Strategies for Leaving a Tax-Free Legacy
Table of Contents
Protecting and Preserving Wealth – Estate Planning Series, Part 4 of 6
In the world of wealth management, estate planning is more than just dividing up assets — it’s about preserving your legacy and ensuring your beneficiaries receive the full benefit of what you’ve built. For high-net-worth families, minimizing tax exposure across generations can make the difference between lasting impact and unnecessary loss.
In Part 4 of the Protecting and Preserving Wealth podcast series, Bruce Hosler, Jason Hosler, and Alex Koury share sophisticated strategies for leaving your assets either tax-advantaged or, ideally, completely tax-free. From Roth conversions to community property structuring, and from annuities to life insurance, this episode reveals how to position your assets with precision and purpose.
Understanding the Three Tax Buckets: Taxable, Tax-Deferred, and Tax-Free
Estate planning starts with knowing where your money lives — and how it’s taxed.
Taxable Accounts
- Examples: Individual brokerage accounts, savings accounts, CDs, and mutual funds not in retirement accounts.
- Taxation: You pay taxes annually on any interest, dividends, or realized capital gains.
- Considerations: These accounts offer liquidity but can erode wealth over time due to constant taxation.
Tax-Deferred Accounts
- Examples: Traditional IRAs, 401(k)s, 403(b)s
- Benefits: Contributions may be tax-deductible. Growth is tax-deferred.
- Catch: Withdrawals are taxed as ordinary income—potentially at your highest marginal tax rate.
- Planning Note: These accounts grow powerfully over time but create a tax burden in retirement or for heirs.
Tax-Free Accounts
- Examples: Roth IRAs, Life Insurance Retirement Plans (LIRPs), some municipal bonds
- Taxation: No federal, state, or capital gains tax if conditions are met
- Ideal Use: These are often the most valuable assets in retirement and legacy planning, due to their complete tax exemption.
“The goal is simple: move more assets from the taxable and tax-deferred buckets into the tax-free bucket — while you still can.” – Bruce Hosler
What Makes an Account “Tax-Advantaged”?
Tax-advantaged accounts occupy the sweet spot between taxable and tax-free. They let your investments grow without the annual tax drag—delaying taxation until the money is actually withdrawn.
Common Tax-Advantaged Vehicles
- Traditional IRA / 401(k): Grow tax-deferred; taxed as income upon withdrawal.
- 403(b) / SEP IRA / SIMPLE IRA: Common for small business owners and employees of non-profits.
- Tax-Deferred Annuities: No contribution limit; gains are taxed as ordinary income when withdrawn.
Why It Matters
Deferring taxes can significantly increase compound growth. But without proactive planning, the eventual income tax burden could push heirs into a higher tax bracket—reducing what they ultimately inherit.
Unlocking the Power of Tax-Free Accounts
Tax-free accounts represent the pinnacle of strategic planning. These are not just smart—they’re legacy game-changers.
Roth IRAs – The Crown Jewel of Tax-Free Growth
- Contributions are post-tax.
- Growth and qualified withdrawals are tax-free.
- No required minimum distributions (RMDs) for original owner.
- Heirs must distribute funds within 10 years—but those distributions are still tax-free.
Life Insurance Retirement Plans (LIRPs)
- Funded with after-tax dollars.
- Cash value grows tax-deferred.
- Policy loans and withdrawals can be tax-free if structured properly.
- Provides tax-free death benefit to heirs.
“Unlike Roth IRAs, LIRPs allow money to be taken out and put back in — without losing tax benefits.” – Alex Koury
Municipal Bonds – With a Caveat
- Federally tax-free interest.
- May affect provisional income for Social Security, making those benefits taxable.
- Best used with awareness of other income streams.
Moving from Taxable to Tax-Advantaged
What if your assets are currently in taxable accounts? The good news: there’s a path forward.
Repositioning with Tax-Deferred Annuities
Bruce Hosler explains how clients can take money generating annual capital gains and reposition it into tax-deferred annuities:
- Avoid annual taxation.
- Let investments grow within the annuity wrapper.
- Only pay taxes when withdrawing funds—often in retirement, when income (and your tax bracket) may be lower.
After Death Considerations
If you pass away with a tax-deferred annuity:
- No taxes are due immediately.
- The heir only pays taxes when they take distributions.
- This preserves the tax-advantaged nature beyond the original owner’s life.
From Tax-Deferred to Tax-Free: The Power of Roth Conversions
Tax-deferred to tax-free transitions are possible—but they require precision.
Roth Conversion Strategy
- Move funds from a traditional IRA to a Roth IRA.
- Pay taxes now on the converted amount.
- Enjoy future tax-free growth and withdrawals.
- Ideal for heirs: They inherit tax-free assets and can distribute them over 10 years.
Strategic Use of Life Insurance
LIRPs offer an alternative route:
- Use distributions from tax-deferred accounts to fund life insurance.
- Receive tax-free income during life.
- Leave behind a tax-free lump sum for heirs.
This strategy can also create a two-generation legacy income stream — allowing children to receive tax-free distributions over their own lifetime.
Step-Up in Basis – A Powerful, Underutilized Tool
What It Is
A step-up in basis allows your heirs to inherit an asset at its current market value—not your original purchase price—eliminating capital gains taxes.
How to Use It
- Only applies to taxable assets like real estate or brokerage accounts.
- No step-up on IRAs or annuities.
- Must hold title correctly in community property states (like Arizona) to receive full step-up on both spouses’ halves.
Common Mistakes
- Holding brokerage accounts jointly instead of titling them in a revocable living trust.
- This mistake could cost families hundreds of thousands in unnecessary capital gains.
“Without a trust, you may only get a 50% step-up in basis. A living trust can secure a full 100%.” – Alex Koury
Beneficiary Designations and Probate Avoidance
Designations are just as important as titles — and often override what’s written in your will.
Key Tools
- Pay-On-Death (POD) for checking accounts
- Transfer-On-Death (TOD) for brokerage and savings accounts
- Named beneficiaries on IRAs, 401(k)s, life insurance, annuities
Timing Matters
- Roth Conversions must happen while you’re alive.
- Spouses can convert IRAs post-mortem, but children cannot.
- Plan now — or risk losing the opportunity forever.
Avoiding Probate
Probate is public, expensive, and slow. Nearly every strategy discussed here — from TODs to trusts — is designed to avoid probate and streamline wealth transfer.
Conclusion: Build a Legacy, Not a Tax Bill
Tax-efficient legacy planning doesn’t happen by accident. It requires:
- Understanding account types and tax treatments
- Repositioning assets with intent
- Utilizing advanced tools like Roth conversions, LIRPs, and 1031 exchanges
- Proper titling and updated beneficiary designations
Hosler Wealth Management offers expert guidance to ensure your financial legacy is both powerful and protected. Whether you’re just beginning to plan or updating an existing strategy, it’s never too early — or too late — to get it right.
Ready to build a tax-smart legacy? Request a call
For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.
Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.
To view all Protecting and Preserving Wealth Podcast episodes: https://www.hoslerwm.com/protectingwealthpodcast/
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Host

Bruce Hosler is the founder and principal of Hosler Wealth Management which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER® professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 28 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.
In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.
2018-2025 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2025 based on data gathered from June 2023 to June 2024. Not indicative of advisor’s future performance. Your experience may vary. For more information please visit
Guest Profiles

Alex Koury CFP®, CERTIFIED FINANCIAL PLANNER® professional and Wealth Manager in Scottsdale, has worked in the financial services industry for fifteen years as a financial advisor and Financial Planner. He holds Series 7, 9, 10 & 66 securities registrations– and is a Registered Representative with Mutual Group.

Jason Hosler holds Series 7 and 66 FINRA securities registrations. He brings a technological edge to our firm and helps many of our clients stay current in the fast-moving age of the internet.
Transcript
Leaving Your Assets Tax Advantaged and Tax Free: Estate and Legacy Planning, Part 4 of 6
Speakers: Jon Gay, Bruce Hosler, Jason Hosler, & Alex Koury.
Jon Gay (00:08):
Welcome back to Protecting and Preserving Wealth, I’m Jon Gay. I’m joined by Bruce Hosler, Alex Koury, and Jason Hosler of Hosler Wealth Management.
Today is part four in our series on estate and legacy planning. And today, we’re talking about strategies for leaving your assets tax-advantaged and tax-free. So, we’re going to start with the man who wrote the book on Moving to Tax-Free, Bruce Hosler. Welcome, everybody.
Bruce Hosler (00:28):
Thank you, Jon. Welcome everyone, we’re glad to have you on our podcast today. This is a great topic: Strategies for Leaving Your Assets Both Tax-Advantaged and Tax-Free. And I want to start off with the definition between the two of those.
So, this planning is dependent kind of on where the asset is positioned and kind of how it’s titled. So, positioning means the type of account that you’ve left your money in: taxable, tax-deferred, tax-free, those are the three primary buckets, but there’s some kind of assets that are also outside of that really.
And it can also have to do with how you’ve held the assets. Now, Arizona is a community property state. So are you holding that in community property with rights of survivorship so you can get a double step up? You can provide that full step up if you make sure that you’ve titled it right.
Now, let’s define tax-advantaged. Jason, I’m going to start with you. What are the assets that we’re going to consider tax-advantaged? They’re not tax-free, they’re not taxable, they’re in between there.
Jason Hosler (01:37):
So, if you’re starting of course with your taxable, you’re subject to tax on any of the interest, dividends, capital gains that you would have in the current year. The step of tax advantaged is for most retirement accounts like IRAs, 401(k)s, 403(b)s, where generally, you’re going to get a deduction for your contribution because the government’s encouraging you to save for retirement.
While you have those assets invested in their earning interest, dividends, capital gains, you don’t pay tax on them. That tax is deferred. It’s deferred until you take a withdrawal. So, then finally, when you’re retired on the backend and you are taking withdrawals from those types of accounts, you recognize that as ordinary income and it’s taxed like W2 wages.
But your accounts being able to grow without paying taxes all those years, that’s an advantage for sure.
Bruce Hosler (02:29):
I want to address that concept of ordinary income folks, because that ordinary income is coming in at your highest marginal rate. If you’ve got all your other income and you add additional ordinary income, it’s coming in at the highest rate that you’re going to have. So, we want to be careful with items that are taxed as ordinary income.
Alex, I want to talk to you, or I want you to talk to our listeners today. The next bucket we want to talk about for this whole concept of strategies of leaving assets is tax-free assets. So, talk to the folks about what tax-free is, and we’re talking specifically tax-free from income tax, but talk to them about the characteristics of those type of assets, Alex.
Alex Koury (03:17):
So, what we’re talking about here is tax-free investments from all income taxes. We’re talking federal taxes, state taxes, and capital gains taxes. So, those investments are best placed in Roth IRAs, where you pay the taxes I just mentioned above.
Now, the next one here is really interesting though, and this is in regards to provisional income. So, for those of you that are taking Social Security or getting close to taking Social Security, provisional income does include some, considered tax-free investments, that actually do make your Social Security taxable.
Primarily, what I’m referring to is municipal bonds, something that is touted as being federally tax-free, potentially state tax-free as well. That is true in terms of your interest or the income you generate off of those bonds, but it does count against your provisional income. When they calculate your Social Security taxes, your Social Security taxes may become actually taxable in that situation.
So, it’s very important to know that distinction between the municipal income, but again, the Roth IRA that we’re talking about free from federal taxes, state taxes, and capital gains taxes.
Bruce Hosler (04:32):
So, we like that tax-free folks. That’s what we’re trying to do. Now, one way to leave taxable money tax-advantaged is to reposition that taxable money. Now, remember taxable money, that’s money that has interest or dividends or capital gains that year. If we reposition that over to tax-advantaged that Jason talked about, we could move that taxable money into a tax-deferred annuity.
Now, we do that because we may be limited on how much we can move into an IRA or a 401(k). There’s not really a limit on moving taxable money to a tax-advantaged tax-deferred annuity.
Now, Jason, you want to talk about how that grows and when they have to pay capital gains on it or do they have to pay capital gains on that tax-deferred annuity? Why is that tax-advantaged?
Jason Hosler (05:25):
Well, it is going to change the nature of the taxability of those funds. So, if you bought property in your taxable bucket and then you later sell it, you’d be subject to capital gains and capital gains rates. When you move it into a tax-deferred annuity, as it’s growing, you don’t have to pay any of those capital gains.
If you invest it within that annuity and it goes up and you sell that position, it’s still within that annuity, there’s no capital gains. But when you take the income from that annuity, when you make a withdrawal out of the annuity, at that point, it’s going to be taxed as ordinary income on you.
So, you don’t have to pay any taxes until you actually take funds from the account. And that same concept applies to your family after you die.
Bruce Hosler (06:11):
So, if you die with a tax-deferred annuity, is that a taxable event?
Jason Hosler (06:20):
No, not until the funds are taken out.
Bruce Hosler (06:23):
So, if I have a tax-deferred annuity and I leave it to you, Jason, when do you have to pay taxes on it?
Jason Hosler (06:31):
When I take the withdrawals from the annuity.
Bruce Hosler (06:34):
So, it continues to be tax-advantaged after the investor passes away, it continues to have that tax-advantaged benefit going along.
Now, Alex, what is the way that we move tax-deferred funds to tax-free to make an IRA or a 401(k) tax-free?
Alex Koury (06:58):
So, the primary way we accomplish this goal is by making Roth conversions or moving money from your tax-deferred IRA. You’re paying taxes on the distribution to move it over to another qualified Roth IRA that we can then invest the money for long-term growth. And when those funds are distributed either by yourself or by your beneficiaries, the assets you’ve converted plus all the growth over time comes out tax-free. That’s the one way we do that.
The other way to do that, it’s a little bit more unique to how we plan for our clients, for their futures. A lot of clients say, “Well, that’s all good and well, but my kids have to take out Roth IRA money within 10 years after my passing.” It eventually becomes “un-tax sheltered,” if you will.
What other options are really available out there? Another option we discuss with our clients is moving tax-deferred assets into what’s called a life insurance retirement plan. The same concept applies though is you make distributions, you pay your taxes, you then have this bucket of money that’s tax sheltered; it can grow tax-deferred.
If you need the money over your lifetime, you can pull out money tax-free in the form of an income distribution. And at the end of the day, those assets can be then passed on to your children or other beneficiaries in terms of a tax-free death benefit.
Jon Gay (08:24):
Alex, I’m glad you mentioned that because with the changes we’ve seen to the stretch IRA, the inherited IRAs in the recent SECURE Act 1.0 and 2.0, I love that at Hosler Wealth Management, you’re thinking about all the different types of ways to leverage these rules to best benefit your clients.
Alex Koury (08:39):
Well, also when it comes to your legacy planning, so for your children, you used to be able to stretch your IRA over the lifetime of the children, and that was pre-2019. So, if your children inherited an IRA prior to that year, they can use the lifetime income to take it out a little chunk. Now, it’s again, you need to take it out within a 10-year period.
The two-generation legacy planning that we do for our clients allows the same concept of the stretch IRA, but now, we pass it through as a life insurance benefit that your children can inherit and take a lifetime income distribution stream over their lives.
Jason Hosler (09:14):
The other advantage to the LIRP, unlike the Roth, is that you have the ability to put money back in where you can’t do that with a Roth. When it comes out, it loses its tax advantages.
Bruce Hosler (09:28):
That’s right. So, the Roth IRA is one of those buckets that we want clients to touch last. It’s the most sacred money because it’s growing and as soon as you take it out, it loses all the benefit. If you look at the LIRP on the other side, it has the ability to take money out, put it back in, take it back out, and it does not lose its tax-free advantages. That makes it very, very, very beneficial.
Now, let’s talk about taking advantage of the step up in basis rules, guys. That means your family can enjoy 100% tax-free money on the assets that you leave to them that qualify to be stepped up in basis.
Do we get a step up in basis on Roth or tax-advantaged, tax-deferred annuities or IRAs? No, those traditional IRAs, that’s ordinary income, always. Roth IRA comes out tax-free, doesn’t get a step up in basis. It’s only taxable assets that qualify for that.
And one of them that I want to talk about for a second is real estate. We run to a lot of clients that have real estate investments, and they want to be able to have a tax-free move. Jason, what is the tax-free move on this type of real estate?
Jason Hosler (10:51):
So, there’s two main ways that we see employed. Number one, is that you hold that highly appreciated piece of real estate until in Arizona, one spouse dies and you can receive a step up in basis.
Oftentimes though, our clients are tired of the toilets, taxes, trash and tenants that comes with managing real estate, and they want to have mailbox money. But they don’t want to pay the capital gains tax and lose some of the income that that real estate is generating. Lose some of the advantages like depreciation, sheltered income.
So, most real estate investors will be familiar with doing a 1031 exchange. That’s a tax-free exchange where you go like to like from real estate to real estate, and you defer recognizing any of the capital gains.
With using 1031 exchanges, you can continue to defer that capital gain, and at death, you receive that step up in basis and your family can sell that piece of real estate and not have to recognize any capital gains or pay any taxes.
Bruce Hosler (11:57):
Now, Arizona is one of nine community property states. So, there’s other states besides Arizona that have these benefits. But Alex, we just had the new gentleman come in and talk to us. He did not realize the community property state laws.
People that have taxable brokerage accounts, we run into this all the time, Alex. They come in, they’re holding it jointly, the couple has had this account, he’s been managing it for 20 or 30 years. It’s grown to millions of dollars, and they have it titled jointly. What is the problem there, Alex?
Alex Koury (12:32):
So, the biggest problem is that at the death of the first owner of that account, only receives a step up on half of the value of that property over those assets in that taxable brokerage account.
So, again, people think, well, it’s all community property, it should all be treated the same. It’s just not the case. Which is why we stress so heavily on having your trust be the owner of these assets. While it’s a living trust, you still own, maintain, and you have control over those assets while you’re alive.
But at the passing of the first spouse, that spouse gets a full step up in basis to say … let’s say it’s a million dollars, now it’s going to become tax-free. Now, you can live off of that. You can let it continue to grow if you chose to, and at your passing, your estate will receive another step up in cost basis to the value of the date of death of your passing.
Therefore, that asset can again receive another step up in cost basis. Your beneficiaries or your children or whoever you decide to leave your money to receive it as well, as tax-free inheritance.
Bruce Hosler (13:37):
At the death of the second spouse, it gets another step up. So, at the death of the first spouse. So, folks, what we’re trying to tell you is this; if you have a brokerage account, you do not want to hold that in your individual name, you do not want to hold that in your joint name. You want to hold that in your revocable living trust that treats those trust assets as community property with rights to survivorship.
There is no brokerage account that comes that way. You have to have a trust, and you have to title that trust account or that brokerage account inside of the trust to get these tax-free benefits that we’re talking about.
Now, let’s talk about beneficiary designations because this is part of leaving a tax-free or a tax-advantaged asset to your children, to your heirs. Beneficiary designations work on IRAs, 401(k)s, annuities, pensions, life insurance, 529s, and other accounts. The way we leave it to the beneficiary and whether it’s taxable or not, depends on the type of account it is.
One point that I want to remind our listeners, we’ve talked about this before — if you have a traditional IRA and you die and you leave it to your children, they cannot ever convert that to a Roth IRA. The opportunity to convert that to a Roth IRA has to be taken during your lifetime or your spouse’s lifetime.
We just had a client passed away last year, before the end of the year, his widow converted all of the IRA to a Roth so that the kids could be able to inherit that Roth IRA. Now, what are the other two accounts?
Jason, I want you to talk about bank accounts. What do we advise clients to put on those bank accounts?
Jason Hosler (15:28):
So, on a bank account, you are able to place a pay on death designation. So, POD, you can add that, and then the bank is notified of who the beneficiary should be ahead of time.
And then on individual or joint accounts, if you’re not taking advantage of using that trust registration, you’re able to add a transfer on death designation that operates the same way where you can name your primary and contingent beneficiaries.
Remember though, if you do have a marriage in a community property state, you want to make sure you’re taking advantage of those community property rules.
Bruce Hosler (16:13):
And the pay on death, one of the things that I want to remind our folks about, what are the type of accounts that we use that on? And primarily, it’s the primary checking account, folks. You have it jointly between a husband and wife, you put the POD on there to make sure that that will transfer to the kids not being subject to probate, because that could be very expensive. You might keep $50,000, a hundred thousand dollars, it might be a probatable account. You avoid that by putting the POD on your checking account.
Jason mentioned the TOD there, Alex, we run into this with people. Maybe they have an individual account, they’re not married anymore and he’s trying to leave it to the kids. They can add a TOD on there, and then on joint accounts, they can do that as well. But that doesn’t give us the step up in basis that we’re after, does it?
Alex Koury (17:05):
It doesn’t. So, again, going back to the whole concept of using a trust for this specific purpose when you have joint situations is highly crucial, again, from a tax planning perspective of getting the full step up, so that way your beneficiaries can enjoy tax-free inheritance.
Jon Gay (17:22):
Glad we came back around to the beneficiary designations at the end here, guys. We’ve talked about this in previous episodes in this series, and no matter what you say in a will, the bank or the custodian of this account is going to look at those POD or TOD designations.
No matter what you walk in with, they’re going to go with their records in most cases. So, it’s really, really important and I’m glad we hit on this today.
Bruce Hosler (17:44):
Yeah, and everything we’ve talked about today avoids probate pretty much, and that’s really one of the goals that’s just as important as tax-advantaged or taxable or tax-free.
Jon Gay (17:55):
Alright guys, if anybody listening wants to talk to you and the team at Hosler Wealth Management regarding these issues or anything regarding their financial future, how do they best find you?
Bruce Hosler (18:04):
Well, of course, they can reach us on the web at hoslerwm.com. How about up in Prescot, Jason?
Jason Hosler (18:10):
In Prescott, they can call our office at (928) 778-7666.
Bruce Hosler (18:15):
Alex, in Scottsdale?
Alex Koury (18:17):
(480) 994-7342.
Jon Gay (18:23):
Alright, gentlemen, we’ll be back to talk part five of our series about charitable giving and charitable legacies. We’ll talk then.
[Music Playing]
Bruce Hosler (18:30):
Thanks, Jon.
Jason Hosler (18:31):
Thank you, Jon.
Alex Koury (18:32):
Bye, Jon.
Disclosure (18:33):
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