The Value of Tax-Aware Estate Planning

Why Equal Is Not Always Equal After Taxes

As we begin the second quarter of 2026, we’ve been spending a great deal of time with clients discussing a concept that is often overlooked in traditional estate planning: taxes. More specifically, how taxes impact what beneficiaries actually receive after inheriting assets.

Many estate plans are built around the concept of “equal” distributions. But, as we often explain to clients, equal on paper is not always equal after taxes.

A beneficiary inheriting a traditional IRA may owe substantial income taxes as those funds are withdrawn over time. Another beneficiary inheriting a house or brokerage account may receive a full step-up in basis and owe little or no tax at all. Coordinating how these assets pass to heirs can materially improve after-tax outcomes for families.

The Hidden Tax Problem

Consider the following example:

Estate Asset	Value	Tax Treatment
Traditional IRA	$500,000	Fully taxable as ordinary income
Residence	$250,000	Step-up in basis at death
Brokerage Account	$250,000	Step-up in basis at death
Total Estate	$1,000,000

Now assume there are two beneficiaries:

• Beneficiary A is in the 12% federal tax bracket

• Beneficiary B is in the 35% federal tax bracket

If the estate is split evenly without tax planning, each beneficiary receives:

Asset	Beneficiary A	Beneficiary B
Traditional IRA	$250,000	$250,000
House/Brokerage	$250,000	$250,000
Total Inheritance	$500,000	$500,000

At first glance, this appears fair. But the after-tax results tell a different story.

Beneficiary	IRA Tax Rate	Estimated Tax on IRA	After-Tax Inheritance
A	12%	$30,000	$470,000
B	35%	$87,500	$412,500

Although each beneficiary inherited the same dollar amount, Beneficiary B ultimately receives approximately $57,500 less after taxes.

This is where tax-aware estate planning comes into play.

Rather than simply splitting every asset evenly, we often coordinate beneficiary designations and trust distributions so that lower-tax-bracket heirs receive a larger portion of tax-deferred retirement assets, while higher-tax-bracket heirs receive more tax-efficient assets such as brokerage accounts or real estate with a stepped-up basis.

The goal is not necessarily equal distributions on paper. The goal is equal after-tax outcomes.

Roth Conversions and the “Sweet Spot”

One of the most effective tools in tax-aware estate planning is the strategic Roth conversion.

For many retirees, the years between retirement and Required Minimum Distributions (RMDs) can present an ideal planning opportunity. We often refer to this period — particularly ages 65 through 73 — as the “sweet spot” for Roth conversions.

Why?

Because many retirees experience temporarily lower taxable income during these years:

• Employment income has stopped

• RMDs have not yet begun

• Social Security benefits may still be partially taxable

• Tax brackets may be lower than they will be later in life

This creates an opportunity to intentionally “fill up” lower tax brackets with Roth conversions.

Consider a married couple filing jointly with:

• $100,000 of taxable retirement income

• A $500,000 traditional IRA

• Ages 65–73

Rather than waiting for future RMDs — or leaving the IRA fully taxable to heirs — the couple could gradually convert portions of the IRA to a Roth IRA while remaining within the 22% federal tax bracket.

Strategy	Tax Paid During Lifetime	Heirs’ Future Tax Burden
No Roth Conversions	Lower initially	Potentially substantial
Strategic Roth Conversions	Moderate taxes now	Significantly reduced

Although Roth conversions require paying taxes upfront, the long-term benefits can be substantial:

• Reduced future RMDs

• Lower taxable income later in retirement

• Tax-free growth inside the Roth IRA

• Tax-free withdrawals for heirs (subject to the 10-year distribution rule)

For families with higher-income beneficiaries, Roth conversion planning can dramatically improve the after-tax value ultimately received by heirs.

Medicaid Asset Protection Trusts (MAPTs)

Another increasingly common estate planning strategy is the Medicaid Asset Protection Trust, commonly referred to as a MAPT.

A MAPT is an irrevocable trust designed to move assets outside of an individual’s countable estate for Medicaid eligibility purposes. In theory, assets transferred into the trust may eventually be protected from long-term care spend-down requirements, provided the transfer occurs outside of Medicaid’s five-year lookback period.

In the right circumstances, MAPTs can be powerful planning tools. However, they are not always the best fit.

“Why Not Just Put the IRA Into the Trust?”

One important limitation of Medicaid Asset Protection Trusts is that qualified retirement accounts — such as traditional IRAs and 401(k)s — generally cannot be transferred into the trust during the owner’s lifetime without triggering a taxable distribution.

In other words, moving a traditional IRA into a MAPT would typically require liquidating the IRA, recognizing the entire balance as taxable income, and then transferring the after-tax proceeds into the trust.

As a practical matter, this means retirement accounts usually remain outside the MAPT and must generally be spent down before Medicaid benefits become available.

This is significant because many retirees hold a large portion of their wealth inside retirement accounts. As a result, clients are often surprised to learn that even with a MAPT in place, substantial retirement assets may still need to be used to fund long-term care expenses before Medicaid eligibility begins.

Once assets are transferred into a MAPT:

• The grantor generally loses direct ownership and control

• The trust becomes irrevocable

• Separate tax filings may be required

• Trust income may be subject to compressed trust tax brackets

• Administration becomes more complex

Importantly, many clients already possess substantial resources available to help fund long-term care expenses before Medicaid planning would ever become necessary.

Consider a retiree with:

• A $250,000 traditional IRA

• $40,000 of annual Social Security income

• No mortgage debt

According to recent long-term care surveys, average assisted living costs now exceed approximately $74,000 annually, while nursing home costs often range from approximately $115,000 to over $130,000 per year depending on the level of care.

Even so, a retiree with moderate retirement assets and ongoing income may still be capable of privately funding several years of care without surrendering flexibility or control of assets through an irrevocable trust structure.

This is particularly important because, when pressed, many clients tell us they ultimately prefer maintaining flexibility and preserving choice in their care arrangements, even if that means spending their own dollars to do so.

As with most planning strategies, the question is not whether MAPTs are “good” or “bad.” The question is whether they fit the client’s broader financial, tax, and family goals.