Strategic wealth planning is a comprehensive financial blueprint that coordinates your family, business, and estate goals beyond the construction and management of an investment portfolio. Although few estates will need to worry about the federal estate tax now that the exemption amount is $15 million, there are state inheritance and estate taxes to consider that kick in at much lower wealth levels. Income taxes also must be taken into account.
Taxpayers can make some lifetime transfers each year without concern for federal gift taxes. This “annual exclusion amount" is $19,000 per donee in 2026, to an unlimited number of donees. For example, a grandparent may give his two children and three grandchildren each $19,000 this year—a total transfer of $95,000—without having to file a federal gift tax return. The exclusion amount is adjusted for inflation each year in $1,000 increments. Additionally, if spouses agree, they can "split" gifts so as to give twice this amount to each person. A gift tax return is then required, but no gift tax will be due.
Finally, families may give unlimited amounts for school tuition or qualified medical expenses free of any gift tax liability. Such gifts must be made directly to the school or health care provider, not as reimbursements to the donee. The important point is that making any of these gifts will not diminish the $15 million estate tax exemption at death. Lifetime transfers larger than these limits will reduce the estate tax exemption, but no gift tax will be payable until the estate tax exemption is exhausted.
Medium-size estates—Tax basis planning
Historically, planning prioritized minimizing estate and/or inheritance taxes by making lifetime transfers and taking appropriate steps to reduce the taxable value of those transfers. The larger estate tax exemption turns that advice on its head for estates expected to be smaller than $15 million ($30 million for married couples).
The reason for the change of strategy is that inherited assets have their tax basis reset to fair market value as of the date that the owner passed. This basis step-up amounts to a forgiveness of any capital gain tax on asset appreciation. Stepped-up basis at death is a practical solution to what would otherwise be a tricky problem in tax administration—the only person who might have accurate details for determining the tax basis has passed.
Example: Grandfather's investment portfolio is worth $4 million, with a tax basis of $1 million. He plans to divide the portfolio among four grandchildren. If he makes a lifetime gift of the securities, and assuming that the basis is divided equally, each grandchild will have to plan for taxes on $750,000 worth of capital gains. If Grandfather holds the assets until his death, the tax on the $3 million capital gain is forgiven under IRC §1014(a), and at zero estate tax cost.
Exception: The basis step-up rule does not apply to income with respect to a decedent (IRD), that is, items that would have been taxable income to the decedent. Common examples of IRD include:
- Wages and compensation, such as commission and deferred compensation arrangements
- Dividend income
- Rental income
- Qualified plans, unless the spouse elects to treat the interest as his or her own
- Partnership interests
- S corporations
- Deferred annuities
An important example in many estates is money saved in a traditional IRA or 401(k) plan. Distributions from those accounts would have been taxable income to the owner, and so they are taxable income to the heirs. This differing tax treatment may come into play when deciding how assets are to be divided among several heirs.
Example: Alice’s estate will consist of a $1 million investment portfolio with a tax basis of $500,000 and a $1 million IRA. Two children will be the beneficiaries. The investment portfolio will receive a stepped-up basis, so the child who inherits it will have no income tax exposure upon an immediate sale of the assets. Whoever receives the IRA will have to pay ordinary income tax on all distributions, and the IRA must be fully distributed within ten years unless a limited exception applies.
Recordkeeping: In order to secure the income tax benefits of basis step-ups, executors or personal representatives of estates will need to document very clearly the value of all assets at the date of the decedent’s death. Appraisals will be needed for nonmarketable assets. This should be done as soon as possible, rather than waiting until a later sale.
Note also that there is no statute of limitations for tax basis, so basis records must be kept indefinitely. If an inherited asset is sold 20 years after it is received, the donee will need to refer to decades-old records to determine whether there is a gain or loss.
Effective estate planning requires a coordinated strategy that adapts to current tax laws and individual family priorities. By thoughtfully leveraging annual gift exclusions, capitalizing on tax basis step-ups, and managing potential income tax liabilities, you can maximize the wealth preserved for your heirs while minimizing overall tax exposure.
Take control of your legacy today. Connect with your Arvest Wealth Management client advisor now to create a personalized, tax-efficient estate plan tailored to your goals. As an extension of our team, your client advisor can provide you and your family with access to a selection of subject-matter experts tailored to your specific needs. Depending on your unique situation, an introduction can be arranged with a Trust Officer, a Private Banker or members of our Advanced Planning Team.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.
