ArticleDue to legislation enacted earlier this year, on January 1, 2026, the federal estate, gift and generation-skipping transfer (GST) exemptions increase to $15 million per person ($30 million per married couple), and will be indexed for inflation annually thereafter. As a result, while federal transfer taxes may still be a concern, planning with income tax basis remains relevant for all, especially for those not subject to estate tax.
Assets held until death receive a step-up in basis, removing any built-in gain for the decedent’s heirs. The tradeoff of utilizing one’s transfer tax exemption by making lifetime gifts is the loss of the step-up in basis at death. With much larger federal exemptions going into effect – and made permanent, with no scheduled sunset – obtaining a basis step-up may prove more valuable than removing future appreciation from one’s taxable estate through gifting.
Ideally, low-basis assets should be retained so they are includible in the client’s taxable estate. If such assets have already been gifted to a trust, having a flexible estate plan that ensures maximum income tax efficiency will prove invaluable. Low-basis assets may be swapped out for high-basis assets by exercising the grantor’s substitution power prior to death. Additionally, trust beneficiaries may exercise a general power of appointment to cause inclusion of assets in their own estates.
Of course, lifetime gifts remain beneficial, especially for clients expected to owe state estate tax. Clients should take this opportunity to review their current estate plans with their advisors to ensure an optimal balance between transfer tax and income tax savings.