Think estate planning is just for the ultra-wealthy? Think again.
A lot of people assume that if their estate is under the $13.99 million federal estate tax exemption, they’re off the hook - no estate tax, no problem. But that’s a big mistake.
Even if you don’t owe federal estate taxes, you could still be losing thousands - or even millions to capital gains taxes, state estate taxes, and other hidden fees that drain what you leave behind.
And here’s the real shocker – some common estate planning strategies could actually cost you more in the long run.
In today's post, I will show why you still need estate planning and will break down how to protect your wealth, avoid costly tax mistakes, and make sure your money stays with your family - not the IRS.
8 Reasons Why You Still Need Estate Planning Even if Your Estate is Under Federal Exemptions
Gifting Strategy to Reduce Taxes
Most people think of gifting as just giving away money, but when done right, it’s actually a powerful tax strategy that can help you and your family keep more of your wealth instead of handing it over to the IRS. The key? Knowing what to gift, when to gift, and how to do it tax-efficiently.
Picture this - you bought shares of a blue-chip stock decades ago for $250,000, and today they’re worth $1.5 million. If you sell them yourself, you’d owe capital gains tax on $1.25 million of profit, which could mean $250,000 or more in taxes, depending on your tax bracket and state.
But what if you gifted those shares to your retired mother instead? Since her taxable income is lower, she’d likely owe much less in capital gains tax than you would. Instead of paying the highest tax rate, she could sell the stock at a lower bracket and keep more of the profits.
Same stock, same wealth - but now you’ve shifted the tax burden in a way that reduces the overall tax bill for your family.
0% Capital Gains Bracket Strategy: Pay No Tax on Your Gains
Most people think that any time you sell an investment, you’ll owe capital gains tax. But did you know that if your taxable income is low enough, you could sell investments and pay zero capital gains tax?
It’s a strategy that many people overlook - but one that can save you thousands. Here’s how it works:
In 2025, a married couple with taxable income under $96,700 can sell investments and pay zero capital gains tax. That means they could sell appreciated stock, keep every dollar, and reinvest tax-free - without losing a cent to taxes.
And here’s the best part - if your income fluctuates from year to year, you might have windows where you can harvest capital gains tax-free. It’s a simple but powerful strategy that most people never take advantage of.
Avoiding Capital Gains Taxes with Step-Up in Basis
Here’s a tax mistake that catches way too many families off guard - gifting assets that would’ve been better left alone. People assume that handing off property or stocks during their lifetime is a smart move, but sometimes, it’s the exact opposite.
Here’s a common situation – you’ve been holding onto a stock portfolio for decades, and it’s grown significantly in value. You bought shares of a company for $50,000 decades ago, and now they’re worth $500,000. You think, “I’ll gift these to my kids now, so they can benefit.” Sounds generous, right? But here’s the problem - when they sell, they’ll be taxed on the full gain, meaning they could owe capital gains tax on $450,000.
Now, consider another approach - you hold onto those shares and pass them down after you’re gone. The moment they inherit them, their cost basis resets to the market value on that day. If they sell right away, they pay zero capital gains tax. That’s a massive tax savings, just for doing… well, nothing.
The same goes for real estate. Maybe you bought your home years ago for $200,000, and now it’s worth $1 million. If you gift it now, your heirs inherit your original cost basis - so when they sell, they’ll owe tax on $800,000 of gains. But if they inherit it instead? Boom, their basis resets to $1 million.
This is why knowing when to hold and when to transfer is critical. Gifting cash or assets that won’t appreciate much? No problem. But highly appreciated assets? Let them inherit. It’s one of the easiest tax breaks available, and most people miss it.
Using Trusts to Control and Protect Assets
A lot of people assume trusts are only for the ultra-wealthy, but the truth is, even a modest estate can benefit from a well-structured trust. Whether you want to avoid probate, protect your assets from creditors, or ensure your wealth is distributed on your terms, a trust can be one of the most powerful estate planning tools available.
Example 1: Avoiding Probate & Managing Assets with a Revocable Living Trust
Let’s say you have $2 million in assets, including a home, investments, and a vacation property. If everything is in your name, your estate will go through probate when you pass. That could mean months - or even years - before your heirs receive anything.
Instead, by placing assets in a Revocable Living Trust, you:
Avoid probate completely, allowing assets to transfer smoothly to your heirs.
Remain in full control during your lifetime, with the ability to update or revoke the trust at any time.
Ensure your assets are managed properly if you become incapacitated.
A Revocable Living Trust doesn’t just make estate planning easier - it simplifies wealth transfer and keeps your family out of court.
Example 2: Protecting Your Wealth from Creditors with an Irrevocable Trust
Next, imagine you’ve built up significant savings and investments, but you’re worried about lawsuits, creditors, or even future long-term care costs.
An Irrevocable Trust helps shield your wealth from potential financial threats by legally separating assets from your estate.
Assets inside an Irrevocable Trust generally can’t be touched by creditors or lawsuits.
If structured correctly, it can also help with Medicaid planning, allowing you to qualify for benefits while preserving assets for your heirs.
Unlike a Revocable Living Trust, you give up control, but in exchange, your assets are better protected.
If asset protection and long-term care concerns are on your mind, this kind of trust can keep more of your wealth intact for your loved ones.
Example 3: Extending Tax Advantages Over Multiple Generations with a Dynasty Trust
Now, if your goal is to leave a lasting financial legacy for your children and grandchildren, a Dynasty Trust could be the key. A Dynasty Trust allows you to:
Keep assets protected from divorce, lawsuits, and financial mismanagement.
Control how and when money is distributed, ensuring heirs don’t overspend.
Potentially reduce estate taxes for future generations, depending on state laws.
Even if your estate isn’t taxable today, a Dynasty Trust ensures that family wealth continues growing tax-efficiently for decades.
Reevaluating Old Trust Strategies That Could Be Hurting You
Since we’re already talking about trusts, let’s address something that often gets overlooked - outdated trust structures that might actually be creating tax problems instead of solving them
If your estate plan was originally designed to minimize estate taxes but you’re now well under the federal exemption, your existing trust setup might actually be costing your heirs in income taxes.
Bypass trusts and irrevocable trusts, for example, were once essential for avoiding estate taxes. But today, for non-taxable estates, they might create an income tax problem by preventing assets from getting a step-up in basis at the surviving spouse’s death.
For example:
John and Linda set up a bypass trust in the early 2000s when estate tax limits were much lower.
When John passed away, his half of the assets went into the bypass trust - which means they no longer qualify for a step-up in basis when Linda later passes.
Now, when their children inherit the assets, they owe capital gains tax on the growth of the trust assets, instead of getting a tax-free step-up.
If you have an older trust in place, it’s worth re-evaluating whether it still serves your needs - or if adjusting your structure could save your heirs from unnecessary taxes.
IRA Planning & The SECURE Act - A Tax Bill Waiting to Happen
If you’re planning to pass down a large IRA or 401(k) to your heirs, the SECURE Act changed the game. In most cases, non-spouse beneficiaries must now withdraw the entire balance within 10 years - meaning a $1 million inherited IRA could turn into a major tax headache if your heirs are in their peak earning years.
Let’s take Lisa, for example. She’s 50 years old when she inherits a $1 million IRA from her father. Sounds great, right? But there’s a problem…
Lisa already earns $175,000 per year in salary.
Under the new rules, she must withdraw the full IRA within 10 years - which means she’ll be adding an extra $100,000 per year to her taxable income if she spreads it out evenly.
That extra income, in 2025, will push her from the 24% tax bracket into the 35% bracket, meaning she’ll pay hundreds of thousands more in taxes than she expected.
So, instead of keeping more of the inheritance, Lisa is handing a huge chunk of it to the IRS.
How do you avoid this problem?
Roth Conversions - Reducing Taxes in Retirement
One solution is a Roth conversion - a strategy that allows you to move money from a traditional IRA to a Roth IRA and pay taxes now, at today’s rates, so your money grows tax-free forever.
Consider if instead of leaving Lisa a $1 million taxable IRA, her father had converted portions of it into a Roth IRA over several years. Now, instead of being forced to withdraw taxable income over 10 years, Lisa inherits tax-free money that continues to grow tax-free.
No RMDs for Roth IRAs - more tax-free growth.
Heirs don’t owe taxes on withdrawals.
Lower total taxes over your lifetime.
Even if you don’t need the money, a strategic Roth conversion can reduce taxes for both you and your heirs - ensuring they inherit more and pay less to the IRS.
Split IRA Strategy - Giving Heirs More Time to Manage Taxes
Another strategy you can consider is a Split IRA strategy. Instead of leaving the entire IRA to the surviving spouse you split the IRA at the first spouse’s death - leaving half to the spouse and half to the children.
The children will get 10 years to withdraw their portion of the IRA after the first spouse passes while the surviving spouse could keep their half and continue tax-deferred growth. Then, after the second spouse passes, the remaining IRA is inherited by the children - giving them a second 10-year period to withdraw those funds.
Instead of forcing heirs to withdraw everything in one high-tax 10-year window, this strategy spreads the tax impact over multiple decades, reducing the overall tax burden on the family.
Using Life Insurance to Offset IRA Taxes
Another way to soften the tax impact of an inherited IRA is life insurance.
Think about it - instead of leaving behind a $1 million IRA, which your heirs will be forced to drain (and pay taxes on) within 10 years, what if you strategically used withdrawals during your lifetime to fund a life insurance policy instead?
Here’s why that works:
Life insurance pays out tax-free - no income tax, no surprises.
No Required Minimum Distributions (RMDs), no forced withdrawals.
Your heirs can use the payout to cover the taxes on any IRA distributions they do receive.
For families with large IRAs, life insurance can act as a tax-free replacement for taxable retirement.
Beneficiary Designations - Avoiding Probate & Unintended Taxes
Now, tax strategies are just one part of the equation. Making sure your assets actually go to the right people is just as important. That’s where beneficiary designations come in.
Many people believe their will controls everything - but that’s not true for retirement accounts, life insurance policies, or payable-on-death accounts.
These assets pass directly to the named beneficiary, bypassing your will. The problem? If your beneficiary designations are outdated or incorrect, your assets could end up in the wrong hands - or face unnecessary taxes.
Here’s a situation that happens all too often - you set up your IRA years ago and listed your ex-spouse as the beneficiary. You’ve since remarried and think your will updates everything - but it doesn’t.
Since IRA and 401(k) accounts follow their beneficiary forms - not your will - your ex-spouse would still inherit the money, even if your will says otherwise.
Review and update beneficiary designations regularly.
Make sure life insurance, IRAs, and annuities go to the right people.
If you want more control, consider naming a trust as the beneficiary.
State Estate & Inheritance Taxes - The Hidden Tax Trap
While federal estate taxes may not be a concern, that doesn’t mean you’re completely in the clear. Depending on where you live - or where you own property - you could still face state-level estate or inheritance taxes.
12 states plus Washington, D.C. still have their own estate tax, and 5 states impose an inheritance tax.
For example:
Oregon and Massachusetts tax estates starting at just $1 million - far below the federal limit.
Illinois, my state, and New York also have state estate taxes that kick in well before the federal exemption.
Pennsylvania and New Jersey have inheritance taxes ranging from 4.5% to 16%, depending on who inherits the assets.
If you live in one of these states - or if you own property in one - it’s important to plan ahead. Smart gifting, trust strategies, or even relocating to a tax-friendly state could help minimize or eliminate state-level estate taxes.
Final Thoughts
You might not have to worry about federal estate taxes, but that doesn’t mean planning isn’t important. The way you structure your assets can still determine how much of your wealth stays in your family.
The choices you make now can shape your family’s financial future. From gifting strategies to updating trusts, small adjustments can have a lasting impact on your legacy.
At the end of the day, estate planning isn’t just about what you leave behind - it’s about making sure it goes exactly where you want, in the smartest way possible. Because let’s be real - your family should benefit from what you built, not the IRS.
If you are looking for ways to reduce taxes, protect your wealth, and make smarter estate planning decisions, feel free to contact us and schedule your Estate Clarity Meeting and let’s create a plan that gives you confidence in your future.
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