Beyond the estate tax: The rising role of income taxes in wealth transfer planning

For decades, one of the threshold questions in estate planning was: “Will my estate be taxable?” Today, that answer is “no” for many more of us. With the currently high federal estate tax exemption set to remain permanent, an increased number of U.S. households will avoid federal estate taxes entirely. As of 2026, the federal gift, estate and generation skipping transfer tax exemption is $15 million. Married couples may also benefit from “portability,” which allows a surviving spouse to use any unused exemption of the deceased spouse.

While the shrinking of estate tax liability is good news for executors and beneficiaries, close attention must still be paid to other tax implications of an estate plan. For many families, capital gains will replace the estate tax as the primary planning concern.

The “step-up" in cost basis at death, always an important consideration, becomes a critical element when “non-taxable estates” are involved. U.S. tax law provides for an increase in the cost basis of most assets included in a person’s estate to the date of death value of the asset. This “step-up” would serve to erase unrealized gains on an appreciated asset, so that when it is sold (either in the estate or by the ultimate beneficiaries) capital gains taxes are minimized or eliminated. Ensuring that a plan has the flexibility to obtain this capital gains cost basis adjustment is key to tax savings, especially when estate tax is not a concern.

Periodic reviews of an estate plan are always advisable, especially when a shift in tax focus is in order. A few areas you may wish to give particular consideration are:

1. State-level estate or inheritance taxes

A number of states continue to impose their own estate or inheritance taxes with much lower exemption thresholds—Massachusetts, for example, starts taxing estates above $2 million and New York at just over $7 million. Washington state's top rate of 35% applies to estates exceeding approximately $9 million. These state-level considerations can materially change the after-tax results of an otherwise well-structured federal estate tax plan.

2. Lifetime gifting

Gifting appreciated assets during life passes to your donee your historical cost basis, not a stepped-up basis. Under previous tax regimes when the federal estate tax exemptions were much lower, it often made sense to make lifetime gifts to remove assets out of an estate to avoid an estate tax that could be as high as 55% (with a 5% surcharge on the largest estates), and trade it instead for a much lower long-term capital gains rate.

But with today’s high exemption, if the assets are unlikely to be exposed to federal estate tax, holding them until death to allow for a step-up will also minimize or eliminate capital gains tax. If your estate is expected to be above the current federal and/or state exemptions, however, lifetime gifting techniques remain essential tools in the estate planner’s toolbox, including:

• Hold appreciated assets when possible.
• Gift cash or high basis assets.
• Gift lower-basis assets to beneficiaries with low income. Joint taxpayers with taxable income under $98,900 and single taxpayers with taxable income under $49,450 (for 2026) would pay no capital gains tax as long as they remain under those levels.
• Consider funding via 529 plans to obtain a possible state income tax deduction for the donor, tax-deferred growth in the account and tax-free qualified distributions.

3. Retirement accounts

Traditional IRAs and qualified plans are taxed as ordinary income when withdrawn, so choosing the right beneficiary structure is key:

• Spouses and certain other qualifying beneficiaries may roll over inherited accounts giving them greater flexibility in timing their withdrawals.
• Lower-income heirs may benefit from inheriting IRAs, as their required withdrawals could be taxed at lower marginal rates. For most non-spouse beneficiaries of decedents dying after 2019, inherited accounts must be fully distributed within 10 years, with annual RMDs required if the decedent had already begun taking them.
• Charities can receive IRA assets tax-free, making pre-tax retirement accounts ideal for charitable bequests.

4. Existing trusts

If you have an existing trust with significant low basis assets, a thorough review of the agreement to determine whether provisions exist to allow for step-up at the death of a beneficiary in whose estate the assets would not be exposed to death taxes, either by the granting of a power of appointment, modification or decanting.

Different tax focus, same asset management considerations

For families both above and below the federal estate tax exemption threshold, estate planning is much more than just tax planning.

The structure of a gift or inheritance should reflect the giver’s intentions and the recipient’s circumstances. Even if minimizing estate taxes isn’t a priority, estate planning remains critical. Properly drafted documents provide control over the timing and method of asset distribution, safeguard assets from creditors, ensure continuity in the event of incapacity, and help protect against mismanagement.