Income taxes can negatively impact your estate plan

The federal gift and estate tax exemption is higher than ever, meaning fewer families need to worry about estate tax liability. Thanks to the One, Big, Beautiful Bill Act (OBBBA), the exemption is now permanently set at $15 million for 2026 and will adjust annually for inflation (set at $13.99 million for 2025). For many families, this provides an opportunity to shift estate planning efforts toward minimizing income tax consequences for heirs.

Why Income Tax Matters in Estate Planning

Gifting an asset during your lifetime comes with an important consideration: your tax basis in the asset transfers to the recipient. If that asset has significantly appreciated, selling it will trigger capital gains tax.

Example:

Imagine you bought real estate 20 years ago for $200,000, and its value has grown to $1 million. Gifting it to your child today means your $200,000 tax basis would be transferred to them. Upon selling, your child could face up to $160,000 in capital gains tax (20% of the $800,000 gain).

By comparison, assets passed on at death benefit from a “step-up” in tax basis. This means the recipient inherits the asset at its fair market value at the date of death. If they decide to sell the asset immediately, they could avoid capital gains tax entirely on the increase in value before the inheritance. From an income tax perspective, holding on to appreciating assets rather than gifting them during your lifetime could make better financial sense.

Balancing Estate Tax & Income Tax Considerations

If your estate won’t exceed the federal exemption amount, retaining assets until death can be a smart move for minimizing income tax burdens on your heirs. However, for those whose estates may face tax liability, the potential estate tax impact could outweigh the benefits of income tax savings.

For larger estates, removing assets from your estate now through outright gifts, irrevocable trusts, or other strategies might shield future appreciation from estate tax. It’s a balancing act between mitigating income tax for heirs and reducing overall estate tax exposure.

Crunch the Numbers and Optimize Your Strategy

To make the best decision, some forecasting is essential. Estimate potential income and estate tax liabilities under different scenarios to determine which planning approach aligns with your family’s goals. If your estate is unlikely to exceed the exemption, prioritize strategies that minimize income tax. For borderline cases, a tailored approach is necessary to strike the right balance.

At SD Mayer & Associates, we understand that estate planning can be as complex as it is important. Our team specializes in breaking down the numbers and crafting customized strategies unique to your circumstances. Whether you need to assess income tax implications, explore gifting options, or minimize estate tax exposure, our advisors are here to help.

Have questions? Contact us today and start building a plan that protects your legacy and secures a bright future for your family.