Why income tax — not estate tax — is now the most important planning conversation in Southwest Florida
By Edward E. Wollman, Founder, Wollman, Gehrke & Associates, P.A.
Ed Wollman has practiced estate and tax planning in Naples for 39 years. In this issue, he shares why the rules of the game have fundamentally changed — and what that means for your family.
"In 39 years of practice, I have found that what families do not know costs them far more than what they do.” A shift nobody told you about. A problem nobody wants to talk about. And a truth that's not just for the ultra-wealthy. So let us talk about it."
For most of the last four decades, estate planning followed a simple rule: give it away before the government takes it. With estate taxes as high as 55% on anything over $600,000, that advice made sense. Families with modest wealth (a home, a retirement account, a business) could find themselves writing enormous checks to the IRS simply for the act of dying.
That world is gone. If your estate plan was built around that old reality, it may be time for a serious conversation.
Today, each individual can pass approximately $15 million dollars of assets free of federal estate tax. For married couples, that figure effectively doubles. The result is that the vast majority of Southwest Florida families, including many with significant wealth, no longer face a meaningful estate tax exposure. But here is what most people do not realize: the strategies designed to avoid estate tax can actually create a much larger income tax bill for your heirs.
The Shift you can focus on NOW
Our firm watched the entire center of gravity in estate planning shift. It used to be straightforward: the estate tax was the enemy, and the plan was to minimize it. Today, it is more nuanced and the stakes of getting it wrong are just as high.
"It's a balance between whether you pay income tax, capital gains taxes, or estate taxes. When the differential in rates is so close, it becomes a timing issue."
Getting that timing wrong is an expensive mistake. For many families in Naples and Southwest Florida, particularly those who relocated from high-tax states like New York, New Jersey, or Illinois, the complexity runs even deeper. Moving to Florida solved one problem: you eliminated state income tax on your earnings and your estate. However, if you still own a vacation home in Connecticut, a business interest in New Jersey, or investment accounts funded during decades of working in a high-tax state, the income tax picture requires careful, deliberate planning. Florida residency is a powerful advantage. It does not automatically solve the income tax problem buried inside a lifetime of accumulated wealth.
Consider a straightforward example that we see regularly in my practice. A couple relocates to Naples after 35 years in the Northeast. They have done well - a $7 million portfolio, most of it in appreciated stocks and real estate they have owned for decades. Their adjusted cost basis (what they originally paid, plus additions) is a fraction of what those assets are worth today. Under the old playbook, the instinct is to transfer those assets now, under the generous current exemption, to get them out of their estate.
But, when you give appreciated assets away during your lifetime, your heirs receive what the tax code calls your "basis" — essentially what you originally paid for them. When they eventually sell, they owe capital gains tax on every dollar of growth. On a highly appreciated portfolio, that tax bill can consume close to 25% of the asset's value.
Now consider the alternative. You hold those same assets until death. The tax code then resets your heirs' basis to the fair market value on the date they passed (this is known as a step-up in basis). Example: If you own stock worth $500,000 that was purchased many years earlier for $50,000, your unrealized gain is $450,000. If you give it away during your lifetime, your heir will have a basis of $50,000. If on the other hand, you hold onto the stock until you die, the recipient takes the stock with a date of death new basis of $500,000. The $450,000 of growth on the stock purchased for $50,000, disappears. Your heirs can sell the stock the next day and owe no capital gains tax.
For a Naples family with $5–10 million in appreciated assets, the difference between these two approaches is not theoretical. It can mean hundreds of thousands of dollars that either stays in your family or goes to the government. There is usually a combination of transferring some assets during your lifetime and holding others until death that makes the most sense. You have to create a long-term plan (not a shoot-from-the-hip plan) to know which one is best.
The IRA Problem Nobody Wants to Talk About
For many families in this demographic, the single largest asset on their balance sheet is not their home or their non-retirement investment portfolio. It is their IRA.
Traditional IRAs and 401(k)s have never been taxed. Every dollar that comes out, whether withdrawn by the original owner or inherited by a child, is treated as ordinary income and taxed accordingly. For decades, that was manageable. Retirees and beneficiaries drew down their accounts gradually over their entire lifetime, staying in moderate tax brackets, and passed whatever remained to their children or grandchildren.
Then the rules changed. Under the SECURE Act, most non-spouse beneficiaries are now required to fully distribute an inherited IRA within just 10 years. For a child inheriting a $1.5 million IRA while still in their peak earning years, that compressed timeline can push them into the highest federal tax brackets precisely when they can least afford it. A significant portion of what you spent a lifetime building gets handed to the IRS in a rush.
I have seen this play out firsthand. I had a client who had accumulated an enormous amount of assets inside a tax-deferred vehicle. Rather than leaving his IRA to his children directly (through inherited IRA(s)) triggering large income tax liability over 10 short years, he contributed the IRA to Charitable Remainder Trust (s) (CRT) for his children’s benefit. The income is then spread out over their entire respective lifetime(s).
"The trustee of the CRT was able to withdraw the entire IRA balance without immediate taxation and the entire balance could be reinvested inside the CRT without the income tax drag. The beneficiaries then receive the annual payout (typically, 5 percent a year) and pay income tax upon receipt of the funds over their remaining lifetime. (He was able to invest 100% of the IRA tax-deferred)."
The difference was not marginal. By keeping the full pre-tax amount working and growing, the long-term impact on his family's wealth was substantial. Without that planning, a significant portion of a lifetime of savings would simply have disappeared into the tax system. This is the kind of outcome that proactive income tax planning makes possible. It is the kind of outcome that almost never happens by accident.
Estate Planning Is Not Just for the Ultra-Wealthy
One of the most costly misconceptions I encounter is the belief that estate planning is primarily about taxes and only relevant for the very wealthy. It is not. This misunderstanding causes families at every wealth level to delay planning that could protect everything they have built.
"Estate planning is agnostic as to net worth. You first have to make sure your foundational documents are in place — so that if you get sick or pass away, everything is going to move smoothly and not end up with a large amount of expenses to administer your estate."
For a family with $3 to $7 million in assets, the most important planning questions have nothing to do with estate taxes. They center on making sure a surviving spouse is financially protected, that assets reach children and grandchildren without costly delays, and that during a period of incapacity — due to an illness, an accident, or cognitive decline — your family is not left scrambling.
At our firm, every client engagement begins the same way: with a complete inventory of your financial life across seven key areas — financial planning, estate planning, wealth preservation, life insurance, cash flow management, long-term care, and philanthropic planning. We call it our Seven-Bucket Framework, and no strategy gets recommended until that full picture is clear.
I think of it as putting your oxygen mask on first.
"Sometimes people get carried away and do more planning than is necessary — and end up with buyer's remorse. It's very important to make sure you are well taken care of first. Without understanding your financial capacity, you could end up over-gifting and end up with a plan that does not fully satisfy your goals."
The goal is never to minimize one tax in isolation. It is to build a plan that protects your income, your family, and your legacy — in that order.
The Two Questions Worth Asking Your Advisor This Spring
For clients who have not reviewed their estate plan in the last two to three years, or who built their plan around avoiding estate taxes, rather than minimizing income taxes, the gap between what your plan does and what it should do may be significant.
"Over-planning where it's not necessary, and under-planning because they lack knowledge that these techniques are available — that's the most common mistake I see. Techniques that are fairly neutral, in the sense that you can continue to receive the income during your lifetime, and just pass the wealth at a lower tax rate when you pass away."
The 2 questions I would encourage every client to bring to their advisor this spring are the following:
1. Based on my current income tax situation, am I in a position to shift any of my assets into something that will grow in a more tax-favored manner?"
2. How can this be done with minimal or no impact on my current cash flow?
It is a simple question. But the planning it can unlock — around step-up in basis, retirement accounts, charitable strategies, and tax-efficient wealth transfer — may be the most valuable conversation you have all year.
"A big part of estate planning is being able to sleep at night knowing you have taken care of your family — for now and in the future."
That's what this work is really about.
Is your current plan built for today's tax environment? Wollman, Gehrke & Associates offers an estate plan review for existing clients and qualified prospective clients throughout Southwest Florida. To schedule a conversation with Ed or a member of our team, contact us.
In our next issue: Roth conversions, Charitable Remainder Trusts, life insurance as a tax shelter, and the advanced strategies that can keep more of your wealth in your family's hands.