Capital Gains and Estate Planning: Legal Traps and Strategic Opportunities

For high-net-worth individuals, estate planning is more than just deciding who gets what. How assets are titled, transferred, or held can trigger unexpected legal and financial consequences — especially when it comes to capital gains. While many focus on estate and gift taxes, overlooking how capital gains interact with your legal structures can derail your legacy goals.

Why Capital Gains Are a Legal Concern in Estate Planning

At the heart of many estate plans are appreciated assets — real estate, business interests, investment portfolios, that may carry significant unrealized capital gains. When transferred during life or death, the legal method of transfer can determine:

Whether beneficiaries inherit a stepped-up basis (and thus avoid gains),

Whether an asset is subject to carryover basis (potentially triggering future liability),

Or whether gains are accelerated due to the legal structure used.

These aren’t just tax issues.  There are legal consequences tied to how and when you transfer ownership, how assets are titled, and what kind of trust or entity holds them.

Key Legal Structures That Affect Capital Gains

1. Irrevocable Trusts
Transferring assets to an irrevocable trust during your lifetime can remove them from your estate, but may forfeit the step-up in basis at death. Depending on whether the trust is a grantor or non-grantor trust, capital gains may be taxed differently or accelerate unexpectedly.

2. Business Entity Planning
Holding appreciated assets (especially real estate or closely held businesses) in partnerships, S corporations, or LLCs can complicate transfers. A poorly structured operating agreement or redemption clause could trigger gain recognition upon sale or death, or block step-up altogether.

3. Gifting Strategies
Gifting low-basis assets outright during life sounds simple. But doing so passes on your tax basis, along with potential liability. More importantly, the legal form of the gift can impact whether it's considered a completed gift for estate tax purposes and whether it triggers gain down the line.

4. Death-Time Transfers and Step-Up
Only certain assets and legal transfer methods qualify for a step-up in basis at death. Some joint ownership structures or retained interests can disqualify the step-up. Even revocable trusts need to be carefully structured to ensure intended step-up treatment occurs.

Questions Worth Asking Now

Are your high-value assets held in a way that allows your heirs to benefit from a step-up in basis, or are they locked into a structure that may create gain at death?

If you're using irrevocable trusts, do they preserve the right kind of tax treatment at your passing?

Will the sale of your business or property interest be treated as a capital transaction or something else under your governing documents?

Are your gifting strategies creating unintended legal consequences for you or your beneficiaries?

Final Thought

Capital gains exposure isn’t just about  IRS rules; it’s about how the legal architecture of your estate plan either protects or undermines your intent. The way you hold title, draft trusts, structure business exits, or plan lifetime transfers has major implications for what your heirs ultimately receive.

If your plan includes appreciated assets — and most do, it’s worth a legal review to ensure the structure supports your goals and avoids unpleasant surprises. If you would like to discuss further, call us at 516-570-4016.