Key Takeaways
- A tax-efficient wealth transfer strategy involves more than just traditional estate planning documents.
- Strategic bequeathment is a tax-efficient estate planning strategy that matches assets with each heir’s tax situation to help maximize the inheritance’s net after-tax value.
- A qualified financial advisor can help implement a strategic bequeathment strategy that makes sense for your family.
When establishing an estate plan, many people focus on strategies such as wills, trusts, charitable planning and powers of attorney, which are all essential components of an effective wealth transfer strategy. However, even the most well-constructed estate plans often overlook one critical question: which assets should go to which heirs? This question brings up another important angle to consider, which I refer to as “strategic bequeathment.”
Strategic bequeathment is the practice of aligning your assets with the tax profiles of those who will eventually inherit them. For example, say you have three children. One is a corporate executive in a high-tax state, another is a teacher and the third is self-employed with fluctuating income. Conventional estate planning wisdom tells us to “divide everything equally;” however, doing so would lead to very different after-tax outcomes for these three children.
Strategic bequeathment aims to distribute assets to each child in a manner that best preserves the assets’ after-tax value. This approach works within traditional estate structures, including revocable trusts, by directing which assets fund each beneficiary’s share, rather than simply equalizing account values.
After reviewing thousands of traditional estate plans, I have rarely seen one that intentionally incorporates strategic bequeathment. However, when you examine its potential long-term impact, you can see how this approach can greatly improve an estate plan’s effectiveness.
What Strategic Bequeathment Actually Means
Strategic bequeathment means distributing assets to each beneficiary in a manner that best preserves the assets’ after-tax value. Remember that different asset types create different tax outcomes for heirs:
- Inherited traditional IRA assets must be fully withdrawn within 10 years, and the beneficiary is taxed at ordinary income rates on every distribution.
- Inherited Roth IRA assets must be fully withdrawn within 10 years, but the distributions are tax-exempt.
- Taxable brokerage accounts receive a step-up in cost basis at the owner’s death, which can eliminate years of embedded capital gains tax liabilities.
- Real estate, whether a primary residence or investment properties, is typically eligible for step-up treatment.
When you match the tax characteristics of these assets with each beneficiary’s projected tax bracket, the planning becomes straightforward:
- High-income heirs typically receive the most benefit from Roth and stepped-up assets.
- Lower-income heirs and heirs in states with lower income tax are often the most tax-efficient recipients of traditional IRA assets.
Consider an example to illustrate how strategic bequeathment can work in real life.
A family has the following assets:
- $1.4 million in a traditional IRA
- $900,000 in a taxable brokerage account
- $300,000 in a Roth IRA
There are three children who will inherit the assets:
- Child A earns $700,000 per year.
- Child B earns $150,000 per year.
- Child C earns $40,000 per year.
Conventional estate planning leaves each child with one-third of each account. However, a strategic bequeathment approach considers each child’s income and tax situation in order to help maximize their after-tax inheritance. In this situation, it looks like this:
- Child A inherits most of the Roth and stepped-up assets.
- Child B inherits a mix of assets.
- Child C inherits the bulk of the traditional IRA assets, which results in these assets being taxed at much lower rates based on this child’s income.
The net benefit of this approach is significantly higher. The assets received by each child are similar, yet the approach avoids unnecessary tax exposure.
Why This Matters Now
Several recent trends make this approach increasingly important.
The SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act compresses the IRA distribution window to 10 years. This means heirs must take distributions and pay the associated income tax, whether they want to or not.
The extension of a high lifetime gift and estate tax exemption
President Trump’s One Big Beautiful Bill Act (OBBBA), which was signed into law in July 2025, extends the current high lifetime gift and estate tax exemption. In 2025, individuals can exclude up to $13.99 million from their taxable estate, or $27.98 million for married couples filing jointly. In 2026, this amount increases to $15 million per individual or $30 million per married couple filing jointly.
This high exclusion amount means that fewer families face meaningful estate tax exposure. Instead, income tax is the primary long-term planning risk for most households, which makes an income tax-friendly bequeathment strategy especially important.
The variability of income
Beneficiaries’ income today is incredibly varied. Different states and careers create different tax realities, and it is important to keep these realities in mind when planning your wealth transfer.
The Importance of Intention and Communication
When planning for a strategic bequeathment, intentionality is key, and it is important to start as soon as possible. Because multiple estate planning documents are involved, the ideal time to incorporate strategic bequeathment is before your documents are finalized.
It is also important to communicate your approach to your heirs. On the surface, it may not appear as if assets are being equally divided, which makes it especially important to explain that your intention is to ensure each beneficiary receives an inheritance that is fair on an after-tax basis. Most families recognize and appreciate the logic once they understand the reasoning behind it.
If your estate plan has never been reviewed from a strategic bequeathment perspective, now is the best time to begin. Taking steps to ensure your assets go to the right people is one of the most effective ways to help maximize your family’s long-term wealth.
To get started, schedule a call with a member of our team to review whether your current estate plan aligns assets with your heirs’ tax realities.
