of up to $108,000. The benefit is that the QCD counts toward satisfying your annual required minimum distribution and does not get reported as income. Once again, using less preferred assets, such as your IRA, to make charitable donations preserves other preferable assets for your heirs.
Utilizing Annual Gifts to Reduce Estate Size
Making annual gifts during your lifetime is one of the simplest ways to reduce the size of your estate and pass more of your accumulated assets to your heirs. This can be done using the annual gift tax exclusion, which allows you to give away up to $19,000 per person each year free of gift taxes. These gifts can be made in cash, shares of investments, property, and closely held business interests. Over time, gifting assets can significantly reduce your taxable estate and lower potential estate taxes for your heirs. This allows your assets to grow outside of your estate, potentially reducing the estate tax burden for your heirs.
If you want to maintain control over the gifted assets, you can place them in trust, which allows you to dictate how and when they are distributed. An irrevocable trust can help shield these assets from taxes and creditors, while still providing for your beneficiaries.
The Power of Life Insurance
In addition to the general benefits of life insurance, providing financial stability and liquidity, leveraging life insurance as another asset class choice for your investing portfolio can be a beneficial strategy in terms of both diversification and wealth transfer as part of a well-designed estate plan. By paying a relatively small premium, you can secure a large sum of money for beneficiaries and provide an income tax-free inheritance. Additionally, by owning the policy through an irrevocable life insurance trust (ILIT), the death benefit can also pass estate-tax-free. By integrating life insurance into your more traditional stock and bond portfolio, you can create a multi-faceted financial strategy that combines protection, growth, and efficient wealth transfer.
Leveraging the Lifetime Gift Tax Exemption
As previously discussed, the lifetime gift tax exemption allows you to transfer up to $13.99 million in 2025. That is, you can give aggregate gifts, in excess of the $19,000 annual gift tax exclusion amount, without paying gift taxes. The benefit of making such large gifts today is that the appreciation of the gift (from the date of the gift until death) would be estate-tax-free. This can have a meaningful impact in the future for those with assets above the federal estate tax threshold that will not be needed as living resources. For instance, $1 million gifted today that if retained would have doubled in value prior to death would produce a savings of approximately $400,000 in estate taxes. Once again, to the extent you use any of your lifetime exemption, your estate tax exemption available at death is correspondingly reduced.
You enjoy an additional gifting opportunity if you have amassed significant wealth in a closely held business. When determining the value of stock in a closely held business for gift tax purposes, an appraiser considers factors such as the shareholder’s inability to control the company and liquidate his or her investment. Often these factors are taken into consideration by applying a discount to the shares’ underlying fair market value. For example, non-voting stock in a closely held business having a fair market value of $1,000,000 might have a gift tax value of $700,000, a 30 percent discount reflecting the shareholder’s inability to vote the stock or sell the stock on the open market. Hence, the grantor could remove $1 million from their appraised estate value but only use $700,000 of their lifetime gift tax exemption.
The following is an additional hypothetical analysis to illustrate the potential additional estate tax savings by using a closely held business and maximize a $13.99 million lifetime gift, assuming a 30 percent business value discount rate. Due to the discounting of the gift valuation, an additional almost $2.4 million in estate tax savings is available along with the tax savings on the future growth of the business.
Spousal Lifetime Access Trust (SLAT)
A common concern over using more advanced gifting strategies is that making large irrevocable gifts deprives you from using those assets in the future. A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by one spouse for the benefit of the other. These trusts allow the donor spouse to transfer assets and utilize their lifetime gift tax exemption to maximize estate tax planning, but keep the assets available, if needed, for the couple’s future financial needs, as the beneficiary spouse can access the trust during their lifetime. This combination of estate tax planning and flexibility makes a SLAT a potentially desirable option for married couples seeking to protect their wealth and maximize the current high exemption amounts prior to the estate tax “sunset” that will potentially occur in 2026.
Grantor Retained Annuity Trust (GRAT)
A GRAT is an effective estate planning tool designed to help individuals transfer assets while minimizing both gift and estate taxes. With a GRAT, the grantor retains the right to receive annuity payments from the trust for a set period, usually ranging from two to ten years. These payments are based on the initial value of the assets placed in the trust and an assumed growth rate prescribed by the IRS. At the end of the trust’s term, any remaining assets are passed on to the beneficiaries, either directly or into another trust for their benefit.
The primary advantage of a GRAT lies in its ability to transfer wealth with no or minimal tax implications. Because the value of the annuity interest retained by the grantor is deducted from the overall value of the assets, the taxable gift value is eliminated or significantly reduced. Furthermore, any growth in the assets that exceeds the IRS’s assumed rate of return is transferred to the beneficiaries without incurring gift or estate taxes. This makes the GRAT an especially effective strategy for individuals looking to pass additional wealth to their heirs while minimizing their tax liability.
GRANTOR RETAINED ANNUITY TRUST HYPOTHETICAL ILLUSTRATION
Long-Term Generational Trusts
Historically, the use of trusts to pass down wealth through generations was a common practice among wealthy families. This was done to avoid the burdensome estate tax that would be imposed on each generation as the wealth was transferred. By placing wealth in trust, the senior generations could ensure that their descendants would benefit from the family’s wealth without having to pay excessive taxes. These trusts would typically pay income to a child during their lifetime and then pass on to their children, continuing until the trust was required to be distributed. However, to prevent this loss of tax revenue, the U.S. Congress enacted the generation-skipping transfer tax (GSTT), which imposes a tax on transfers to individuals who are more than one generation beyond the donor.
The GSTT is imposed in addition to the federal gift tax and estate tax and is equal to the highest estate tax bracket in effect at the time of the transfer. Everyone has a GSTT exemption, which is currently set at $13.99 million. Under current law, this exemption is scheduled to be reduced by half in 2026. By allocating their GSTT exemptions to trusts, individuals can ensure that the property and any appreciation on it will be exempt from estate tax and GSTT until the trust terminates. This not only provides tax advantages, but also offers protection from creditors and ensures a pool of assets for future generations that will not be further reduced by transfer taxes as each generation passes.
Family Governance
Not everything is about dollars and cents when considering family wealth and taxes. Family governance is the set of rules, policies, and processes that a family establishes to manage their wealth and relationships. It involves creating a structure and framework for decision-making, communication, and conflict resolution within the family. The goal of family governance is to ensure the long-term sustainability and appropriate use of the family’s wealth, as well as to preserve family unity and harmony.
WEALTH IS MORE THAN FINANCIAL CAPITAL[iii]
The complexity of the family governance will be dependent on several factors, such as the size of the family and how many generations exist, liquidity of wealth versus ownership of one or more closely held business interests, longevity of family wealth, and philanthropic intentions.
Family governance is essential for generational wealth transfer because it helps avoid conflicts and misunderstandings within the family. By establishing clear roles, responsibilities, and expectations, family members can work together more effectively and make decisions that serve the best interests of the family. It also helps to maintain the family’s values and legacy, as the governance structure can include guidelines for how the family’s wealth should be used and passed down to future generations. Without proper family governance, the transfer of wealth is at risk of being mismanaged or causing rifts within the family, leading to the potential loss of the family’s wealth and legacy.
While this article covers several planning opportunities and topics, there are numerous others that may be appropriate for your consideration. Each situation, regardless of amount of wealth, is unique, as every family situation and family members’ personal goals and objectives are different. It is highly important to work with advisors who not only understand retirement and investment planning, but also can connect the tax and estate planning strategies that most benefit you and your future generations.
We’re here to help. For more information on these estate planning strategies and help to start your journey to building generational wealth, contact an HBKS wealth advisor at 866-536-5776, or email me at ptaylor@hbkswealth.com.
Important Disclosures
The information and examples included in this document are for general, educational, and informational purposes only. It does not contain any financial or investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any financial or investment advice. If you would like financial or investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy, or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy, or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
[i] “Q2 2023 – The Banking Issue,” The Cerulli Edge: US Retail Investor Edition, Cerulli Associates, 2023.
[ii] Colson, A. (2025, January 22). What to know about TCJA expiration. Tax & Accounting Blog Posts by Thomson Reuters. https://tax.thomsonreuters.com/blog/what-to-know-about-tcja-expiration/
[iii] Bernstein Private Wealth Management (2023). “Putting Family First – The Power of Governance in Family Offices,” https://www.bernstein.com/content/dam/bernstein/us/en/pdf/whitepaper/Putting-Family-First-The-Power-of-Governance-in-Family-Offices.pdf
