Your Kids' Tax Brackets Could Lead to Unequal Inheritances
Sometimes, divvying things up equally means one child might end up with less because of tax implications. Here’s how to avoid that.


Estate planning is a critical aspect of comprehensive financial planning, especially when it comes to ensuring your heirs receive the maximum benefit from your legacy. Among the various components of estate planning, the designation of beneficiaries for individual retirement accounts (IRAs) is a particularly nuanced decision with far-reaching tax implications.
The distinction between Roth IRAs and traditional IRAs (or company retirement plans) is crucial to understand when planning for the future of your heirs. Each type of account is subject to different tax rules upon distribution:
- Roth IRAs. These accounts offer tax-free distributions to beneficiaries, which can be particularly advantageous for heirs who are in higher tax brackets.
- Traditional IRAs and retirement plans. Distributions from these pre-tax accounts are taxed according to the beneficiaries' individual tax rates, which means that the actual amount received after taxes can vary significantly among your heirs.
A one-size-fits-all approach in designating equal percentages to each beneficiary may not be the most effective strategy. Instead, a more tailored approach that considers the unique tax brackets of each beneficiary can lead to a more equitable distribution of your estate.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Impact on after-tax inheritance
Consider a scenario where Clara is 80 years old and looking to maximize the amount that goes to her heirs, subsequently reducing the amount claimed by Uncle Sam at tax time. Ray is a prominent attorney in the highest tax bracket of 37%. Steven earns less money and falls in the 12% federal tax bracket.
Clara has $1 million in a traditional IRA (pre-tax account) and $500,000 in a Roth IRA. Initially, she had split both accounts 50/50 between her two sons. However, leaving more of the tax-free Roth to Ray may make sense because he is the higher-earning beneficiary. More of the traditional IRA could be left to Steven, as he is in a lower tax bracket, and the taxable distributions from the IRA are less impactful. Consider the following:
By adjusting the amount going to each beneficiary, Clara's distribution was more equitable to each child. She also was able to have less of her inheritance lost to taxes. In fact, she was able to give her heirs a total of $62,500 more ($1,317,500 - 1,255,000) than by splitting each account 50/50.
This also works when considering how much to leave a beneficiary from taxable brokerage accounts. Because of how capital gains are taxed, you may be able to leave your heirs more money by adjusting the amount each beneficiary receives based on their tax bracket.
Tax-efficient estate planning
In essence, strategically designating IRA beneficiaries transcends mere asset distribution; it is a testament to the power of informed financial planning and the profound impact of tax considerations on inheritance. This example illuminates a path for families that can significantly enhance the value of their legacy for their heirs.
By eschewing the traditional equal-split approach in favor of a model that aligns with each beneficiary's unique tax situation, individuals can ensure that their heirs are positioned to receive the maximum possible benefit from their inheritance. This method not only honors the benefactor's intent to provide for their loved ones but does so in a manner that is both tax-efficient and equitable, allowing for a legacy that is felt more deeply and preserved more completely.
The case of Clara and her sons serves as a compelling illustration of how adjusting beneficiary designations to account for different income levels and associated tax brackets can result in a more favorable after-tax outcome. Such strategic adjustments, while requiring careful consideration and possibly the guidance of a certified financial planner, can significantly reduce the tax burden on the estate. This allows a greater portion of one's life savings to reach the intended recipients — fully embodying the true spirit of a given legacy.
Investment advisory services offered through Osaic Advisory Services, LLC (Osaic Advisory), a registered investment advisor. Osaic Advisory is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Advisory.
Related Content
- Resist the Taboo: Talk to Your Kids About Family Wealth
- To Protect Your Kids, Consider These Estate Planning Steps
- Four Ways to Give Money Tax-Free to Your Kids When You Die
- IRS Quietly Changed the Rules on Your Children’s Inheritance
- How to Optimize Taxes When You Tap Your Retirement Accounts
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Antwone Harris, MBA, CFP®, is a seasoned financial professional with over 20 years of experience helping clients transition from their main careers to the next phase of their lives. As a former VP-Senior Financial Consultant at Charles Schwab Inc., he managed over $890 million in client assets and ranked in the top 5% of more than 1,100 advisers nationwide. His financial expertise has been featured in major media outlets such as CBS, ABC, NBC, FOX, The Washington Post, Bloomberg, The Financial Times and Kiplinger. Harris is a CERTIFIED FINANCIAL PLANNER™ and a Retirement Income Certified Professional®, focusing his practice on creating comprehensive plans for individuals approaching or already in retirement. Recognizing the anxiety surrounding retirement preparation, Harris founded Platinum Bridge Wealth Strategies to provide specialized financial planning for those nearing or in retirement.
-
Why Splurging in Retirement is Totally Worth It
Splurging on yourself is okay when it fits your budget, as it can enhance your happiness and reward your hard work without compromising financial security.
-
5 Ways Portfolios Have Been Impacted In Trump's First Six Months in Office
President Trump's first six months in office have kept investors on their toes thanks to whipsaw tariff policies and a massive tax cut and spending bill.
-
Are You a Doormat at Work? The Hidden Cost of Excessive People-Pleasing
I talked to the author of the upcoming book 'Fawning,' and she explains how the 'fawn' response can lead to blurred boundaries, difficulty asserting needs and a loss of self, with serious emotional consequences like anxiety and PTSD.
-
A Guide to Personalizing Your Retirement Plan for Maximum Impact
This strategy challenges conventional retirement rules of thumb by combining traditional savings, home equity and annuities to provide higher income and liquid savings and help cover long-term care costs.
-
How Advisers Can Rev Up Sales With Medicare
Help boost your revenue stream by integrating Medicare solutions into your financial practice for long-term client value and profits.
-
Take It From a Tax Attorney: This Is a Magic Multimillion-Dollar Tax-Saving Strategy
The qualified small business 1202 stock exemption is a $10 million exclusion that seems too good to be true and is often overlooked.
-
What Would You Like to Leave Behind? A Financial Planner's Guide to Family Wealth Discussions
Communicating about your assets and plans for passing them on increases clarity while preventing surprises and family disputes.
-
Seven Financial Considerations When Downsizing for Retirement
With prices going up on everything, you may be looking for a cheaper place to live. To truly evaluate costs, take a hard look at taxes and intangibles.
-
I Have Plenty of Money: Why Do I Need a Long-Term Care Plan?
Long-term care planning, whether through insurance or self-funding, is crucial not only for financial protection but also to preserve family relationships and reduce the emotional and logistical burdens on loved ones.
-
Three Steps for Evaluating a Downsize in Retirement: A Financial Planner's Guide
Unless you think things through, you could end up with major (and costly) regrets. To make the right choice, base it on the three keys to retirement happiness.