The planning gap is already costly
A recent survey found that 56% of parents have talked with their children about inheritance, while only 39% of adult children recall a conversation about family plans for transferring money and assets. Both groups are also uncertain: about 40% of parents and 40% of adult children say they do not know whether taxes could affect an inheritance.
That uncertainty arrives as baby boomers age and a generational transfer often estimated at more than $100 trillion begins. Estate size does not determine whether planning is useful; even a modest portfolio can create avoidable tax and administrative problems if heirs do not know what to do.
A practical first step is to sort assets into taxable investments, retirement accounts, and assets held in trust. Each bucket follows different rules.
Let appreciated investments receive a basis adjustment
For highly appreciated stocks or funds, holding an asset until death can be more tax-efficient than selling it during life or transferring it as a lifetime gift. In many cases, an inherited asset receives a basis adjustment to its value when the owner dies. That can remove much of the appreciation that occurred during the original owner’s lifetime from the heir’s capital-gains calculation.
Federal long-term capital gains can be taxed at 15% or more, depending on the taxpayer and the transaction. The potential savings become especially important when a portfolio contains long-held winners.
This does not mean an owner should never sell. Someone may need cash, want to rebalance, or prefer to support a charity. The key is to compare the after-tax result of selling now, gifting during life, and transferring at death. A lifetime gift can move future growth out of an estate, but it may also carry the donor’s original basis rather than receiving the same adjustment available to many inherited assets.
Manage inherited retirement accounts carefully
Retirement savings in a 401(k) or traditional IRA require a different approach. Contributions and investment growth may have received tax deferral, but withdrawals are generally treated as taxable income for the beneficiary. Taking the entire balance in one year can push an heir into a higher tax bracket and create an unexpectedly large bill.
Many non-spouse beneficiaries have a general 10-year window to liquidate an inherited retirement account. Spreading distributions across that period can give heirs more control over their taxable income, although it does not eliminate the tax entirely. Beneficiary designations, account rules, and possible exceptions should be reviewed before money is withdrawn.
Use annual gifts to transfer wealth gradually
Under the 2026 federal gift-tax allowance, an individual may give up to $19,000 to each recipient without using the lifetime exemption. The allowance can be used every year and for multiple recipients, making it a flexible way to shift wealth while the giver is still alive.
These gifts are generally not treated as taxable income for the recipient. They may also reduce the size of a taxable estate over time. Families often use this approach to help with a home purchase, education, travel, or other meaningful expenses.
There is still a trade-off. A gift of appreciated securities may preserve the donor’s basis, while an inherited asset may qualify for a basis adjustment. Keep records of the gift date, value, and cost basis, and confirm whether any filing is required.
Consider an irrevocable trust for larger estates
An irrevocable trust can be useful when an estate is large, family circumstances are complex, or long-term control matters. When properly designed, the trust can hold investments, remove future appreciation from a taxable estate, and provide for beneficiaries according to the creator’s instructions.
Trusts may also offer protection from creditors or lawsuits and allow distributions to be paced over many years. The word irrevocable is important: the creator generally cannot simply reclaim the assets or rewrite the arrangement whenever circumstances change. Legal fees, trustee responsibilities, and tax rules make professional guidance essential.
Start with an inventory and a family conversation
Make a list of accounts, beneficiaries, debts, insurance policies, and important documents. Then decide which assets should be transferred during life and which should pass at death. Review the plan after major events such as a marriage, birth, divorce, relocation, or substantial change in portfolio value.
Finally, tell heirs where the plan is stored and whom they should contact. A tax-smart strategy only works if the people responsible for carrying it out understand the next steps. The simplest way to begin is often the most important one: start the conversation early.
