Most long-time construction business owners reach a point when they start thinking about not only their own retirements, but also their families’ financial security. Whether you’re at that point or closing in fast, here are four tax-savvy strategies for transferring wealth to the next generation.

1. Annual gifting

Annual gifting is a proven strategy for reducing the size of a taxable estate. Savings can accumulate substantially over time — particularly if you transfer assets that are expected to appreciate (for example, stocks). This is because you can “freeze” the value of the gift before it appreciates further. Gifting also works well for assets that are subject to substantial valuation discounts, such as for lack of marketability or control.

For 2025, the annual gift tax exclusion is $19,000 per recipient, and you can make such tax-free gifts to as many people as you like. If you’re married, your spouse can gift an additional $19,000 to the same recipients, allowing you to trim your combined estate by $38,000 for each recipient. Joint gifts to 10 different people this year could remove as much as $380,000 from your estate.

If your gifts exceed the annual exclusion, you don’t need to pay taxes, but you do reduce the amount of your lifetime gift and estate exemption that’s available at your death. For 2025, the federal exemption is $13.99 million ($27.98 million for a married couple).

Important: Absent congressional action, the lifetime exemption is scheduled to drop by about half after 2025. As of this writing, Congress is working on tax legislation that could potentially extend the current high exemption amount.

2. Grantor retained annuity trusts

A grantor retained annuity trust (GRAT) is a type of irrevocable trust that lets the grantor (you) transfer appreciating assets with few gift or estate tax consequences. You fund the trust with a one-time contribution of assets and subsequently receive annuity payouts for a specified time. The total value of the payouts eventually equals the initial contribution. The trust’s income, gains and losses flow to the grantor, rather than the trust.

When the annuity term expires, the assets remaining in the GRAT transfer to your designated beneficiaries. The gift tax amount is based on the present value of their interest in the initial contribution, so appreciation passes without being subject to gift or estate taxes. Along with the contribution, interest is also removed from your estate so long as you don’t die before the annuity term ends.

3. Intentionally defective grantor trusts

An intentionally defective grantor trust (IDGT) is another type of irrevocable trust. It allows assets to appreciate without incurring gift or estate taxes. The trust is established with a “defect” — for example, it may allow you, the grantor, to swap trust assets. This causes the IRS to treat it as owned by the grantor for income tax purposes. Although that means you’re on the hook for income taxes, your tax payments reduce your taxable estate and aren’t treated as gifts.

If you gift appreciating assets to an IDGT, the initial value of the assets counts against your lifetime gift and estate tax exemption. And, as the grantor, you may be able to sell such assets to the trust without recognizing a gain.

To qualify, the sale must be for fair market value and in exchange for a promissory note, which can provide you with cash flow in the form of payments. The note must bear interest at the applicable federal rate. The note will be included in your estate, but it likely will appreciate more slowly than the sold asset.

4. Intrafamily loans

If you have substantial liquid assets, intrafamily loans are worth considering. The IRS allows family members to extend loans at lower interest rates than can typically be obtained from commercial lenders.

Moreover, any such loan isn’t applied against your gift or estate tax exemptions so long as it’s properly documented with a promissory note. The value of notes on intrafamily loans is included in your estate. The funds you lend, however, can appreciate outside of the estate.

Never too soon

Running a construction business long enough to accumulate substantial wealth is an accomplishment in and of itself. That’s why it’s never too soon to start considering steps to provide for your heirs and guard against unnecessarily high estate taxes. 

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