The Hidden Tax Traps in Your Estate Plan

It’s tax season! Now is the perfect time to ensure your estate plan isn’t setting your loved ones up for a big tax bill. Many people don’t realize that estate taxes, capital gains taxes, and income taxes can significantly reduce what goes to their loved ones when they are gone.

Here are three common tax traps and how to avoid them:

Trap #1: Not Using the Gift Tax Exemption

You can gift up to $19,000 per person in 2025 without paying any tax. Spreading wealth through gifts during your lifetime can reduce estate taxes later. Take Sarah, for example, who wants to leave her daughter $500,000 but waits to pass it through her will when she dies. Since Sarah’s estate is over the federal exemption limit, her daughter will end up paying a hefty estate tax. Had Sarah gifted $19,000 per year during her lifetime, she could have saved Sarah thousands in unnecessary taxes. 



Trap #2: Failing to Plan for Capital Gains Taxes

If heirs inherit assets that have significantly increased in value, they may face large capital gains taxes when selling them. Using trusts or other strategies can help minimize this burden. Let’s say John inherits a house from his father, who bought it decades ago for $100,000. When John sells it for $500,000, he faces a massive capital gains tax on the $400,000 increase in value. However, if the house had been properly transferred through a step-up in basis strategy via a trust, the taxable gain would have been minimized or eliminated.

Trap #3: Naming the Wrong Beneficiaries for Retirement Accounts

Inheriting retirement accounts like IRAs or 401(k)s can create unexpected tax consequences for your heirs. Take Lisa, for example, who named her estate as the beneficiary of her IRA instead of her children. Because of this, the IRA must go through probate, and her heirs lose the tax advantages of stretching distributions over their lifetimes. Had Lisa named her children directly, they could have benefited from tax-deferred growth and lower required

withdrawals.

Avoid Tax Traps

Tax-efficient estate planning is something everyone needs, not just the wealthy. Start by booking a Peace of Mind Planning Session. This meeting, $275, is offered free of charge when you mention this blog. Take the first step today!

🔗 Schedule Your Peace of Mind Planning Session