Around two-thirds of Americans do not have an estate plan in place at the time of death.1
Building wealth is only part of your story.
Without a clear tax strategy, even well-planned savings and investments can be reduced before they reach your family. Many families focus on growing and accumulating assets. Still, they are surprised or caught off guard by how much taxes can affect what is ultimately passed on, because they do not fully understand how taxes can impact it.
Understanding how taxes work and where common legacy planning gaps exist can help you take steps to better what you’ve worked so hard to build. With tax rules changing under the One Big Beautiful Bill Act, knowing and understanding how taxes can influence wealth transfers is an integral part of planning ahead.
Why Estate and Inheritance Taxes Deserve a Closer Look in Legacy Planning
Federal estate taxes should be given significant consideration when planning for future transfers to the next generation. At the time of death, federal estate taxes may apply if the value of the estate is above a specific limit. Assets above the federal estate tax exemption threshold may be taxed at rates of up to 40%.2 Tax laws continue to evolve, and typically change after Presidential elections.
Some states also impose their own estate or inheritance taxes. These state-level taxes often have exemption thresholds that are significantly lower than the federal limit, so families that aren’t subject to the federal estate tax may still face a state tax obligation.3 When planning isn’t addressed in advance, federal and state taxes together can significantly reduce the value of an estate, and may be more than families expect. What appears to be a substantial legacy on paper could look completely different once taxes are paid.
Income Taxes Don’t Disappear at Death
A common misunderstanding about income taxes and inheritance is that income taxes disappear at death.
Not all inherited assets receive the same tax treatment. From an income tax perspective, many trusts are subject to accelerated tax brackets, meaning undistributed income can be taxed at higher rates than individual taxpayers. Retirement accounts, such as traditional IRAs and 401(k) plans, are generally taxable to beneficiaries as ordinary income. Although these accounts offer tax benefits during life, they may result in income taxes for their heirs.
Often, inherited retirement assets must be withdrawn by beneficiaries over a defined period, such as ten years for non-spousal beneficiaries. However, timing could differ depending on whether or not the deceased had begun RMDs. This, in turn, can create taxable income during those years, potentially vaulting beneficiaries into higher tax brackets.4 For an heir who already earns a high income, the tax implications from inheritance on these retirement accounts reduce the benefit received.
Capital Gains and Basis Rules: What Is Often Overlooked In Tax Costs
Capital gains taxes are another critical factor to consider when transferring wealth. Many appreciated assets receive a step-up in cost basis at death, which can reduce or even eliminate capital gains taxes for heirs when those assets are sold. This can be particularly beneficial for long-held investments.
Since assets transferred during life often retain their original cost basis, this may result in higher capital gains taxes for recipients in the future.5 Strategic timing and method of transfer can have long-term tax consequences that extend beyond the initial estate settlement.
An Often-Overlooked Complication in Wealth Transfers: Liquidity Constraints
Estate-related taxes are often due within a short timeframe after death, regardless of whether the estate holds sufficient liquid assets. For business owners, family businesses, real estate, and private investments, significant value may exist, but without adequate liquidity, heirs may be compelled to sell assets to fulfill their tax obligations.6 Selling assets under time pressure can undo years of thoughtful wealth building. Proactive liquidity planning can help to provide flexibility and control during the wealth transfer process.
Why Proactive Planning Can Change the Outcome
Taxes alone rarely explain why wealth is diminished during a wealth transfer. More often than not, it is small but critical details, such as outdated estate documents, misaligned beneficiary designations, or inefficient ownership structures that quietly reduce what reaches the next generation.
Legacy planning is about more than deciding who receives assets. At Prime Capital Financial, our financial advisors take a coordinated, detail-focused approach to help your strategy reflect your goals, adapt as circumstances change, and support the people and causes that matter most to you. The result is greater clarity, alignment, and a more intentional transfer of the wealth you have worked hard to build.
This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult an attorney to determine whether this information applies to their situation.
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.
2 https://www.fidelity.com/learning-center/personal-finance/what-is-the-estate-tax-exemption
3 https://www.fidelity.com/viewpoints/wealth-management/insights/state-in-estatthe amount of wealthspecifice-planning
4https://smartasset.com/taxes/401k-inheritance-tax
5 https://www.fidelity.com/learning-center/personal-finance/what-is-step-up-in-basis
6 https://myfw.com/articles/estate-liquidity-the-most-overlooked-risk-in-wealth-transfer/
