Don't Let Capital Gains Eat Your Inheritance -- Here's What to Do Now

You've done everything right: built a strong portfolio, invested in real estate, maybe even created a thriving business. But when it comes to passing that wealth on, capital gains taxes can quietly undo decades of smart financial planning.

And for affluent families, the stakes are especially high. A mistimed transfer or a misunderstood tax rule can mean six- or seven-figure bills for your heirs. The good news is it can all be avoided. But it starts with knowing how capital gains really work when wealth changes hands.

What most families get wrong about inherited assets

Here's the core issue: If you give appreciated assets -- like stock, property, or even collectibles -- to your kids while you're still alive, the transferred assets retain your original cost basis. That means when they eventually sell, they're on the hook for capital gains taxes on the full difference between what you paid and the current value. It's worth mentioning that this only applies to assets that have gained value. Gifting assets at a loss is usually not a smart thing to do.

Now consider this: If those same assets are passed down after your death, your heirs may qualify for a step-up in basis, which adjusts the asset's value to the fair market value at the time of your passing. It's one of the most powerful, and overlooked tools for preserving inherited wealth.

A quick example:

• You bought stock for $200,000 that's now worth $1.5 million.
• If you gift it during your lifetime, the cost basis remains $200,000 for the recipients. When they sell, they could face a $1.3 million capital gain -- and a steep tax bill to match.
• If they inherit it after your death, their basis steps up to $1.5 million. Sell it at that value, and the taxable gain? $0.

It's a dramatic difference. And it's one that could easily mean hundreds of thousands of dollars in savings.

Afraid you're not set up for success? The advisors on our partner SmartAsset's platform have been rigorously vetted through our proprietary due diligence process.

What to do instead: Strategies that keep your heirs richer

Here's how to avoid letting capital gains chip away at your legacy:

1. Understand the step-up in basis

Before transferring any assets, talk to a tax advisor about whether those assets would qualify for a step-up in basis at death. In many cases, it's better to hold appreciated investments in your name and let heirs inherit them -- not gift them during life.

If you want to find an advisor but need a place to start, this no-cost quiz from our partner, SmartAsset, makes it easier to find a fiduciary financial advisor.

2. Use gifting strategically

If you do want to give while living, focus on cash or assets that haven't appreciated much. You can also explore using trusts to manage future appreciation in a tax-smart way.

3. Review your estate plan regularly

Tax laws change. Your estate plan should change with them. With the current estate tax exemption set to drop after 2025, now's the time to revisit your strategy.

4. Coordinate with professionals

Work with a financial advisor, estate attorney, and CPA who understand how to navigate capital gains in large estates. Coordination matters -- especially when your portfolio includes a mix of real estate, private equity, and market investments.

The goal is to keep your money

Your generosity should be a gift, not a tax problem. By planning ahead and understanding how capital gains apply to your estate, you can help your family keep more of what you've worked so hard to build.

Don't leave it to chance. A few smart moves now could save your heirs a fortune later.