IS YOUR ESTATE PLAN COSTING YOUR FAMILY MONEY?
accounts funded during decades of working in a high-tax state, the income tax picture requires careful, deliberate planning. Florida residency is a powerful advantage. It does not automatically solve the income tax problem buried inside a lifetime of accumulated wealth. Consider a straightforward example that we see regularly in my practice. A couple relocates to Naples after 35 years in the Northeast. They have done well - a $7 million portfolio, most of it in appreciated stocks and real estate they have owned for decades. Their adjusted cost basis (what they originally paid, plus additions) is a fraction of what those assets are worth today. Under the old playbook, the instinct is to transfer those assets now, under the generous current exemption, to get them out of their estate. But, when you give appreciated assets away during your lifetime, your heirs receive what the tax code calls your “basis” — essentially what you originally paid for them. When they eventually sell, they owe capital gains tax on every dollar of growth. On a highly appreciated portfolio, that tax bill can consume close to 25% of the asset’s value. Now consider the alternative. You hold those same assets until death. The tax code then resets your heirs’ basis to the fair market value on the date they passed (this is known as a step-up in basis). Example: If you own stock worth $500,000 that was purchased many years earlier for $50,000, your unrealized gain is $450,000. If you give it away during your lifetime, your heir will have a basis of $50,000. If on the other hand, you hold onto the stock until you die, the recipient takes the stock with a date of death new basis of $500,000. The $450,000 of growth on the stock purchased for $50,000, disappears. Your heirs can sell the stock the next day and owe no capital gains tax. For a Naples family with $5–10 million in appreciated assets, the difference between these two approaches is not theoretical. It can mean hundreds of thousands of dollars that either stays in your family or goes to the government. There is usually a combination of transferring some assets during your lifetime and holding others until death that makes the most sense. You have to create a long-term plan (not a shoot-from-the-hip plan) to know which one is best. The IRA Problem Nobody Wants to Talk About For many families in this demographic, the single largest asset on their balance sheet is not their home or their non-retirement investment portfolio. It is their IRA.
Ed Wollman has practiced estate and tax planning in Naples for 39 years. In this issue, he shares why the rules of the game have fundamentally changed — and what that means for your family. “In 39 years of practice, I have found that what families do not know costs them far more than what they do.” A shift nobody told you about. A problem nobody wants to talk about. And a truth that’s not just for the ultra-wealthy. So let us talk about it.” For most of the last four decades, estate planning followed a simple rule: give it away before the government takes it. With estate taxes as high as 55% on anything over $600,000, that advice made sense. Families with modest wealth (a home, a retirement account, a business) could find themselves writing enormous checks to the IRS simply for the act of dying. That world is gone. If your estate plan was built around that old reality, it may be time for a serious conversation. Today, each individual can pass approximately $15 million dollars of assets free of federal estate tax. For married couples, that figure effectively doubles. The result is that the vast majority of Southwest Florida families, including many with significant wealth, no longer face a meaningful estate tax exposure. But here is what most people do not realize: the strategies designed to avoid estate tax can actually create a much larger income tax bill for your heirs. The Shift you can focus on NOW Our firm watched the entire center of gravity in estate planning shift. It used to be straightforward: the estate tax was the enemy, and the plan was to minimize it. Today, it is more nuanced and the stakes of getting it wrong are just as high. “It’s a balance between whether you pay income tax, capital gains taxes, or estate taxes. When the differential in rates is so close, it becomes a timing issue.” Getting that timing wrong is an expensive mistake. For many families in Naples and Southwest Florida, particularly those who relocated from high- tax states like New York, New Jersey, or Illinois, the complexity runs even deeper. Moving to Florida solved one problem: you eliminated state income tax on your earnings and your estate. However, if you still own a vacation home in Connecticut, a business interest in New Jersey, or investment
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