How Income Taxes Can Impact Your Estate Plan — And What You Can Do About It
Posted by Robert Ingrasci on July 31, 2025
Estate planning often focuses on minimizing estate taxes, but with recent legislative changes, income taxes are becoming a bigger piece of the puzzle. Thanks to the One, Big, Beautiful Bill (OBBB), many families now face fewer concerns about estate tax, but that doesn’t mean tax planning is off the table.
A Shift in the Estate Planning Landscape
The OBBBA permanently increased the federal gift and estate tax exemption to $15 million starting in 2026, adjusted annually for inflation. For 2025, the exemption is already at $13.99 million. This means fewer estates will be subject to federal estate tax, allowing families to shift their focus toward income tax strategies that benefit heirs.
Why Income Taxes Matter More Than Ever
When you gift an asset during your lifetime, the recipient inherits your tax basis, essentially, what you paid for it. If the asset has been appreciated significantly, your loved one could face a hefty capital gains tax when they sell it.
Example: Imagine you bought a property for $200,000, and it’s now worth $1 million. If you gift the property to your child and they sell it, they could owe up to $160,000 in capital gains tax (20% of the $800,000 gain).
However, if that same asset is passed on after your death, the recipient gets a step-up in basis to the asset’s fair market value at the time of death. That means they could sell it with little to no capital gains tax, a major tax advantage.
Strategic Planning: Hold or Gift?
If your estate is below the exemption threshold, it may be wise to hold onto appreciating assets and pass them on at death to minimize income tax for your heirs.
But if your estate exceeds the exemption, the potential estate tax liability might outweigh the income tax savings. In that case, it could be smarter to remove assets from your estate now, through gifts, irrevocable trusts, or other vehicles, to prevent future appreciation from being taxed.
Crunch the Numbers
The best strategy depends on your unique financial picture. Forecasting both income and estate tax liabilities can help you decide whether to prioritize minimizing income tax or estate tax.
For many families, the answer is clear. For others, it’s a closer call. Either way, thoughtful planning can make a big difference.
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Bob is an experienced tax professional who devotes his professional time to structuring tax strategies in the areas of compliance, consulting, and planning. Bob works closely with a broad range of high-net-worth individuals and multi-generational families, specializing in the areas of gift and estate planning, charitable gift planning, trust and estate administration, individual taxation, and wealth preservation. Bob serves as a practice leader in the Family Wealth and Estate Planning group. Bob joined Lumsden McCormick in 2008 and was named partner in 2022.