One of the questions I hear from some families is deceptively simple: “My spouse and I have a $5 million estate and one child—do we have an estate tax issue?”
At first glance, the answer may appear to be “no.” Based on today’s federal estate tax exemptions, a married couple with a $5 million combined estate can generally pass those assets outright to their child without triggering federal estate tax. However, focusing only on taxes at the parents’ level overlooks a much larger, and potentially more costly, long-term planning issue.
The Hidden Estate Tax Exposure for Your Children
Let’s assume you leave an outright inheritance of $5 million to your child. No estate tax is due at your deaths. However, once those assets are inherited, the amount received and all future growth, become part of your children’s taxable estate.
Historically, assets that are invested for long‑term growth may reasonably be expected to grow at an average rate of approximately 7% per year. At that rate, assets double roughly every 10.3 years. That means a $5 million inheritance could grow to $10 million in about a decade and to $20 million in just over 20 years.
By the time your child reaches the later stage of their life, their inherited assets, combined with what they build themselves, could easily push them over future estate tax exemption amounts, which may be significantly lower than today’s levels. The result: a substantial portion of what you worked to build may ultimately be lost to estate taxes at the next generation.
Planning Beyond the First Transfer
Proper estate planning is not just about minimizing taxes at death; it is about preserving family wealth across generations. One of the most effective tools to accomplish this goal is a Lifetime Asset Protection Trust for your child.
With this type of trust, your children have access to and use of the funds, but the assets are not owned outright by them. As a result, both the original inheritance and all future appreciation can remain outside of your children’s taxable estate. When structured correctly, those assets can eventually pass to your grandchildren estate tax–free, regardless of how much they have grown in value.
This strategy can eliminate millions of dollars in potential estate taxes over time by removing both current and future value from the taxable estates of your heirs.
Added Protection Beyond Tax Planning
The benefits of a Lifetime Asset Protection Trust extend beyond tax efficiency. Assets held in trust can also be protected if a child experiences a divorce or creditor issues. Because the trust, not the beneficiary, owns the assets, they are often shielded from claims by former spouses, lawsuits, or financial missteps.
Planning for the Legacy You Intend
Leaving assets outright may be simple, but simplicity often comes at a cost. Thoughtful estate planning allows you to preserve wealth, protect your children, and create a lasting legacy that benefits future generations.
At Greenspoon Marder, our Wills, Trusts and Estates practice group regularly works with families to implement strategies that go beyond basic wills and address long‑term tax exposure, asset protection, and generational planning. With the right structure in place, it is possible to transfer wealth efficiently, while keeping it where you intend it to remain: in your family.
