Peter Coughlin of Berkshire Money Management recently wrote a blog post that landed with me: Families do not lose wealth only because markets misbehave; families lose wealth because the handoff is messy. His point was mostly human: If adult children do not understand the “why” behind the money, they will improvise the “how.”
Peter is right—this is first and foremost a conversation about family. In practice, he also recognizes the importance of identifying the three predictable pickpockets that appear when wealth moves from one generation to the next: estate and inheritance taxes, capital gains taxes, and income taxes on retirement accounts.
If you plan for those three and give your kids a little context, you can keep a surprising amount of money in the family rather than donating it to the IRS. As Peter would point out, this is not about turning your family into a board meeting. The goal is to be kind to the people you love by removing avoidable financial landmines.
Most people will not pay the estate tax until they do (thanks, Massachusetts)
At the federal level in 2026, the first $15 million of an estate is exempt from federal estate tax per person. Above that, the federal estate tax can reach 40 percent. Yes, many families never encounter the federal estate tax. But wealthy families can. And even families who do not owe federal estate tax can still get clipped at the state level (more on that in a moment).
The unlimited marital deduction: a gift… and a trap if you misunderstand it
If you leave assets to your spouse, federal law gives you a powerful tool: the marital deduction. The property included in your estate that passes to your surviving spouse is generally eligible for the marital deduction, meaning it can reduce (or eliminate) estate tax when the first spouse dies. That is the good news.
The part people miss is the “when,” not the “whether.” The marital deduction usually defers estate tax; it does not magically erase it. If the surviving spouse still owns those assets later (plus growth), they are back in the picture when that spouse dies.
So married couples should think in “two-death math,” not “one-death math.” That is where planning choices, such as portability elections and credit-shelter structures, come in.
One very important note: If you want to preserve a deceased spouse’s unused federal exemption via portability, the estate generally must file a timely Form 706 to make that election, even if no estate tax is otherwise due.
The real estate tax problem is with the states
Here in Massachusetts, many families are well below the federal estate tax threshold and still face a state estate tax. Massachusetts has an estate tax threshold of $2 million. Oregon is even lower at $1 million. A home, a vacation property, a brokerage account, retirement assets, and life insurance can add up to $2 million in a hurry. But there are ways to avoid those taxes.
How can you avoid estate taxes in Massachusetts?
If your estate exceeds $2 million, there are steps you can take to limit your tax exposure. Proactive planning is critical. Here are several options to consider (I will expand on some later).
- Estate planning with a trust
One of the most effective ways to reduce estate taxes is through an irrevocable trust. Assets placed into an irrevocable trust are not included in your gross estate for estate tax purposes; the trust generally utilizes an independent trustee, and you, the grantor, cannot maintain control over the trust during your life. Upon your passing, the assets transferred into the trust are no longer considered part of your taxable estate, thus reducing your estate’s overall tax liability. - Strategic gifting
Gifting assets while you are still alive is another strategy to reduce the value of your taxable estate. The federal gifting exemption allows you to give up to $19,000 per person per year tax free. By gifting money or assets to your heirs now, you can reduce your estate size and avoid estate taxes later. Also, if you have a large IRA, making qualified charitable distributions (QCDs) directly from your IRA to a charity can reduce the tax burden on both you and your heirs. - Life insurance
Life insurance can be a crucial component of your estate plan. While the proceeds from a life insurance policy are generally tax free, they can be included in the value of your estate for tax purposes. However, by setting up an irrevocable life insurance trust (ILIT), you can keep the life insurance policy out of your taxable estate, ensuring that the benefits go directly to your heirs without being diminished by taxes. - Roth conversions
Converting traditional IRA funds into a Roth IRA can also help reduce future estate taxes. While you will pay taxes on the income at the time of the conversion, it creates a source of tax-free income for your heirs later. By paying taxes now, when rates are known, you reduce your estate’s value, which can lower your future estate tax liability.
Capital gains taxes: The step-up in basis is one of the best gifts you can leave
Here is where wealthy families accidentally light money on fire: They gift appreciated investments to their heirs during life because it feels generous, but then the kids inherit the tax bill. When you gift appreciated stock, you avoid the capital gains tax, but the recipient inherits your original cost basis and pays the capital gains tax (if any) when they sell it.
(An important note: That can be an effective strategy depending on the recipients’ needs and if they are in a lower income bracket for the capital gains tax. But do not forget to file a Form 709 if the gift exceeds the annual exclusion.)
The rule your family should know is the stepped-up basis. For many inherited assets, the beneficiary’s cost basis is generally stepped up to the fair market value at the date of death (or an alternate valuation date in some cases).
Imagine you bought a portfolio of blue-chip stocks years ago for $2 million. Over time, it grew to $6 million. If you gift those shares to your adult child during your lifetime, they generally inherit your $2 million basis. If they sell, they may owe capital gains tax on approximately $4 million in gains.
If, instead, they inherit that same portfolio after your death, the basis is generally stepped up to approximately $6 million. If they sell shortly after, the taxable gain could be close to zero.
Same stocks. Same family. Wildly different tax outcome. That is why, for many families, the best “tax move” is not always giving more; it is giving the right assets at the right time.
However, as I am sure Peter would point out, there is also real value to seeing your kids enjoy experiences because of your gifting—do not conflate the best tax strategies with the most enjoyable life strategies.
Income tax: Retirement accounts are the inheritance that comes with a bill
Most inheritances are not subject to income tax. Retirement accounts are the big exception. Traditional IRAs and other pre-tax retirement accounts, such as 401(k)s and 403(b)s, are not taxed during life. When your children inherit them, the IRS eventually wants its share, and distributions are taxed as ordinary income.
Under current post-SECURE Act rules, many non-spouse beneficiaries must empty an inherited retirement account by the end of the 10th year following the year of death (with details depending on beneficiary type and circumstances). Adult children are often in their peak earning years when they inherit. The distributions stack on top of salary, bonuses, and business income, and what could have been a thoughtful legacy becomes an accidental “highest marginal rate” event.
This is where Peter’s theme of communication comes into play again (and throughout!). If your kids do not understand that a $2 million IRA is not “$2 million of spendable money,” they can get blindsided. Roth IRA conversions change that conversation, often to the benefit of the parents and their heirs.
The parents deliberately convert their traditional IRA (or other pre-tax retirement account) to a Roth IRA (sometimes all at once; sometimes over time). This strategy controls tax brackets now rather than letting the IRS determine them later. The conversion itself creates taxable income, but the parents can often pay the tax from taxable assets, which can be beneficial because it moves more value into the Roth environment while reducing the overall estate.
Then the real magic shows up later. When heirs inherit a Roth IRA, the IRS still applies distribution rules, and inherited Roth IRAs generally remain subject to required minimum distribution (RMD) requirements similar to those for inherited traditional IRAs. But withdrawals of contributions from Roth IRAs are tax free, and most withdrawals of earnings are also tax free, assuming the Roth satisfies the five-year rule (if the Roth is less than five years old, withdrawals of earnings can be taxable). Roth conversions can transform an inheritance that would have generated ordinary income taxes into one that is typically tax free for heirs.
The fine print matters. Roth conversions can affect your modified adjusted gross income (MAGI) and affect Medicare premiums. A higher MAGI also interacts with other taxes, so, as with each of these strategies, you should work with an experienced professional to navigate the particulars.
Annual gifting and strategic gifting: “Small” numbers add up fast
The annual gift tax exclusion is the amount of money or value of property an individual can give to another person each year without having to report the gift to the IRS or incur gift tax. For 2026, the amount is $19,000 per recipient.
That sounds modest until you remember two things: You can do it every year, and married couples can often double it per recipient.
Annual gifting is the plain-vanilla move. Strategic gifting is how wealthy families set themselves apart.
Strategic gifting often means shifting future appreciation out of your estate. That can include gifting interests in a family entity or using tools such as intrafamily loans when interest rates make them attractive.
You do not need a perfect tax plan. You need a plan that reflects how taxes actually work while remaining family focused. Peter’s original theme, that family communication is the mortar, matters—family over money always. But if you are looking for the “how do we keep more of this?” answer, it is usually tax planning that does the heavy lifting.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $1 billion of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
