MW 'I'm in the home stretch': I'm 80. Do I leave my kids a 'Magnificent Seven' dynasty trust or a brokerage account?

By Quentin Fottrell

'Do I leave them to pay capital-gains tax on the dynasty trust or estate tax on my personal account?'

"How do I decide what approach I should take?" (Photo subject is a model.)

Dear Quentin,

About a decade ago, I set up dynasty trusts for my two children. I funded them with cash and equities that I transferred from my personal stock account. While I am in relatively good health, I just turned 80 and I know I am in the home stretch. The equities that I transferred to the trusts were mostly "Magnificent Seven" companies. These stocks have, over the years, appreciated significantly.

The dynasty trust allows for these trusts not to be considered when determining my estate tax, but whenever they are sold by my descendants, they will have to pay significant capital gains. If, however, I transfer these stocks back into my personal stock account, they will be subject to the step-up rule and thus not taxed at all and will instead be valued at the date of my death. They will, however, then be subject to 40% estate tax.

How do I decide what approach I should take? Do I leave them to pay capital-gains tax on the dynasty trust or estate tax on my personal account?

Octogenerian Mother

Related: My daughter has $500K in med-school expenses. Can my wife and I afford to pay it off?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

In one back-of-the-envelope calculation, paying estate tax only would save your kids $1.5 million.

Dear Octogenerian,

There are a lot of what-ifs in your decision-making process.

It all depends on the size of your children's inheritance and on its appreciation - as well as on what happens with the estate-tax exemption next year. Assuming all things are equal, you would probably be better off bringing these assets back into your estate.

Leaving these complexities aside for a moment, John Pantekidis, managing partner at TwinFocus, says your decision is not an unusual one for ultrahigh-net-worth individuals. "This decision should be viewed from several different angles because it is not merely a mathematical tax calculation but deserves a comprehensive analysis," he says.

Your decision involves income- or estate-tax exposure, forecasted appreciation, longevity, philanthropic objectives, balance-sheet considerations and regulatory risks, to name just a few considerations. "The countervailing tension exists between avoiding estate tax through lifetime transfers and avoiding capital gains tax through step-up at death," he says.

A tax face-off

Here's some back-of-the-envelope math: If your stocks were valued at $20 million - to pick a big, round number - your children would likely pay marginally more in capital gains than in estate tax. The federal estate and gift-tax exemption for 2025 is $13.99 million per person. For married couples, it's $27.98 million.

With $20 million in assets and an original cost basis of $2 million, you receive an unrealized gain of $18 million. Given the current estate-tax exemption of $13.99 million, your children would have to pay a 23.8% capital-gains tax rate (which includes 3.8% net investment income tax). That's a tax bill of $4.284 million.

Your taxable estate, if you brought these assets back into your personal brokerage account, would be $7 million at 40%. That's a $2.8 million estate tax. The step-up in basis eliminates all possible capital gains. Given that your heirs get $17.2 million, paying estate tax only would save your kids $1.5 million.

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Spanner in the works

Side note: The estate-tax exemption was set to half in 2026. "That's off the table," says Kierman Law, an estate-planning firm in Scottsdale, Ariz. "Instead, starting Jan. 1, 2026, the federal estate and gift-tax exemption is set at $15 million per person ($30 million for couples). That's indexed for inflation going forward. The generation skipping transfer $(GST)$ tax exemption matches that amount."

And now for the potential spanner in the works: In order to change your mind, you, as the donor, will have to review the terms of the trust, according to Neil V. Carbone, trusts and estates partner at New York law firm Farrell Fritz PC. Many dynasty trusts are set up to be "intentionally defective grantor trusts."

"One way to make a trust 'defective' for income-tax purposes is to include a power to swap assets out of the trust by substituting into the trust other assets of equivalent value," he says. "Such a swap power will allow the donor to swap out low-basis property from the trust and to replace it with high-basis assets."

Swapping out assets

"While the donor's power to swap assets is not exercised in a fiduciary capacity and the donor does not require the trustee's consent to exercise it, the trustee does have a fiduciary obligation to ensure that the assets substituted into the trust are in fact of an equivalent value," Carbone adds.

Even though the exercise of a swap power should not result in a taxable gift - because the values of the properties should be equivalent - many donors will choose to file a gift-tax return to report the swap transaction in order to start the running of the statute of limitations on any challenge from the Internal Revenue Service, he says.

You should review your tax options at regular intervals. Pantekidis adds: "Only by conducting a thorough investigation that involves quantifying the mathematical break-even and the qualitative implications, families can make well-informed decisions that protect balance sheet integrity, maintain flexibility, and sustain wealth across generations."

No one ever said it would be simple.

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More columns from Quentin Fottrell:

'I would like to know the truth': My stepgrandmother told me she left me her IRA. How do I find it?

'I'm worried about hurt feelings': I regret hiring my brother-in-law as my financial adviser. How do I fire him?

'She may have a spending problem': Would it be wrong to secretly give our son money - without telling his wife?

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-Quentin Fottrell

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October 25, 2025 12:29 ET (16:29 GMT)

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