There is a gap between what the family thinks it owns and what it actually owns.
There is a gap between what the family thinks it owns and what it actually owns.
Cash and fixed income
Cash is the easiest asset for any family - easy to transfer, easy to divide, basis equal to value. Fixed income generates cash flow and serves as the family's safety net. Neither is likely to make a family wealthy.
Marketable securities
For transfer purposes, marketable securities are nearly ideal. They are transferable, divisible, and liquid. Equities held for a long time build a large inherent tax liability - and if included in the gross estate, that liability generally disappears at death. Three children can split a portfolio, each take their share with a fresh basis, and reinvest in whatever fits their own life. No partner consent.
Retirement assets
Retirement accounts do not get a basis step-up. Traditional IRA distributions generally are ordinary income, and most adult children must empty an inherited IRA within ten years. A $5 million IRA is not $5 million the children can spend. Estate tax can compound the income tax; the §691(c) deduction only partly fixes the double tax. Families can leave retirement assets to charity or pay the tax - convert to a Roth during life, at known rates. Qualified Roth distributions are income-tax-free.
Real estate
Death changes the tax picture but not the practical picture. The next generation inherits the mortgage, the operating agreement, the partners and the K-1s. When depreciated, refinanced real estate has been moved outside the estate, the grantor used the deductions and took out the cash. When the trust sells, debt and tax consume much of the proceeds. A lot of the economics are gone. The building, the debt, and the partners are all still there.
Alternative investments
Private equity funds, hedge funds and direct business interests are hard to transfer. Funds expected to last 10 years often last 15. The family lists the manager's mark on the balance sheet. The family will receive whatever the exits produce. Selling early may require consent and a substantial discount, if there is a market at all. Capital calls survive the original investor. Capturing an inherited partnership interest’s basis step-up inside the fund generally requires a §754 election. The next generation holds an illiquid interest in a vehicle they did not choose, on a timeline nobody controls.
Trust assets outside the estate
Assets gifted to trusts outside the gross estate retain carryover basis. Death does not erase decades of appreciation. Avoiding the estate tax has a cost - and sometimes that cost is an income tax liability passed to the next generation.
I’ll be discussing these ideas at the upcoming Notre Dame Tax & Estate Planning Institute, October 28–30, 2026.
Register for the conference to attend my presentation and the other sessions.
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