As the federal gift and estate tax exemption increases, the number of families affected by gift and estate tax liability decreases. With the passage of the One, Big, Beautiful Bill Act (OBBBA), wealthy families now have greater certainty that the exemption amount will remain high and continue to increase in the future.
The exemption had been scheduled to return to an inflation-adjusted $5 million in 2026. But the OBBBA permanently increases it to $15 million for 2026. The amount will be adjusted annually for inflation. (For 2025, the exemption amount is $13.99 million.) Now, because many estates won’t be subject to estate tax, more planning can be devoted to easing the income tax bite for heirs.
Why income taxes matter
If you gift an asset to your child or other loved one during your life, your tax basis in the asset carries over to the recipient. If the asset has appreciated significantly in value, the sale of the asset will result in a capital gain.
For example, say you bought a piece of real estate 20 years ago for $200,000 and its value has grown to $1 million. If you give the property to your child, who decides to sell it, he or she will be liable for as much as $160,000 in long-term capital gains tax (20% of the $800,000 gain).
In contrast, when an asset is transferred at death — that is, via “bequest, devise or inheritance” — the recipient’s basis is “stepped-up” to the asset’s date-of-death fair market value. The recipient can turn around and sell the asset tax-free (apart from any tax on post-death gains). Thus, from purely an income tax perspective, it’s advantageous to hold on to appreciating assets rather than gift them during your life.
If you don’t expect that your estate will exceed the gift and estate tax exemption, retaining these assets until death can minimize the impact of income tax on your heirs. However, if your estate is large enough that estate tax liability is a concern, the possibility of income tax savings may be outweighed by the potential estate tax bill.
In that case, a better strategy may be to remove assets from your estate — through outright gifts, irrevocable trusts or other vehicles. Doing so will shield future appreciation in their value from the estate tax.
Crunch the numbers
To determine the right strategy for you and your family, you need to do some forecasting. By estimating the potential income and estate tax liabilities associated with various options, you can get an idea of whether you should focus your planning efforts on income tax or estate tax. Of course, if there’s little chance your estate will exceed the exemption, it makes sense to adopt strategies that minimize income tax. But for some families, it may be a closer call. Contact us with questions.
© 2025