How do I transfer wealth without paying taxes?
One of the biggest challenges our high-net-worth clients face is transferring wealth to their future generations without losing some of it to transfer taxes.
Whether through gift taxes during your lifetime or estate taxes after you pass away, the IRS takes a chunk out at tax rates of up to 40% or more.
However, downstream gifting can reduce or eliminate these taxes and efficiently move your wealth to younger generations.
What Is Downstream Gifting?
Downstream gifting is an estate planning technique that takes advantage of the annual gift tax exclusion and lifetime gift tax exemption to transfer wealth in a tax-efficient way.
It’s called downstream gifting because it’s used when transferring wealth from older (parents, grandparents) to younger (children, grandchildren, great-grandchildren) generations. Upstream gifting, on the other hand, transfers wealth from younger to older generations. That is a technique we discuss in a separate blog post.
In downstream gifting, you make gifts over time rather than waiting to transfer wealth through your estate when you pass. By taking advantage of tax exclusions and exemptions during your lifetime, you move assets out of your taxable estate which helps to minimize or avoid estate taxes entirely.
To move assets (i.e., appreciated stock, business interests, cash), you transfer them either directly to family members or to trusts established for their benefit.
How does Downstream Gifting allow me to transfer wealth without paying taxes?
Annual Gift Tax Exclusions
Every year, the IRS allows you to gift a certain amount ($19k in 2025) without triggering gift taxes. This means a married couple can gift $38,000 annually to each child, grandchild, or other beneficiary without using any of their lifetime gift tax exemption or paying gift taxes.
A couple with three kids and six grandkids could transfer $342,000 annually ($38,000 × 9 recipients) tax-free. Over a decade, this is over $3.4M in tax-free wealth transfer.
Lifetime Gift Tax Exemption
Beyond annual exclusions, everyone has a lifetime gift tax exemption of $13.99M (per current tax law). This means you can give away up to this amount during your lifetime without paying federal gift taxes. For married couples, the combined exemption is nearly $28M.
Any part of your lifetime exemption that you don't use for gifts is applied to your estate at death. However, by using your exemption for gifts during your lifetime, you remove the future appreciation of those assets from your estate, which can result in significant tax savings.
Valuation Discounts
When you gift a minority interest in an asset like a family business or real estate, the IRS typically allows you to discount the value of that gift because the recipient lacks control and the asset may be difficult to sell.
The discounts can range from 20%-40% or more, meaning you can transfer $1M worth of assets while only using $600k to $800k of your gift tax exemption.
Another benefit of downstream gifting is that it removes future appreciation from your estate. When you gift assets that later increase in value, that appreciation occurs outside of your taxable estate, which saves you in taxes.
How does Downstream Gifting work?
Direct Gifts to Family Members
The simplest form of downstream gifting is making direct gifts. Gifts can include cash, securities, real estate, or business interests. Most families establish regular gifting programs to ensure they transfer the maximum amount allowed by annual exclusion limits each year.
Grantor Trusts
Grantor trusts allow you to transfer assets to beneficiaries while keeping some control of them and receiving favorable tax treatment. Once assets are in a grantor trust, they (and their future appreciation) are removed from your taxable estate. You’ll continue to pay income taxes on the trust earnings, which allows the trust assets to grow income tax free for your beneficiaries. Popular grantor trust structures include Grantor Retained Annuity Trusts (GRATs) and Sales to Intentionally Defective Grantor Trusts (IDGTs).
Generation-Skipping Strategies
By making gifts directly to grandchildren instead of your own children, or by establishing a generation-skipping trust, families can avoid a set of transfer taxes that are normally owed with each generational transfer. Each person has a generation-skipping transfer tax exemption ($13.99M in 2025) that allows them to transfer $13.99M to grandchildren and later generations without triggering the 40% GST tax.
Family Limited Partnerships (FLPs)
Parents contribute assets to the FLP in exchange for general and limited partnership interests. They then gift limited partnership interests to children or trusts while keeping control through the general partnership interest. These usually qualify for valuation discounts, allowing parents to use less of their gift tax exemption.
What are the advantages of Downstream Gifting?
Estate Tax Reduction
Removing assets from your taxable estate during your lifetime means they (and their future appreciation) won't be subject to the 40% federal estate tax rates when they’re transferred.
Leveraged Wealth Transfer
Through valuation discounts and the removal of future appreciation, downstream gifting allows you to transfer more wealth than the nominal value of your gifts.
Maintained Control
Through certain trust structures, family partnerships, or retained interests, you as the gifter get to keep some level of control over transferred assets.
Income Tax Benefits
Paying income taxes on grantor trust earnings allows for additional tax-free gifts to your beneficiaries while reducing your taxable estate.
What are the disadvantages of Downstream Gifting?
Irrevocability
Most downstream gifting strategies involve irrevocable transfers, so you cannot reclaim gifted assets. This can cause issues if your financial or familial circumstances change.
Gift Tax Consequences
Downstream gifting minimizes transfer taxes but doesn't eliminate them. Large gifts may require paying gift taxes or using lifetime exemptions, which reduces the amount available for future transfers or estate tax protection.
Income Tax Issues
Because gifted assets keep your original cost basis, beneficiaries might face larger capital gains taxes when they eventually sell.
Valuation Challenges
Valuation discounts might trigger audits from the IRS. And if they successfully challenge your valuations, you could face penalties or additional taxes.
Who Should Consider Downstream Gifting?
High-Net-Worth Families
If your estate exceeds $13.99M, downstream gifting can help you save in estate taxes. And if you have rapidly appreciating assets (i.e., a fast-growing business, concentrated positions of well-performing stock), downstream gifting helps ensure that growth happens outside your taxable estate.
Business Owners
Downstream gifting allows you to transfer business interests while maintaining control and benefiting from valuation discounts.
Downstream gifting allows families to move assets to younger generations while minimizing transfer tax burdens.
Through annual exclusions, lifetime exemptions, valuation discounts, and sophisticated trust structures, families can preserve more wealth for future generations.
However, their complexity makes planning and ongoing guidance necessary.
As always, we recommend working with a tax professional who understands both tax strategies and wealth management.
Author: Rob Cucchiaro, CFP, CRPC, AAMS
Questions answered in this blog:
How do I transfer wealth without paying taxes?
What is downstream gifting?
How does downstream gifting work?
How does downstream gifting allow me to transfer wealth without paying taxes?
What is the annual gift tax exclusion in 2025?
What is the current lifetime gift tax exemption?
How is downstream gifting made more effective with valuation discounts?
Does downstream gifting remove future appreciation of my assets from my taxable estate?
What are methods of downstream gifting?
How do direct gifts to family members work?
What is a grantor trust?
What are common grantor trust structures?
What is the generation-skipping transfer tax exemption?
What is the purpose of a generation-skipping trust?
How can Family Limited Partnerships be used in downstream gifting?
What are the pros and cons of downstream gifting?
Who should consider downstream gifting?