You’ve worked hard your entire life—building a business, saving diligently, investing wisely—not just for your own comfort, but to leave something meaningful for the people you love. But what if, despite your best intentions, your estate plan is unknowingly setting your family up for an unnecessary financial hit?
As the federal estate tax exemption has grown dramatically over the last decade—from $5 million in 2011 to nearly $14 million today—the fear of estate taxes has faded for many families. But another, quieter threat has taken its place: income tax on inherited assets. And it’s one that could quietly erode the legacy you hoped to pass on.
The Hidden Cost: How “Basis” Impacts What Your Family Keeps
When it comes to taxes on inherited property, it’s not just about what you pass on—it’s about how you pass it on.
Every asset—your home, your investments, your business—has what’s called an income tax basis, which is essentially its starting value for tax purposes. If your heirs sell an asset for more than its basis, they pay capital gains tax on the difference. That tax can eat away at what you intended to be a gift of love and security.
Here’s the critical piece: when assets are passed at death, they typically receive a step-up in basis, which means their value resets to the fair market value at that time. If your family sells the asset soon after, they may owe little—or nothing—in capital gains tax.
But if you pass the asset to them during your lifetime or through certain outdated trust structures, they may be stuck with your original basis—and a painful tax bill.
A Common Estate Planning Tool That Could Backfire
Many couples—especially those who created their estate plans years ago—have what’s known as an AB trust (or bypass trust) built into their documents. This structure was once a powerful way to avoid estate taxes, but in today’s environment, it may be doing more harm than good.
Here’s how it works:
When one spouse dies, part of their estate goes into a bypass trust. While this trust can provide income and support to the surviving spouse, the assets in it are frozen at their current basis. When the second spouse dies, those assets don’t get a second step-up—and that can trigger a significant tax hit for your children or other heirs.
Imagine this: You leave stock worth $1 million in a bypass trust. Years later, it’s grown to $1.5 million. If that stock is sold after your spouse’s passing, your children could face a $500,000 taxable gain, simply because of how the assets were positioned—not because of any mistake they made.
That’s not just a tax—it’s a missed opportunity. And it’s not what most people intend when they plan their legacy.
You Have Options—And Peace of Mind Is One of Them
The good news? You don’t have to leave your family with this hidden tax burden. Today’s estate planning tools offer flexible, compassionate ways to protect your loved ones and reduce their future tax liability.
Here are a few thoughtful strategies:
-
Simplify and protect: For couples who are comfortable doing so, leaving everything outright to the surviving spouse may allow for two full step-ups in basis—once at your death, and again at theirs. This can maximize tax savings for your family. However, it’s important to weigh this against asset protection concerns, especially in the case of remarriage or potential creditor issues.
-
Empower your spouse: By giving your spouse a general power of appointment over assets in the bypass trust, you can ensure those assets are included in their estate—and receive a new step-up in basis when they pass.
-
Plan for flexibility: Naming a trust protector in your trust document allows for adjustments down the road. This role can help tailor your plan to future tax laws and family needs, even long after you’re gone.
Your Legacy Deserves a Second Look
You created your estate plan with love and foresight. But if it hasn’t been reviewed in recent years, it may no longer reflect today’s tax laws—or your family’s current needs.
Ask yourself:
-
Are my assets positioned to minimize taxes for my children?
-
Does my plan still make sense now that estate tax exemptions are higher?
-
Am I unintentionally locking my family into an outdated strategy that could cost them?
An estate plan is more than a legal document—it’s a final act of care. It’s the last gift you give, and one of the few chances you’ll have to speak to your family through actions, not just words.
Let’s Make Sure Your Plan Reflects Your Heart
If you’re not sure whether your estate plan could be creating a future tax burden, now is the time to find out. With thoughtful adjustments, you can protect your family not just from estate taxes, but from avoidable income tax bills—and give them the full benefit of everything you’ve built.
Reach out for a basis planning review, and ensure your legacy is as generous, wise, and loving as you intended it to be.