How to Build a Legacy That Benefits Your Family, Not the IRS

A successful business owner recently asked me a question I hear often: “I’ve spent my whole career building wealth, but I’m worried that taxes are going to eat up half of what I leave to my kids. Is there anything I can do about it?”

Whether you’re a few years from retirement or in the prime of your high-earning career, estate planning represents one of the most important yet often overlooked parts of financial wellness. The good news? With thoughtful planning, you can significantly reduce the tax bite and ensure more of your money goes to the people and causes you care about most.

Understanding the Tax Challenge

Here’s what I’ve learned after years of helping families navigate this: if you don’t plan carefully, taxes can seriously erode wealth when it transfers to your loved ones. Depending on your estate size and structure, your heirs might face federal estate taxes up to 40%, state-level inheritance or estate taxes, and income taxes on certain inherited accounts like traditional IRAs.

But here’s the encouraging part — with proper planning, you can minimize this tax burden dramatically. I’ve seen families save hundreds of thousands, sometimes millions, in taxes through smart strategies implemented years in advance.

The Federal Estate Tax Landscape

Let me start with the current rules. Right now, the federal estate tax exemption sits at almost $14 million per individual. That means if your estate is worth less than that amount, it won’t face federal estate tax. But here’s the catch — this exemption is projected to drop to around $6.8 million unless Congress extends the current higher limits.

For married couples, there’s good news. With proper planning, you can essentially double your exemption. I always tell couples this is one area where being married really pays off from a tax perspective.

Strategy One: Lifetime Gifting

One of the simplest yet most powerful strategies I recommend is gifting assets during your lifetime. As of 2025, you can give up to $19,000 per person per year, or $38,000 as a couple, without triggering any gift tax.

Let me show you how powerful this can be. I worked with a couple who had three children. By gifting $38,000 to each child annually over 10 years, they moved more than $1 million out of their estate completely tax-free. The math is simple, but the impact is enormous.

For families focused on education, I often recommend supercharging 529 college savings plans. You can contribute five years’ worth of gifts at once — up to $190,000 for couples in 2025 — while staying within IRS guidelines. This strategy lets you make a significant impact on education funding while reducing your taxable estate.

Strategy Two: Maximizing Spousal Exemptions

Here’s something many couples miss: each spouse gets their own federal estate tax exemption, but you have to structure your estate properly to preserve both. We sometimes recommend what’s called a credit shelter trust or bypass trust.

When one spouse passes away, their exemption-protected assets go into the trust, benefiting the surviving spouse during their lifetime. Then when the second spouse dies, those assets pass to heirs without additional estate tax. This approach essentially doubles your estate tax protection.

Strategy Three: Understanding Stepped-Up Basis

This is one of the most misunderstood yet valuable concepts in estate planning. Let me explain with an example I use with clients.

Say you bought Apple stock years ago for $10,000, and now it’s worth $100,000. If you gift it during your lifetime, your heirs inherit your original $10,000 cost basis and might owe capital gains tax on the $90,000 appreciation if they sell.

But if they inherit the stock after your death, the cost basis “steps up” to current market value. That means if they sell it right away, there’s no capital gains tax at all. For highly appreciated assets, it’s often better to hold onto them and let your heirs inherit them rather than gifting during your lifetime.

Strategy Four: Roth Conversion Planning

When your heirs inherit a traditional IRA, they’re required to take distributions and pay income taxes, typically draining the account within 10 years. But if they inherit a Roth IRA, distributions remain tax-free as long as you met the five-year holding period.

I often recommend Roth conversions for clients during low-income years, like early retirement. You pay taxes now, but your heirs benefit from tax-free withdrawals later. Plus, you might reduce your taxable estate size at the same time.

Strategy Five: Irrevocable Trusts for High Net Worth Families

For families whose estates exceed federal exemptions, irrevocable trusts become incredibly valuable. These trusts remove assets from your estate, helping reduce estate taxes while giving you more control over distribution timing.

I’ve helped clients implement irrevocable life insurance trusts (ILITs) that keep life insurance payouts out of their estates, and grantor retained annuity trusts (GRATs) that are ideal for passing growth assets with minimal gift tax. These strategies can be complex, so I always recommend working with both an estate planning attorney and financial planner to ensure alignment with your overall goals.

Strategy Six: Charitable Giving Strategies

If you’re already charitably inclined, you can use tools like donor-advised funds to get an immediate tax deduction, avoid capital gains on appreciated stock, and support favorite causes over time.

For those wanting to go further, charitable remainder trusts can provide income during your lifetime with the remainder going to charity after death. I’ve seen these tools help families give back while reducing their taxable estate and creating retirement income streams.

Strategy Seven: Keep Beneficiary Designations Current

Here’s something that trips up many families — and it’s completely avoidable. Assets like IRAs, 401(k)s, bank accounts, and life insurance policies pass directly to named beneficiaries, bypassing probate entirely.

I always tell clients to review these designations annually. Life changes like marriage, divorce, births, or deaths can make old designations problematic. A simple review every year or two can save your heirs from significant headaches and delays.

Putting It All Together

Let me summarize the key strategies: Know your estate value and potential tax exposure. Use annual gifts and education savings to reduce your estate during your lifetime. If you’re married, structure your estate plan to use both spouses’ exemptions.

Hold onto highly appreciated assets so heirs can benefit from stepped-up basis. Consider Roth conversions for tax-free inheritance. Explore trusts for asset protection and distribution control. Use charitable strategies to support causes you love while potentially lowering taxes. And keep those beneficiary designations updated.

The Importance of Early Planning

Here’s what I’ve learned after years of helping families with estate planning: there’s no one-size-fits-all solution. Your family dynamics, financial situation, and state of residence all play important roles.

But what is universal is this — the earlier you start planning, the more options you’ll have and the more peace of mind you’ll enjoy. I’ve seen families save enormous amounts in taxes simply because they started planning early and implemented strategies over time.

Don’t wait until you think you “need” estate planning. The best time to start is now, regardless of your age or wealth level. The strategies you implement today can have a tremendous impact on what you’re able to pass to the next generation.

Take the Next Step

Ready to develop a tax-efficient estate plan that protects your legacy and minimizes taxes for your heirs? I can help you evaluate your current situation, identify optimization opportunities, and create a comprehensive strategy that aligns with your family’s goals.

To take the first step in aligning your money and your meaning and having the retirement you’ve always dreamed about, click to schedule a free consultation on our website.