Editor’s note: Mallon FitzPatrick is a longtime columnist with Rethinking65. Read more of his articles here.
Mallon FitzPatrick
The recent enactment of the One Big Beautiful Bill Act (OBBBA) on July 4 marks a pivotal moment in tax and estate planning. While our clients may perceive “estate planning” as reserved for the ultra-wealthy, it is imperative that we actively educate and engage our mid-wealth clients — those with net worth typically ranging from $5 million to $10 million — on its profound and renewed importance. This isn’t about Forbes lists; it’s about protecting their life, lifestyle and legacy.
Here’s why sophisticated estate planning is more critical than ever for this segment, and how we can best serve them:
The Mid-Wealth Imperative: Beyond Federal Estate Tax
While OBBBA solidified the federal estate tax exemption at a generous $15 million per person (indexed for inflation, effective January 1, 2026), it’s a critical misconception for clients to believe they are “in the clear.” We must emphasize that federal estate tax is only one piece of the puzzle.
State-Specific Tax Traps: Many states impose their own estate or inheritance taxes with significantly lower thresholds than the federal level. For clients in these states, a $5 million or $10 million estate can absolutely trigger substantial state-level transfer taxes. Our planning must meticulously navigate these state nuances.
The Basis Step-Up Strategy: This is paramount. With the higher federal exemption, the focus for many mid-wealth estates shifts from estate tax avoidance to income tax basis planning. Assets passing through an estate (or a QTIP trust, as we’ll discuss) generally receive a “step-up in basis” to fair market value at death, eliminating accrued capital gains. For assets like appreciated real estate or stock portfolios, this can save heirs millions in future income taxes. We need to actively review existing structures to ensure assets are positioned to receive this vital step-up.
Probate Avoidance and Privacy: Regardless of tax implications, basic planning tools like wills, revocable living trusts, and properly structured beneficiary designations remain essential to bypass probate. Using these tools ensures a smoother, private and less costly asset transfer process. This proactively mitigates potential family disputes and administrative headaches.
Navigating Tax Traps and Maximizing Wealth Preservation
Clients often “set and forget” retirement accounts, but their inherent “income in respect of a decedent” (IRD) tax liability can be a nasty surprise for heirs. This creates an immediate opportunity for sophisticated planning:
Optimizing Retirement Account Distribution: For clients with significant IRA or 401(k) balances, we should explore strategies to manage IRD. For charitably inclined clients, designating charities as beneficiaries for these accounts can be highly tax-efficient — enabling clients to avoid income tax entirely while satisfying philanthropic goals.
Strategic Gifting & Leveraging OBBBA’s New Landscape:
Annual Exclusion Gifts: The ongoing $19,000 annual exclusion per person remains a powerful tool for gradual estate reduction, entirely gift-tax free.
Direct Payments for Tuition/Medical Care: These remain excellent, unlimited, and tax-exempt ways for clients to support family members.
Lifetime Gifting Post-OBBBA: While the “use it or lose it” pressure of the expiring exemption is gone, strategic lifetime gifting — particularly through structures like spousal lifetime access trusts (SLATs), for those who still value removing assets from their estate — remains a viable strategy for long-term wealth transfer and asset protection.
Charitable Deductions (0.5% AGI Floor): Be mindful of OBBBA’s new 0.5% adjusted-gross-income floor for itemized charitable contributions (effective 2026). This may necessitate “bunching” strategies or leveraging donor-advised funds (DAFs) to maximize deductibility while maintaining consistent philanthropic intent.
Trusts as Dynamic Tools for Protection and Control
The conversation around trusts for mid-wealth clients needs to extend beyond just estate taxes. OBBBA’s impact on basis step-up further shifts the emphasis:
Credit Shelter Trusts vs. QTIPs Post-OBBBA: Many older wills and trusts direct assets to “credit shelter” (or bypass) trusts. While these historically shielded assets from the surviving spouse’s estate tax, they explicitly forfeited a basis step-up at the survivor’s death. With the $15 million federal exemption, this trade-off is no longer favorable for most mid-wealth clients. We should be reviewing and recommending amendments to redirect assets to:
Outright to Surviving Spouse: This is the simplest route for full basis step-up.
QTIP (Qualified Terminable Interest Property) Trusts: This is often the preferred solution. Assets in a QTIP qualify for the marital deduction (avoiding estate tax at the first death) and receive a basis step-up at the survivor’s death. QTIPs also offer asset protection for the surviving spouse and control over ultimate beneficiaries, which a direct, outright gift does not. This can be especially useful in blended families. QTIPs’ combination of income tax efficiency and non-tax benefits makes them a vital planning tool.
Addressing Existing Credit Shelter Trusts: For clients who are beneficiaries or trustees of existing credit shelter trusts, we must explore strategies to modify these trusts (e.g., decanting, non-judicial settlement agreements, or even court modification) to potentially achieve a basis adjustment at the primary beneficiary’s death, where beneficial.
Asset Protection Trusts (SLATs, DAPTs): For clients with specific concerns about creditor protection, litigation, or simply safeguarding wealth for future generations, irrevocable trusts like SLATs (spousal lifetime access trusts) and DAPTs (domestic asset protection trusts, where jurisdictionally appropriate) remain powerful. These trusts offer long-term stability, control over distributions, and shield assets from risk, independent of federal estate tax concerns.
Beyond the Numbers: Lifestyle and Legacy
Finally, we must always anchor our discussions in the “why.” Estate planning at this level isn’t about impending death; it’s lifestyle planning and legacy protection.
Long-Term Financial Security: A well-structured plan anticipates inflation, healthcare costs (especially with Medicare’s funding challenges), and market volatility, ensuring a $5-10 million portfolio actually supports a desired lifestyle throughout a potentially longer retirement.
High-Tax State Strategies: For clients in high-tax states, For clients in high-tax states, establishing certain trust structures in low-tax jurisdictions (e.g., Nevada, South Dakota) can offer legitimate ways to reduce state income tax exposure, enhance privacy, and maintain favorable tax treatment even if the client relocates to a different state in the future.
Blended Families and Complex Needs: Modern family dynamics demand clear, deliberate planning. Trusts are indispensable tools for ensuring assets flow to the intended beneficiaries, protecting vulnerable heirs (special needs, financial instability), and avoiding painful disputes.
The OBBBA has provided invaluable clarity regarding the federal estate tax exemption, but it has simultaneously amplified the importance of sophisticated, holistic estate planning for our mid-wealth clients.
The 2025 window, specifically for leveraging the last year of the Tax Cuts and Jobs Act’s (TCJA) original rules before OBBBA’s full effects kick in for some provisions in 2026, presents a timely call to action.
We must proactively guide clients in crafting blueprints that minimize taxes (income and state), avoid probate, reduce conflict, and truly reflect their enduring values. Because, as we know, if they don’t write the blueprint for their legacy, someone else will – and perhaps not kindly.
Mallon FitzPatrick, CFP, is a principal and managing director at Robertson Stephens and heads the firm’s financial planning center. For more information about Mallon or Robertson Stephens, please visit www.rscapital.com or email info@rscapital.com. Advisory services are offered through Robertson Stephens Wealth Management LLC. Opinions presented are those of the author and not necessarily Robertson Stephens.Please read important disclosures.
