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”

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”

How to Prepare for the Financial Impact of a Spouse’s Death

Social Security benefits are just one of many changes happening when a spouse dies. A recent article in Barron’s, “A Spouse’s Death Brings a Financial Jolt. How to Prepare,” explains what can be done before and after the death of a spouse to protect the surviving spouse.

The surviving spouse receives the higher of the two Social Security benefits. The survivor also receives a one-time death payment of $255.

The surviving spouse may be able to use the higher married couple filing jointly tax bracket. However, check with your estate planning attorney to be sure. Unless the surviving spouse is qualified as a widow or widower, they will file as a single taxpayer the following year. The standard deductions are lower, and thresholds for tax brackets are reduced.

Be prepared for healthcare premiums to rise. Medicare premiums are tied to income, and while couples pay the standard premium of $174.70 up to income of $206,000, single people pay it only up to $103,000. If the decedent was working and health care came through their employer, the surviving spouse may need to access COBRA or buy health insurance on the open market, an expensive proposition.

Not all deaths are foreseeable. However, one spouse will almost always die before the other, so planning is necessary. Couples should review their estate plans, named beneficiaries, and trusts every three to five years.

Some strategies should be done while both spouses are still living. Converting some or all of traditional IRA accounts to Roth accounts is one to consider. Pre-tax IRA or 401(k) accounts are moved to after-tax Roth accounts when both spouses are living and take advantage of higher standard deductions and generous tax brackets, compared to when filing as a single.

The sale of a primary residence becomes costly when one spouse has died. When a couple sells their home, they receive a joint $500,000 capital gains tax exemption. When a single person does, the exemption is halved, making the home sale far less profitable.

Estate planning attorneys may advise clients to be cautious about significant decisions while grieving their loss. However, steps must be taken before death or in the calendar year after death to protect the surviving spouse.

Here’s an example. For a couple where the wife was diagnosed with pancreatic cancer, stocks with large capital gains were moved out of a joint account into an account in the wife’s name only. Upon her death, the husband inherited the stocks, receiving the equities at their current value.

In another scenario, accumulated capital losses were used to offset gains in a trust brokerage account following the death of the husband. Capital losses typically expire upon the death of the investor, but spouses can use those losses during the same calendar year. The revocable trust was revised, and the highly appreciated assets were sold, taking advantage of the losses.

When there is a diagnosis of a serious disease, or someone is not recovering from an illness, the time to review the entire estate and plan accordingly becomes more pressing. Talk with an experienced estate planning attorney to keep your estate up to date and discuss possible strategies to be considered if and when a spouse becomes seriously ill.

These are not easy conversations to have. However, taking care of these issues before the death of a spouse can make life easier for the surviving spouse.

Reference: Barron’s (Oct. 5, 2024) “A Spouse’s Death Brings a Financial Jolt. How to Prepare.”

What Is Legacy and Estate Planning?

Creating a last will and testament is part of planning for the future. Leaving a legacy is another. Both are part of an estate plan, which addresses planning for incapacity during your lifetime and the disposition of your property after you’ve passed. A comprehensive estate plan is a worthy endeavor, says a recent article from North Shore News, “How to secure your legacy with estate planning.”

The core components of an estate plan include a last will, power of attorney and advance directives for health care decisions, sometimes called health care power of attorney or health care proxy. Your family will face additional stress and expenses if you don’t have a last will. Your wishes for the disposition of property won’t be honored, unless you proactively have an estate plan created.

Will charitable giving be part of your legacy? This also requires advance planning. When you make donations to individual charities or use Donor Advised Funds, you create a legacy of giving and may also create tax benefits. An experienced estate planning attorney will help create a plan to maximize the tax advantages of charitable gifting.

Estate planning is especially important for women, who statistically live longer than men and tend to have lower earning power. Women need to consider who will be their caregivers if their partners predecease them or if they are solo agers.

Discussing family dynamics with an estate planning attorney can help ensure that the estate plan is created to address individual needs. Estate planning is never a one-size-fits-all plan.

Estate planning also requires regular reviews. One estate planning attorney advises her clients to revisit their estate plans every time there’s a presidential election. It’s an easy way to remember the passing of four years, which is a good time to review an estate plan.

A carefully crafted and regularly updated estate plan addresses changes to your life and the laws governing wills, trusts and retirement accounts. The SECURE Act made major changes to how assets in retirement accounts are distributed to heirs, for instance. The addition of Roth IRA and SEP accounts created huge changes in the passing of assets to the next generation.

Your estate planning attorney will give you and your family the peace of mind of knowing you’re prepared for the future, including the unexpected events, happy and sad, that life brings.

Reference: North Shore News (October, 2024) “How to secure your legacy with estate planning”

Estate Planning Questions for Couples with a Big Age Gap

Even if it was never an issue in the past, when couples with a significant age gap reach their 60s and 70s, the age difference can present challenges. When one partner is ten or more years younger than the other, assets need to last longer, and the impact of poor planning or mistakes can be far more complex. The article in Barron’s “Big Age Gap With Your Spouse? What You Need to Know” explains several vital issues.

Examine healthcare coverage and income needs. Health insurance can become a significant issue, especially if one partner is old enough for Medicare and the other does not yet qualify. How will the couple ensure health insurance if the older partner retires and the younger depends on the older partner for healthcare? The younger partner must buy independent healthcare coverage, which can be a budget-buster.

Be strategic about Social Security. Experts advise having the older spouse delay taking Social Security benefits if they are the higher-income partner. If the older spouse passes, the younger spouse can get the bigger of the two Social Security benefits. Delaying benefits means the benefits will be higher.

Planning for RMDs—Required Minimum Distributions. Roth conversions may be a great option for couples with a significant age gap. Large traditional tax-deferred individual IRAs come with large RMDs. When one spouse dies, the surviving spouse is taxed as a single person, which means they’ll hit high tax brackets sooner. However, if the couple converted their IRAs to Roths, the surviving spouse could withdraw without taxes.

Estate planning becomes trickier with a significant age gap, especially if the spouses have been married before. Provisions in their estate plan need to be made for both the surviving spouse and children from prior marriages. An estate planning attorney should be consulted to discuss how trusts can protect the surviving spouse, so no one is disinherited. Beneficiary accounts also need to be checked for beneficiary designations.

Couples with a significant age gap need to address their own mortality. A younger partner who is financially dependent on an older partner needs to be involved in estate and finance planning, so they know what assets and debts exist. Life has a way of throwing curve balls, so both partners need to be prepared for incapacity and death.

Plans should be reviewed more often than for couples in the same generation. A lot can happen in six months, especially if one or both partners have health issues.

Reference: Barron’s (May 19, 2024) “Big Age Gap With Your Spouse? What You Need to Know.”

Estate Planning for a Taxing Inheritance

Estate planning should address tax planning to accomplish several goals. In addition to minimizing tax liability, tax-sensitive estate planning can ensure family members inheriting wealth are given a helpful asset, not a costly one. A recent article, “Inheriting Tax Liabilities” from Financial Advisor, explains how this can be done.

A beneficiary inheriting a pre-tax traditional IRA has to pay full state and federal income tax on any withdrawals, which must occur within ten years. Demographics show this inheritance most often occurs when the heirs are in their careers' highest tax income bracket, making it a double tax whammy.

There’s no step-up in basis for a traditional IRA. A $3 million IRA isn’t a $3 million IRA when it’s inherited. If the person inheriting the IRA is in a high-tax state and is also a high-income earner, they could lose nearly 45% every year when taking their required distributions.

The timeframe for IRA inheritances is tricky. Let’s say a couple works hard and saves in their tax-deferred 401(k) for three decades. When they retire, they roll those savings into traditional IRAs. When the second spouse dies, her children will probably be 55 to 60 years old, when people are usually in their highest earning and taxable years.

Another hitch: inherited IRA distributions can’t be donated to charity or kept in the IRA to be passed along to the heir’s children.

How to address this? It depends.

If there are two adult children and one has more modest wages and resides in a low-tax state, giving the lower-income heir a larger percentage of the IRA will result in a larger after-tax amount. If the other child is a high-income earner, bequeathing after-tax assets may make more sense. The two heirs may end up with the same amount when adjustments are made to their circumstances.

In some instances, it makes sense for the parents to convert traditional IRAs to Roth IRAs and pay the taxes to give heirs the advantages of the Roth IRA. Another strategy is to bequest pre-tax IRA assets to a charity and give heirs tax-free assets.

Think less about equal inheritances and more about adjusting assets to end up with the same spendable savings.

The same adjustments will be helpful when planning for illiquid assets like the family home. Preparing assets like real estate or art collections requires time, and the cost of commissions and marketing can reduce the inheritable value of the assets.

An inheritance is a gift to loved ones, improved by clear-sighted estate planning that considers the individual family’s circumstances in more depth. Review your family’s entire picture with your estate planning attorney so the end results will truly be what you wish.

Reference: Financial Advisor (March 15, 2024) “Inheriting Tax Liabilities”

What’s the Age Cut-Off for a Roth IRA?

Roth IRAs aren’t just for young people, as long as you meet the criteria regarding income, how much you may contribute and when you’re eligible for penalty-free withdrawals. A recent article, “Are You Too Old to Benefit From a Roth IRA?” from U.S. News & World Report, explains the benefits and requirements for older workers considering a Roth IRA.

Requirements for a Roth IRA

Once you meet the qualifications, you can add funds to a Roth IRA at any age. In 2024, the contribution limit Is $7,000 or $8,000 if you’re 50 or older. The account must be open for at least five years to take penalty-free withdrawals in retirement. If you take funds out early, you could face penalties, and contributions to a Roth IRA may only be made from earned income.

A single person may add funds to a Roth IRA if they earn up to $146,000. After that, the amount you may contribute is phased out until income reaches $161,000, after which you can’t add funds directly to the account. For married couples, the income threshold is less than $230,000.

Roth IRA Tax Benefits

Funds are taxed before they go into a Roth IRA account, giving the advantage of the account the tax-free distributions of contributions and earnings. In addition to the five-year rule, you’ll need to meet these eligibility requirements:

• The original owner dies, and you inherit the Roth IRA.
• The owner is at least 59 ½ years old.
• The owner meets disability requirements.
• The distribution is used for first-time homeowner expenses of up to $10,000.

Age Considerations

If you’re in your 70s and still working, there are some facts to consider before opening a Roth IRA. The tax-free growth of Roth IRAs works best as the holding period increases. The up-front tax costs may be very high if you’re in your highest income level and a higher tax bracket. This makes a Roth IRA more advantageous for younger contributors. However, if you work part-time, your lower taxable income might make the Roth IRA an excellent way to save.

Passing Funds to Heirs

With traditional IRAs or 401(k)s, Required Minimum Distributions start at a certain age, usually after celebrating your 73^rd birthday. However, there are no RMDs for Roth IRAs, and the funds remaining in the account after you die could be passed on tax-free. Beneficiaries may inherit the Roth IRA while allowing it to grow tax-deferred for up to ten years, then take the money without paying taxes.

Opening a Roth IRA later in life should be coordinated with your overall retirement and estate plan to be sure it works in concert with your overall estate plan. When reviewing your estate plan, it’s something to discuss with your estate planning attorney.

Reference: U.S. News & World Report (Dec. 29, 2023) “Are You Too Old to Benefit From a Roth IRA?”

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)”

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”