For years, much of advanced estate planning focused on one objective: move appreciating assets outside the taxable estate.
That can still be the right strategy. But it is not always the right strategy.
Estate planning decisions can affect more than estate tax. They can also affect the income-tax basis of property and, ultimately, the capital gain recognized when an asset is sold. In some cases, a strategy that succeeds in reducing the taxable estate can create a different tax cost for the family later.
That tradeoff deserves attention before an irrevocable plan is put in place.
Estate inclusion is not always a bad result
Property acquired from a decedent generally receives a new income-tax basis determined by reference to its fair market value at death, subject to the rules and exceptions in Internal Revenue Code § 1014.
That can matter enormously for an asset that has appreciated substantially.
Suppose an owner purchased an asset decades ago for $500,000 and it is worth $4 million at death. If the asset qualifies for a basis adjustment to its date-of-death value, much of that lifetime appreciation may disappear for purposes of calculating later capital gain.
Now consider an asset transferred during life as a completed gift. Gifted property generally carries the donor’s basis with it, subject to special rules. Moving an appreciating asset out of the taxable estate may therefore preserve a very low basis in the hands of the recipient.
The estate-tax result may be better. The eventual income-tax result may not be.
The size of the estate changes the analysis
For 2026, the federal basic estate and gift tax exclusion is $15 million per individual.
That means many families who once assumed that minimizing estate inclusion should dominate the planning discussion may have little or no projected federal estate-tax liability under current law.
For those families, removing highly appreciated property from the estate solely to reduce a tax they are unlikely to owe can deserve a second look.
That does not mean lifetime gifting is undesirable. A gift may serve important family, succession, asset-protection, charitable, or other objectives. Future appreciation may also make transfer planning attractive even when the estate is currently below the exclusion amount.
It means the analysis should include both sides of the tax equation.
Grantor-trust status does not solve the basis problem by itself
This distinction can become especially important with irrevocable grantor trusts.
A trust may be treated as owned by the grantor for income-tax purposes while its assets are nevertheless excluded from the grantor’s gross estate for estate-tax purposes.
Those are different tax concepts.
The IRS has expressly concluded that grantor-trust status alone does not cause assets outside the grantor’s gross estate to receive a basis adjustment under § 1014 at the grantor’s death.
In other words, calling a trust a “grantor trust” does not answer the basis question.
Estate inclusion matters.
Sometimes inclusion can be useful
Advanced planning therefore does not always mean trying to exclude as much property from the estate as possible.
In the right circumstances, planners may consider whether particular assets should remain includible in an estate or whether powers and other provisions should be structured in a way that produces estate inclusion.
A general power of appointment, for example, can cause property subject to the power to be included in the power holder’s gross estate. Whether creating or retaining such a power is desirable depends on the circumstances, including the size of the estate, the amount of appreciation in the assets, creditor and family considerations, and the other terms of the trust.
This is not a drafting trick to use automatically. It is one possible planning lever.
Asset selection matters too
Even within the same estate, different assets may call for different treatment.
A highly appreciated investment asset with substantial unrealized gain presents a different basis question from cash or an asset whose fair market value is close to its tax basis.
Likewise, an interest in a closely held business may involve valuation, succession, liquidity, control, and anticipated-sale considerations that cannot be reduced to a simple estate-tax calculation. For one way an owner may transfer the future growth of a business interest, and the trade-offs involved, see our article on grantor retained annuity trusts for Florida business owners.
Good transfer planning therefore asks not only how much wealth should move, but which assets should move and why.
Advanced planning requires comparing taxes, not merely minimizing one
There was a time when an estate large enough to face substantial federal estate tax could reasonably make estate-tax reduction the dominant objective.
For some families, that remains true.
For others, the better result may come from accepting some estate inclusion in exchange for a more favorable basis result. Still others may benefit from transferring selected assets while retaining different assets until death.
The answer depends on the estate.
The important point is simpler: reducing the taxable estate and reducing the family’s total tax burden are not necessarily the same thing.
Advanced estate planning should account for that difference.