Transfer assets into a trust
Certain types of trusts can help avoid estate taxes. An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries.
As far as avoiding other taxes, you can put money into a Roth IRA so it can grow tax free. You can set up your children as beneficiaries of the account. When you die, they will be allowed to grow the money for another ten years tax free, before they have to withdraw it.
You do not need to file a gift tax return or pay gift taxes if your gift is under the annual gift tax exclusion amount per person ($18,000 in 2024). But even if you do exceed that amount, you don't necessarily need to pay the gift tax.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
From this perspective, if you are inclined to give, you should gift as much as you can comfortably afford during your lifetime, while remaining aware of the available step-up in capital gain basis for inherited assets. So, gift your assets that have minimal gains and save your most appreciated assets for inheritance.
One good way is to leave the inheritance in a trust. The trust can be set up with some provisions, such as making distributions over time.
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift. However, form 709 is not the only way the IRS will know about a gift.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
All About the Stepped-Up Basis Loophole. A stepped-up basis is a tax provision that allows heirs to reduce their capital gains taxes. When someone inherits property and investments, the IRS resets the market value of these assets to their value on the date of the original owner's death.
The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
One option is to leave your house to someone in your will. A will names the beneficiary for each item of property and transfers ownership after the probate process. A will can be easy to prepare.
There are 2 primary methods of transferring wealth, either gifting during lifetime or leaving an inheritance at death. Individuals may transfer up to $13.99 million (as of 2025) during their lifetime or at death without incurring any federal gift or estate taxes. This is referred to as your lifetime exemption.
If your loved one is worried about whether a beneficiary can handle an inheritance — such as leaving a large sum of money to a young family member — they could set up a trust fund. This legal entity manages property and assets on behalf of someone else.
If you choose to put your house in an irrevocable trust that names your children as the beneficiaries, the property will no longer be part of your estate when you die. By removing it, there will be no estate taxes charged in the transfer and the property will not be subject to Medicaid estate recovery.
In these circumstances, a trust can help set up specific management plans for your assets, provide tax benefits and give your beneficiaries time to adjust to having assets held for them. If you have a straightforward estate and mature adult children, leaving assets outright to them might be appropriate.
When a child is young, parents often open a custodial account on the child's behalf, also known as either UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) accounts. Parents typically open these accounts as a convenience to accumulate birthday and holiday cash gifts that a child receives.
Over the next two decades, Cerulli Associates estimates that baby boomers and the Silent Generation will pass down a combined $84.4 trillion in assets to younger generations. Dubbed the “Great Wealth Transfer,” this phenomenon is already underway and will impact millions of families.
You can gift assets through direct transfers, deed changes, living trusts, or by paying for others' expenses like tuition or life insurance premiums. Legal and tax advice is important when structuring these gifts.
Gifting Money to Younger Children or Grandchildren. Gifting to younger children or grandchildren follows similar tax rules as gifting to adults. You can gift up to the annual exclusion amount per child ($18,000 in 2024) without triggering gift tax. For larger gifts, use the lifetime exemption and file IRS Form 709.
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
Give now or later: The IRS doesn't care
For tax purposes, the timing of your generosity makes little difference if your family is not likely to be subject to estate taxes.