Capital gains are often overlooked in estate plans when families transfer appreciated assets like real estate, stocks, or business interests without considering the tax consequences. According to a recent article from Motley Fool, “The Inheritance Mistake That’s Costing Wealthy Families Millions,” the timing when appreciated assets are transferred makes all the difference.
If you gift appreciated assets while you’re still living, the cost basis for the gift assets remains the same. Your heirs could owe massive capital gains taxes when they sell. However, if the same assets are passed down after your death, they usually qualify for a step-up in basis. This re-sets the value to the fair market value price at the time of your passing and knocks out all or most of the capital gains tax burden.
Gifting with warm hands may feel generous. However, gifting while you’re living could turn into a legacy with a big tax bite.
Here’s an example. You purchased a vacation home many years ago for $250,000, and it is now worth $2.5 million. Gift it now to loved ones, and they’ll receive the $250,000 basis. If they decide to sell the property, they’ll owe taxes on $2.5 million. Depending upon their own income tax bracket, they could need to pay almost $500,000 in taxes.
Instead, leave the property to them in your will. They’ll receive a step-up in basis to $2.5 million, and if they sell it soon after inheriting it, their tax liability could be very low, even zero.
Why do people make this mistake if it seems so obvious? Wealthy families often want to help their families while they’re still living and enjoy seeing the family benefit from their inheritance. Others may make the mistake of thinking gifting while they’re living simplifies their estate and minimizes probate. Most people are unaware of the step-up rule or don’t realize its significant impact.
This is only one of many estate planning mistakes seen by experienced estate planning attorneys. A few of the biggest (and costliest) mistakes include relying on an outdated will or trusts that no longer reflect family members or current wealth. Unequal distributions often lead to litigation between family members. Neglecting to update beneficiary designations on insurance policies or retirement accounts can lead to a variety of problems, including disinherited family members and ex-spouses receiving unexpected windfalls.
If you haven’t reviewed your estate plan in the last three to five years, now is the time to make an appointment with an estate planning attorney and make sure that your estate plan will perform the way you wish. It takes the skills and knowledge of a professional to create or update an estate plan, thereby avoiding expensive and stressful mistakes.
Reference: Motley Fool (June 7, 2025) “The Inheritance Mistake That’s Costing Wealthy Families Millions”