Estate Planning

Legacy Planning: Transferring Wealth to the Next Generation

Leave a Tax-Efficient Legacy

Learn strategies for efficient wealth transfer including stepped-up basis, Roth conversions for heirs, annual gifting, and estate tax planning techniques.

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$15M

Permanent Estate Tax Exemption (OBBBA)

$18K

Annual Gift Exclusion (2024)

10 Years

Inherited IRA Distribution Window

40%

Federal Estate Tax Rate

Quick Answer

Stepped-up basis at death erases all capital gains - hold appreciated assets for heirs rather than selling
Roth conversions shift tax burden from heirs to you at potentially lower rates - heirs withdraw tax-free
Annual $18K gift exclusion ($36K per couple) allows systematic wealth transfer outside estate
OBBBA made the $15M estate exemption permanent - focus now on protecting future appreciation
SECURE Act requires 10-year IRA withdrawal for most heirs - makes Roth conversions more valuable

The Tools

Wealth Transfer Strategies

Stepped-Up Basis: The Ultimate Tax Strategy

At death, heirs receive assets at current market value (stepped-up basis), erasing all unrealized capital gains. $100K invested that grew to $1M has $900K gain. If sold before death: ~$180K capital gains tax. If inherited: $0 tax. This makes holding appreciated assets until death powerful for wealth transfer.

Roth Accounts: Tax-Free Inheritance

Roth IRAs provide tax-free income to heirs (though now subject to 10-year distribution rule). Unlike Traditional IRAs where heirs pay income tax on withdrawals, Roth distributions are entirely tax-free. Converting to Roth shifts tax burden from heirs to you - often at lower rates.

Annual Gift Exclusion: $18,000 Per Person

In 2024, you can gift $18,000 per person ($36,000 per couple) annually with no gift tax or reporting. Over 10 years, a couple could transfer $360,000 to each child completely tax-free. These gifts also grow outside your estate, avoiding future estate tax on appreciation.

Estate Tax Exemption: $15M Permanent (OBBBA)

The One Big Beautiful Bill Act (OBBBA) made the federal estate tax exemption permanent at $15M per person ($30M per couple). This eliminates the uncertainty of the 2026 sunset. Estates below this threshold owe no federal estate tax. Focus shifts to protecting future appreciation and leveraging transfer strategies.

Implementation

Proven Strategies

Strategic Roth Conversion for Heirs

Convert Traditional IRA to Roth while in lower tax brackets. You pay tax now at your rate; heirs receive tax-free distributions. Under SECURE Act, non-spouse heirs must withdraw inherited IRAs within 10 years - Roth allows tax-free withdrawals during their peak earning years.

Best for: Those with significant Traditional IRA balances who want to minimize heir tax burden.

Example:

Retire at 60 with $1M Traditional IRA. Convert $100K/year at 22% bracket ($22K tax/year) over 10 years. Pay $220K total tax. Children inherit $1M+ Roth at your death. They withdraw over 10 years completely tax-free during their high-earning 40s-50s. Saves children $300K+ in taxes at their higher rates.

Appreciated Asset Transfer Strategy

Identify which assets to hold until death (appreciated stocks, real estate) for stepped-up basis and which to use for lifetime spending (cash, bonds, high-basis assets). Spend down assets with low embedded gains; let high-gain assets pass to heirs tax-free.

Best for: Those with significant unrealized capital gains in taxable accounts.

Example:

Portfolio: $500K stock (basis $100K, $400K gain), $500K bonds. If you need $500K for retirement: Spend the bonds. Hold stock until death. Heirs inherit stock at $500K basis - $400K gain erased. Alternatively: Sell stock first, pay $80K capital gains tax, heirs inherit cash. Holding stock saves $80K.

Annual Gifting Program

Implement systematic annual gifting using $18,000 exclusion ($36,000 per couple). Can gift directly, fund 529 education accounts, or pay medical/education expenses directly (unlimited if paid directly to institution). Reduces estate size and shifts future appreciation outside estate.

Best for: Those with estates approaching or exceeding estate tax exemption levels.

Example:

Couple with 3 children and 6 grandchildren (9 recipients). Annual gifting: $36,000 x 9 = $324,000/year. Over 10 years: $3.24M transferred tax-free. Plus: Pay private school tuition directly ($50K/year x 6 grandchildren = $300K/year) - unlimited, tax-free. 10 years of combined giving: $6.24M outside estate.

Avoid These Pitfalls

Common Mistakes

Leaving Large Traditional IRAs to Heirs

Under SECURE Act, non-spouse heirs must withdraw inherited IRAs within 10 years - often during peak earning years at high tax rates. A $1M Traditional IRA inheritance can cost $400K+ in taxes. Consider Roth conversions to shift tax burden to your lower-rate years.

Selling Appreciated Assets Before Death

Selling appreciated assets triggers capital gains tax that could be completely eliminated through stepped-up basis at death. Unless you need the funds, holding appreciated assets until death is often the most tax-efficient strategy. Let heirs inherit, not you sell.

Not Planning for Estate Growth

With the $15M exemption now permanent under OBBBA, focus shifts to protecting future appreciation. Estates grow over time - today's $10M estate could exceed exemption thresholds in 10-20 years. Use transfer strategies now while assets are at lower values.

Questions

Common Questions

Here are the most common questions we receive about this topic.

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Generally: Appreciated assets (stocks, real estate) for stepped-up basis, Roth IRAs for tax-free income, life insurance for liquidity. Avoid leaving: Large Traditional IRAs (taxable to heirs), highly appreciated assets you need to sell (lose step-up). Match asset type to heir needs.

Depends on: Your financial security, heir needs and maturity, estate size relative to exemption, asset types. Advantages of giving now: See impact, shift appreciation outside estate, annual exclusion tax-free. Advantages of waiting: Maintain control, stepped-up basis, can adjust based on circumstances.

Not always. Trusts provide: Probate avoidance, privacy, control over distributions, potential tax benefits. But simple estates can use: Beneficiary designations, TOD/POD accounts, joint ownership. Consult estate attorney - complexity and cost of trusts may not be justified for all situations.

SECURE Act requires most non-spouse heirs to withdraw inherited IRAs within 10 years (previously could stretch over lifetime). This concentrates income tax into fewer years at potentially higher rates. Makes Roth conversions more valuable and life insurance more attractive for IRA replacement.

Accounts pass to named beneficiaries (bypass probate). Spouse inheritors can roll into own IRA or inherit. Non-spouse heirs must withdraw within 10 years (Traditional = taxable, Roth = tax-free). No beneficiary designated = goes to estate (worst outcome - accelerated taxation, probate).

Ready to Plan Your Legacy?

Thoughtful legacy planning ensures your wealth benefits your heirs, not the tax collector. Let us help you create a comprehensive wealth transfer strategy.

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