Tax efficiency isn’t just about reducing what you owe, it’s about shaping how your wealth moves through generations. As Michael Mongin, CPWA®, explains, “Thoughtful wealth and tax planning allows for family harmony, efficiency, and ease of management of your assets in succession to the next generation.”
Behind that statement lies a world of nuance. When managed intentionally, taxes influence everything from investment performance to estate design. When overlooked, they can quietly erode returns, introduce unnecessary complexity, and create tension among heirs.
Common Pitfalls in Tax Mismanagement
The most frequent mistakes often stem from inattention rather than intent. Failing to offset capital gains with losses, neglecting to plan for estate obligations, or missing available exemptions can all increase costs unnecessarily. These missteps may not only lead to higher tax bills but also missed opportunities to strengthen a family’s long-term financial position.
Mongin emphasizes that understanding the foundational rules of estate and gift taxation is essential. “You have an annual exclusion worth $19,000 per year and a personal estate and gift tax exemption of roughly $14 million,” he notes. “These are two of the most important tools to consider when giving assets to someone other than your spouse.”
Understanding Income and Investment Tax Efficiency
Beyond estate transfers, tax efficiency extends to everyday investment management. The type of income—capital gains, dividends, or interest—determines how much ultimately stays in your portfolio.
- Long-term capital gains (for assets held over 12 months) are taxed at a maximum federal rate of 20%.
- Short-term capital gains and non-qualified dividends are taxed as ordinary income, often at higher marginal rates.
- Qualified dividends receive the same favorable treatment as long-term gains.
- Interest income varies: it may be taxable at the federal or state level, or tax-exempt if derived from municipal bonds issued within the investor’s home state.
The composition of a portfolio—and where assets are held—can dramatically influence these outcomes. Strategic asset location, for example, can help balance taxable and tax-deferred growth while maintaining liquidity and diversification.
When Trusts Make Sense
While trusts are often associated with ultra-high-net-worth families, Mongin stresses that they can serve a much broader purpose. “Trusts can be effective for anyone who wants to properly plan for the distribution and succession of their estate,” he explains.
A trust allows assets to bypass probate, keeping the transfer private and reducing delays. It also enables the grantor to define how, when, and to whom assets are distributed, providing structure and protection for beneficiaries. In most cases, the trust itself owns the assets, shielding them from creditors or potential liabilities faced by beneficiaries.
Timing Reviews and Adapting to Change
Estate and tax laws are continually evolving, which makes regular reviews essential. Mongin recommends reassessing estate plans and beneficiary designations periodically, particularly as new legislation or personal circumstances arise.
Under current law, the Tax Cuts and Jobs Act of 2017 temporarily doubled the federal estate-tax exemption through December 31, 2025. Unless Congress acts to extend it, the exemption will revert to roughly half its current level (around $7 million per person, adjusted for inflation) beginning in 2026.
Another key concept is the step-up in basis at death, which can eliminate capital gains on appreciated assets. When heirs inherit property, its value is reset to the fair market price at the time of death, potentially reducing future tax liabilities upon sale.
Strategies to Limit Exposure
For larger estates, techniques like portability, irrevocable trusts, and valuation discounts can help minimize exposure to estate tax. Portability allows a surviving spouse to inherit a deceased spouse’s unused exemption, effectively doubling the amount sheltered from taxation.
Other advanced tools, such as grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), and family limited partnerships, can further refine control and efficiency.
Life insurance, too, plays a distinct role. Properly structured, it remains one of the few financial tools that can avoid both income and estate taxes. “In most cases, life-insurance proceeds are income-tax-free when received by a beneficiary,” Mongin explains. “If held within an irrevocable life-insurance trust, they may also be excluded from the insured’s taxable estate.”
Charitable giving offers yet another dimension of tax efficiency. Vehicles such as charitable remainder trusts (CRTs), charitable lead trusts (CLTs), and donor-advised funds (DAFs) can align philanthropic goals with broader estate strategies, ensuring both impact and efficiency.
The Case for Starting Early
Ultimately, effective tax and estate planning isn’t about reacting to new laws about designing a plan that reflects your values, goals, and family structure. “Start early,” Mongin advises. “Align your plan with your personal principles and work with your financial advisor, attorney, and CPA to bring that vision to life.”
Whether the objective is to simplify wealth transfer, preserve privacy, or reduce friction among heirs, tax efficiency remains one of the most powerful levers for shaping a legacy that endures.
Ready to take a closer look at your tax and estate plan? Connect with us.
Sources:
- Internal Revenue Service (IRS) – Inflation Adjustments for Tax Year 2025 (Revenue Procedure 2024-40)
- Also see the PDF of Rev. Proc. 2024-40
- IRS – Estate and Gift Tax FAQs
IRS – Estate and Gift Taxes (General information page) - IRS – Topic No. 409: Capital Gains and Losses
- IRS – FAQs regarding Capital Gains, Losses, and Sale of Home
- IRS – Frequently Asked Questions on Gift Taxes