Understanding the Hidden Risks in Estate Planning
For many couples, the federal estate tax exemption—set at $15 million per person for 2026—provides a false sense of security. While a $4.2 million estate is well below federal thresholds, it can still face significant tax exposure depending on the order in which spouses pass away. Recent analysis suggests that for a couple in Massachusetts, the difference between who dies first can result in a staggering $700,000 tax variance.
This “tax cliff” is primarily driven by state-level estate taxes and the impact of the SECURE Act on high-earning heirs. In states like Massachusetts, which has a $2 million estate exemption, the state tax burden can compound with the federal income tax liabilities faced by children who inherit traditional IRAs and must deplete them within a 10-year window.
The Anatomy of the Tax Gap
The financial outcome for heirs is heavily influenced by the composition of assets and the survivor’s tax filing status. Consider a couple aged 73 and 70 with $4.2 million in assets, including a large traditional IRA, a Roth IRA, a brokerage account, and cash. Their three adult children are already in high federal income tax brackets (32% to 37%).
- Scenario A (Husband dies first): The wife inherits the traditional IRA, continues taking RMDs as a single filer, and eventually leaves a larger taxable balance to the children. This results in higher state estate taxes and forces heirs to pay substantial federal income taxes on the inherited retirement accounts.
- Scenario B (Wife dies first): The husband inherits the Roth IRA, which continues to grow tax-free. Because the Roth is a smaller part of the taxable estate and provides tax-free income, the total combined tax liability for the heirs is significantly lower.
The delta between these two scenarios can reach $700,000, largely because the Roth owner surviving longer allows for more tax-efficient wealth transfer and reduced RMD pressure on the surviving spouse.
Three Strategic Moves to Mitigate Tax Exposure
Couples in this financial bracket can take proactive steps to minimize these liabilities regardless of the order of death:
- Execute Bracket-Filling Roth Conversions: By converting $80,000 to $120,000 annually from a traditional IRA into a Roth IRA during joint-filing years, couples can take advantage of generous married-filing-jointly tax brackets. This reduces the future RMD base and prepays taxes at lower rates than what the surviving spouse might face as a single filer.
- Relocate Before the Second Death: Because state estate taxes are tied to one’s legal domicile, moving to a state without an estate tax before the second spouse passes away can eliminate the state-side tax bill entirely.
- Leverage Gifting and Disclaimer Planning: Utilizing the annual gift exclusion—which allows for $19,000 per recipient in 2026—can help reduce the size of the taxable estate. Additionally, naming contingent beneficiaries to allow for disclaimer planning into a credit-shelter trust can keep assets out of the survivor’s taxable estate.
The common mistake is treating the traditional IRA as ‘the spouse’s problem later’ instead of a joint balance to be drained methodically during joint-filing years.
For high-net-worth households, estate planning is not just about the total asset value, but about the structure of those assets and the timing of death. By treating retirement accounts and state domicile as active components of a financial strategy, couples can protect their heirs from unnecessary tax burdens.
