Paul O. Dillon, Attorney at Law

What the Loss of Step-Up in Basis could Mean for Estate Plans

Adding to the uncertainty around estate planning for 2025 are discussions about eliminating the step-up in basis, which would present a significant challenge for families seeking to grow wealth over generations. A recent article from Forbes, “Estate Planning: What The Potential Elimination Of Step-Up In Basis Means For Families,” explains how this tool has protected homeowners and family business owners from overly burdensome taxes.

Step-up in basis is a tax provision that adjusts the value of an inherited asset to its fair market value as of the date of the original owner’s death. If a person purchased a home for $100,000 several decades ago, now valued at $1 million, heirs would inherit the home at the stepped-up value of $1 million. If they decided to sell the property immediately, they would owe little or no capital gains taxes.

If there were no step-up in basis, the impact would be felt by middle-class families who inherit property, stock investments, or small businesses. This would have a significant impact on opportunities for building generational wealth.

Heirs who hope to keep a home in the family or continue to own rental property may find themselves needing to sell the assets to cover the tax bills. Small business owners who rely on this step-up in basis would also face a liquidity crisis, unless there were ample funds for heirs to keep running the business. The alternative is to close the business.

The solution, if this change does occur, can be found in a few different estate planning strategies. They include:

• Using trusts, such as a revocable living trust, may help manage capital gains. However, they must be created correctly by an experienced estate planning attorney. Irrevocable trusts should be examined as a possible alternative.
• Gifting strategically, even while living, may be another option. This could help by locking in current tax rules and taking advantage of the currently high federal exemptions.
• Tax planning should always be included in estate planning, especially if the step-up in basis is eliminated. Roth IRAs, 529 plans, or life insurance-based strategies may help shield assets passed on to the next generation.
• Donations to charities and the use of donor-advised funds are a means of eliminating or minimizing capital gains taxes, while supporting causes that hold meaning for the family.

However, things change, the need for proactive estate planning by a skilled estate planning attorney remains a constant. With effective estate planning, homeowners and small business owners can safeguard their wealth, ensuring it can be passed on to future generations.

Reference: Forbes (March 21, 2025) “Estate Planning: What The Potential Elimination Of Step-Up In Basis Means For Families”

How a Terminal Diagnosis Clarifies Estate Planning

Personal finance writer Jonathan Clements was known among readers, friends and family for the sound financial advice in his weekly column for The Wall Street Journal. He followed his own advice, saving diligently to retire early, write books and launch a personal finance website. The same discipline extended to his health—Clements rode his bicycle or went for a run nearly every day.

But Clements received a life-altering diagnosis at age 61. He had cancer and it had spread throughout his body. The doctor’s prognosis wasn’t good, even though his body responded well to treatment. In Clements's recent article for AARP, “19 Ways My Cancer Diagnosis Transformed My Finances and Mindset,” we learn what steps he’s taken since his diagnosis.

Clements isn’t retiring. He is doing what he’s been doing for years: waking up, having coffee, exercising, writing, taking an afternoon walk and doing the things that bring him enjoyment every day.

He has no regrets about leading a frugal life. He says avoiding financial worries throughout this adult life was worth being careful about money.

Despite his diagnosis, he continues to live frugally. He and his partner of many years married, so she would be able to qualify for Social Security benefits. They’ve taken a few special trips, but he’s still not buying first-class tickets.

Never a big shopper, he continues to limit his purchases to what he needs.

Gifting is now a priority. He isn’t spending because, in part, he wants to leave a healthy sum to his wife and his children. He’s also funded 529 College Savings Plans for his grandsons.

His investment strategy has changed from a conservative approach to preserving assets to an aggressive stance because he’s investing not for his retirement but for his heirs. Their time horizon is longer than his, so he’s now keeping 80% or more in stock-index funds.

Clements isn’t worried about long-term care costs, which type of Medicare to choose, or minimizing his retirement tax bill. His main priority is making sure everything is for heirs.

While Clements turned 62 in early 2025, he still hasn’t applied for Social Security. His goal is to ensure his wife’s ability to take survivor’s benefits when he dies and for those benefits to be as high as possible. When she turns 70, she will swap to a benefit based on her own earnings.

He realized his paperwork wasn’t as orderly as he thought. He has shredded old tax returns and investment statements and removed unnecessary paper documents. He’s also found that even after thirteen years of downsizing, there’s more stuff to eliminate.

He also thought his finances were simple. However, he’s simplified them even more. Four credit cards became two and a Roth 401(k) has been folded into his Roth IRA. He’s liquidated a small inherited IRA.

Shortly after his diagnosis, he sat down with his wife and children to review his estate plan. He realized they didn’t know the difference between a Roth IRA and a traditional IRA. The whole “step-up-in-cost-basis” concept was a mystery to them. After a lifetime of writing on personal finance, what was second nature to Clements was unfamiliar to his children. They continue talking about his estate plan and finances, so everyone understands his intentions and the assets.

If you’ve received a serious diagnosis, taking care of your loved ones is likely your priority as well. The steps taken by Clements may be helpful. Include a review and discussion of your estate planning documents with your family and keep your estate planning attorney up to date so you can focus on your priorities.

Reference: AARP (Jan. 16, 2025) “19 Ways My Cancer Diagnosis Transformed My Finances and Mindset”

What Kind of Trust Helps a Family with Young Children?

Trusts are not just for wealthy people. They are used when a family has young children and wishes to ensure that there is a plan in place to care for the children in case the parents die or become incapacitated. A recent article from Business Insider, “I asked an estate planning attorney the best way to establish a trust for my 2-year-old daughter,” explains what parents can do to protect their youngest loved ones.

There are a few different trusts to consider, depending on your situation:

Revocable Living Trust. The revocable trust is the most flexible. It is a separate legal entity with language directing how assets will be used for different scenarios. For instance, if someone dies or becomes disabled and their beneficiaries are all children, the trustee will manage and allocate necessary financial resources to support the children. Many estate planning attorneys consider a trust even more important than a will, since it doesn’t require the estate to be settled before trustees can access the assets.

An IRA Trust. You may want to consider creating an IRA trust if you own an IRA. This allows a minor child to be the beneficiary of the retirement account. On the death of the IRA owner, assets go into the trust, which has a trustee who manages the asset until the person comes of age or whenever the original owner wants them to receive the money.

When a regular IRA account is left to a minor, the family must petition the court to obtain a court-appointed guardian to manage the account until the minor is of legal age. With an IRA trust, you’ve clarified who the trustee should be and when the child will receive the money. If the money is not needed and can remain in the trust, it is a protected asset for their future.

A Trust for Minors. This allows you to leave assets to a child until they reach a certain age, which you articulate in the trust. You can leave all or a portion of the money to the beneficiary to be distributed when you feel they can manage it. You decide when to release the funds, who the trustee should be, the rules for how the money is to be spent and when the minor may receive income.

An Education Trust. In addition to creating a 529 College Account for a minor child, it’s a good idea to create an Education Trust to be sure the funds will be used for education. You can assign a certain amount for education and state the age you’d like the beneficiary to receive any leftover funds.

An estate planning attorney can help you create a plan for your children or grandchildren to ensure that they have the funds they need in case of tragedy and place guardrails on the money so it’s protected.

Reference: Business Insider (Jan. 31, 2025) “I asked an estate planning attorney the best way to establish a trust for my 2-year-old daughter”

Is It Better to Transfer Assets before Death?

Many people like to give inheritances after they have passed. However, another approach is to gift while living, which has some definite advantages for both the giver and the recipients. As explained in the article, “Gifting While You’re Alive: Tax Benefits and Practical Tips,” from Kiplinger, giving while living allows you to see how your legacy helps others, provides for greater control and has tax advantages.

Reasons for gifting while living vary widely. Therefore, be sure that your gifting strategy is part of a comprehensive estate plan and makes sense for your financial needs during your lifetime. Don’t give assets you need to cover living expenses, surrender investments early to incur additional costs or create a significant tax burden for yourself. Gifting while living should only be done if you and your spouse can afford it.

In 2024, individuals can give up to $18,000 per person to as many people as they want. In 2025, the level will increase to $19,000 per person for an individual and $38,000 for a married couple.

The IRS defines a gift as a property transfer where no equal value is received in return. Whether your gift is used for a down payment on a house, adding an owner to real estate property, paying off a debt for someone else, or forgiving a previous loan, check with an estate planning attorney to be sure that you are staying within the exclusion levels. Anything over the limit will incur taxes.

If your generosity extends to helping with educational costs or medical debt, be sure to make payment directly to the hospital, care facility, university, or private school. Only direct payments are gifts.

Gifting assets like shares in a business or real estate requires a professional appraisal to document the value of the gift. You don’t want to draw any attention from the IRS, so be sure to follow the guidelines.

If you hope to help a family member buy a home, you could structure your gift as an intrafamily loan. There are guidelines you’ll need to follow to make sure this is not considered a taxable gift by the IRS.

When gifts are made could matter as much as their size. Be careful when gifting appreciated assets and discuss this with your estate planning attorney beforehand. Inherited assets receive a step-up in basis at death. Still, inherited assets retain their original cost basis and could lead to capital gains taxes for the recipient if they sell the assets. If you gift your home to your children, for instance, they may be subject to a big tax bill if they sell the house in the future.

Section 529 educational savings plans are a great way for grandparents to help with their grandchildren’s education. Contributions can be front-loaded, allowing up to five years’ worth of contribution to be made at once—as much as $90,000 in 2024 and $95,000 in 2025 to a single 529 plan. Any additional gifts to the same beneficiary during the five-year period following the big funding could trigger gift taxes.

Talk with your estate planning attorney about making this kind of giving part of your overall estate plan. Seeing your family enjoy your generosity and knowing you’ve made a big dent in estate and inheritance taxes is a warm feeling for all concerned.

Reference: Kiplinger (Dec. 4, 2024) “Gifting While You’re Alive: Tax Benefits and Practical Tips”

How a Serious Diagnosis Changes Estate Planning

A thoughtful conversation with Jonathan Clements, a long-time and well-respected personal finance reporter, appeared in a recent article on Morningstar, “How Illness Can Change the Way You Approach Your Finances.” Clements, who covered personal finance for The Wall Street Journal for decades, was diagnosed with advanced cancer and told he had about a year to live. He spoke with a reporter about his financial and estate planning decisions considering his illness.

Accelerated Giving to Children. Clements has been giving more to his children and funding 529 plans for grandchildren. He lives in one of the few states with an inheritance tax—Pennsylvania. His wife won’t have to be concerned with the inheritance taxes. However, his children will. The Keystone State puts a 4.5% tax on every dollar they inherit, regardless of whether they live in Pennsylvania.

Streamline Investment Accounts. Even before the diagnosis, Clements noted he had simplified his financial accounts. He’d had four credit cards and trimmed that number to two, learning that closing credit card and bank accounts takes a lot of time and effort.

Shred Outdated Records. Like so many of us, he had bank records going back decades. A shredder has been working overtime in his home, getting rid of bank documents and tax returns dating from 1986. Clements now has seven years of tax returns and supporting materials.

Powers of Attorney. Despite such a serious diagnosis, Clements admitted to not having a Power of Attorney until recently. He had moved from New York to Pennsylvania four years ago to be closer to his daughter and grandsons.  However, he had never gotten around to updating his POA. Sound familiar? If you moved and haven’t updated your POA, now would be a good time to do so.

The Problem with Inertia and Estate Planning. Clements is far from the only person to delay getting estate planning documents taken care of, readily admitting, “The cobbler’s children have no shoes.” Everyone should have an estate plan created by an experienced estate planning attorney, with adjustments made if they move, have children or grandchildren, divorce, or remarry. Many people fail to make these updates, and their loved ones are left to deal with the aftermath.

Talk With Your Family About Your Estate Plan, Finances and Wishes. After decades of writing on personal finance, Clements is well-versed in all personal finance matters, investments and how they impact estate planning. However, when he sat down to speak with his family after the diagnosis to talk about his estate, what he thought was simple and straightforward wasn’t clear to them.

Beneficiary designations, last will and testament, investments, how wills go through probate and how some assets pass through probate, and others don’t were second nature to him but not to family members. The initial family meeting was followed by countless conversations with his two adult children and his wife to clarify things like probate, Roth IRAs versus traditional IRAs and how assets are passed.

Having a conversation with your loved ones and meeting with an experienced estate planning attorney should be done before a terminal diagnosis arrives. It takes time to work through the details, and family members will need more than one conversation to fully understand your wishes. Leaving behind a well-organized estate is leaving a gift to loved ones.

Reference: Morningstar (Oct. 20, 2024) “How Illness Can Change the Way You Approach Your Finances”

It’s Not Too Soon for Generation X to Start Estate Planning

Adults born between 1965 and 1980 are often called the “sandwich generation” as they sometimes support older children who are still figuring out who they want to be when they grow up and caring for aging parents. While retirement may feel far away, says a recent article from Kiplinger, “Come as You Are: Wealth Management for Gen X,” it’s on the horizon, and planning for the future should start now.

Some of the tools used for retirement planning include 401(k) plans, which are tax-deferred plans from an employer. If your employer offers matching funds, try to contribute enough to take advantage of the match. You can also use a personal IRA to make tax-free annual contributions.

With changes from the SECURE 2.0 Act, you can open and contribute to a 529 College Savings Account and then roll a portion of unused funds into a Roth IRA once the account has been opened for 15 years and the funds have been in the account for at least five years. There are rollover limits, but this might be a good fit for retirement savings. Commonly, 529 funds are used for various educational purposes, so even if your children are past college, your grandchildren might use them for private school, not just college.

The one constant in life is change, and estate planning documents created when your children were little need to be reviewed and possibly updated. If the last time you thought about your will was when your adult children were born, you should schedule a review with your estate planning attorney. Changes like marriage, divorce, death, financial ups and downs and changes in the tax law all call for updates to wills.

If you don’t have long-term care insurance, now is the time, while you’re still relatively young and healthy enough to be able to buy it. Insurance companies now offer hybrid policies combining life insurance with a long-term care insurance policy rider.

Digital assets are a relatively new asset class requiring estate planning. Speak with your estate planning attorney to be sure your estate plan documents reflect your digital life. If you are active on social media, investing in cryptocurrency, or own an online business, you have digital assets and need to protect them.

Be proactive about estate planning to protect yourself now and your loved ones after you’ve passed. Just as retirement is on the horizon, so are the inevitable events of aging. Make an appointment to see an estate planning attorney to learn your needs, now and in the future.

Reference: Kiplinger (Oct. 7, 2024) “Come as You Are: Wealth Management for Gen X”

Will My Family Need to Pay an Estate Tax?

Known as the “death tax,” an estate tax is applied to assets inherited by others when you die. In addition to the federal tax, twelve states and the District of Columbia have their own estate taxes, says a recent article from CNBC, “What is estate tax and who pays it?”

Inheritance taxes and estate taxes are often confused. A beneficiary pays inheritance taxes, while estate taxes are paid from the decedent’s estate before any remaining property or assets are distributed to heirs.

One of the executor’s duties is to file an estate tax return. The value of the assets is usually determined by their fair market value.

The unlimited marital deduction means the surviving spouse is exempt from federal estate taxes.  However, the second spouse to die’s estate will need to pay estate taxes.

The current federal estate tax exemption ranges from 18% to 40%, depending on how much the estate is over $13.61 million. This historically high number will revert to $5 million (indexed for inflation) on January 1, 2026.

Twelve states and the District of Columbia impose their own estate taxes. These include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Connecticut and Vermont have flat estate taxes. However, most estate tax rates increase with the total value of the assets.

An experienced estate planning attorney will help identify strategies to minimize or avoid paying estate taxes altogether. For instance, if you leave assets to a qualifying charity, that amount is deducted from the gross estate before taxes.

Gifting is a frequently used means of minimizing estate taxes. In 2024, you can gift up to $18,000 per individual without paying the federal gift tax and without the gift counting towards your lifetime gift exemption of $13.61 million. A married couple may give up to $36,000 tax-free combined.

Irrevocable trusts transfer control of an asset from the grantor to the beneficiary, protecting it from creditors and reducing the estate's value. While rules vary from state to state, irrevocable trusts typically may not be amended, modified, or terminated without the beneficiary's consent.

Contributions can also be made to 529 educational plans, which offer tax-free earnings and withdrawals for educational expenses. They are excluded from the taxable estate. However, the contribution can’t be more than $18,000 per year, or it will be subject to the gift tax. Each state sets its own contribution limits per beneficiary.

Most Americans don’t have to pay federal estate taxes. Still, many state taxes have lower exemption levels, so speak with your estate planning attorney to learn your estate’s tax liability and consider how to minimize it for your heirs.

Reference: CNBC (Feb. 17, 2024) “What is estate tax and who pays it?”

Can Grandparents Give Money to Grandchildren for College?

Helping grandchildren prepare for long-term success and easing the financial burden of college costs is a gift for two generations, as mentioned in a recent article from Kiplinger, titled “529 Plans: Give the Gift of Education (and Compounding).”

Giving cash directly to children or parents isn’t the best long-term strategy. Once the money is given, control is surrendered, and the gift may not be used as intended by the giver. Saving for college is one of the significant financial challenges parents face, especially considering the high inflation of college tuition costs. Between 2021 and 2022, U.S. college tuition rates increased by 12%.

This is where estate planning intersects with the new year. As the current historically high estate tax exemption ends at the end of 2025, managing the size of one’s estate becomes a higher priority. The structure of 529 college savings accounts can be used for tax efficiency and to control the eventual use of the gift while taking advantage of long-term compounding.

Current gift tax rules allow individuals to gift up to $18,000 per year per person. Therefore, a married couple could gift $36,000 to each child and grandchild without it counting against their lifetime exemption or requiring them to file a gift tax return. However, the 529 is even more advantageous, allowing a five-year front-loading of such gifts per recipient.

If your state has a plan, funding 529 plans offers deductions on state income taxes. If your state doesn’t have a 529 plan, you can open an account in another state but won’t receive the tax deduction.

There have always been concerns about overfunding a 529 account or having unused funds if the beneficiary decides not to attend college. Most plans allow account owners to change beneficiaries without any tax consequences as long as the new beneficiary is a member of the current beneficiary’s family. If the new beneficiary is younger than the prior one, it may be wise to change the asset allocation to reflect the new time horizon.

Another common question regards the impact gifting may have on the student’s application for federal aid. While 529 plans owned by parents are considered, 529 plans owned by grandparents are not on the FAFSA (Free Application for Federal Student Aid) form.

Changes to the original 529 structure have rendered these accounts even more valuable. The Tax Cuts and Jobs Act expanded the eligibility of 529 accounts for private and parochial K-12 schools. Then, the SECURE Act allowed 529 funds to be used to pay down up to $10,000 in student debt.

Starting in 2024, the SECURE 2.0 Act allows 529 funds to be rolled over into a Roth IRA at the annual contribution limit up to a lifetime maximum of $35,000 for a beneficiary. The account needs to be open for at least 15 years. Still, having an account grow in a tax-free environment and removing the distribution restrictions presents a valuable new investment tool.

Speak with your estate planning attorney about how to incorporate the benefits of the 529 account into your estate plan to help family members achieve educational goals and plan for estate taxes.

Reference: Kiplinger (Dec. 20, 2023) “529 Plans: Give the Gift of Education (and Compounding)”

How Does Estate Planning Protect Young Children?

Once you have a child, you’ve got a bundle of joy—and a lifelong commitment to caring for the child, sometimes even after they reach adulthood. What would happen if something happened to you and your partner? To be sure your child or children are taken care of, you’ll need to take these estate planning steps, as explained in a recent article from Kiplinger, “To Protect Your Kids, Consider These Estate Planning Steps.”

Appointing a guardian. Planning for the absence of parents from a physical and financial perspective needs to be done. Parents need to establish a guardian and have the person named in their will. It may be a good idea to name a secondary guardian if something happens and the primary guardian is unwilling or unable to serve in this role.

Create a trust. Parents should consider creating a trust for their children to ensure that there is money to provide for their care if both parents die. A child under the age of 18 is a minor and, as such, may not legally hold title to property. A trust is used to hold assets for the child’s benefit. The language of the trust would have instructions to provide for the children’s education, health and support.

There are two basic trusts to consider. A revocable trust is created during a person’s lifetime and can be changed anytime by the trustmaker. A testamentary trust is created as part of a will. Neither trust needs to be funded until the person passes away, at which time the property of the decedent is placed in a trust if the will contains the correct instructions. An estate planning attorney will be able to structure this plan.

Assign a trustee. This person manages the trust assets for the children's benefit. They need to be financially responsible people who can manage the funds for the children. The trustee can be a family member but should not be the same person chosen as the guardian. Keeping these roles separate ensures that the guardian will not misuse funds. Another option is to hire a professional to serve as the trustee. Professional trustees, including banks or financial advisors, usually charge a percentage of assets. In some cases, estate planning attorneys serve as trustees for minor children.

Establish terms of distribution. It’s up to the parents to decide how their children should receive trust assets. They can mandate principal distributions at certain ages, like a certain percentage at age 20, another at 30 and the balance at 40. While the parent dictates the terms of distribution while the children are minors, the trustee will be the one to decide on distributions for food, health, education, or extracurricular activities.

How do you be sure there will be money for your children? Parents should purchase life insurance, since most young parents don’t have a lot of liquidity. Term policies are the least expensive and can be for ten, twenty, or thirty years, during which the policy is guaranteed if the premium is paid. Whole life insurance is another option. However, it is more expensive.

Start a 529 college savings fund. These accounts can be funded through automatic withdrawals from a checking account, or family members can be encouraged to make gifts to these accounts. In some states, there are state income tax benefits for residents. The growth is tax-free if the funds are used for qualifying educational expenses.

When the child becomes a legal adult. Once a child celebrates their 18^th birthday, they are legal adults, and parents lose their rights. New adults should have a healthcare proxy so someone can make medical decisions for them in case of incapacity. They should also execute a HIPAA disclosure form so healthcare professionals can discuss their medical care with parents.

If a child has special needs. An estate planning attorney will create a Special Needs Trust to hold assets and name a trustee to manage the funds. This trust allows a child with special needs who may be eligible for government benefits to continue to receive benefits in addition to distributions from the trust.

Reference: Kiplinger (Nov. 19, 2023) “To Protect Your Kids, Consider These Estate Planning Steps”

Should You Gift Kids Inheritance Now, or After You’ve Passed?

This is a genuine dilemma facing millions of parents and grandparents as they prepare to pass an enormous amount of wealth—$73 trillion—to the next generation. There are pros and cons to both approaches, according to the article, “Give the Kids Their Inheritance Now or Make Them Wait? 3 Things to Keep in Mind,” from Barron’s.

Giving too much too early could put parents in an economic bind in their later years. Therefore, this needs to be considered in light of today’s longer life spans. However, if you can afford to make a generous gift and your children could use the money now for a good purpose, it’s hard to justify making them wait.

How much to give is as critical as when to make the gift. The predominant concern is if you give your children too much, they won’t be motivated to earn their own wealth, or other family members will resent the gift. Estate planning attorneys and financial advisors routinely speak with families about these issues. These conversations always consider the values they want to instill in their children.

In some cases, parental support can help a child while working at an entry-level (i.e., low paying) job in their dream career. Covering the cost of rent for a few years can offer young adults a support net until they achieve financial stability.

This is very different than paying the expenses of a young adult with no career goal whose primary focus is a robust social life.

Anyone can make a yearly gift to any other person of up to $17,000 tax-free, or $34,000 per couple, but there are ways to make gifts without triggering gift taxes. Direct tuition payments to schools are tax-free. Unlike putting money into a 529 account, there is no limit to how much can be paid directly to a college or university. Parents and grandparents could also help with a downpayment on a child’s home without paying gift taxes.

Gifts don’t have to be large to have an impact. Some parents and grandparents give their children or grandchildren a small amount to start saving for retirement. A gift of a few thousand dollars during their 20s can grow into a nice sum over many decades. If the recipient has earned income, you can contribute to their IRA or Roth IRA accounts.

If assets are limited, consider giving personal possessions, such as jewelry or family heirlooms, to younger generations. You’ll get to see them enjoy their gifts, without putting your own financial situation at risk.

Whenever the decision is made to make these gifts, families should talk about their values and intentions around money.

If there are concerns about children losing an incentive to work because of the family’s wealth, a spendthrift trust might pass wealth along while controlling its distribution.

Remember that today’s generous federal estate tax rules are set to expire in 2026. Currently, individuals can gift up to about $13 million ($26 million for couples) tax-free in their estate plans. If the exemptions expire, this amount will be cut by approximately half.

Reference: Barron’s (Nov. 4, 2023) “Give the Kids Their Inheritance Now or Make Them Wait? 3 Things to Keep in Mind”