Two things are certain in life – death and taxes. While both are common concerns, taxes are often misunderstood, especially in estate planning. There are three key types of taxes that come into play: estate and gift taxes, capital gains taxes, and income taxes.
Federal Estate and Gift Tax (FEGT): This tax applies when a person transfers significant wealth during their lifetime or at death. It is payable before assets are distributed to beneficiaries. Currently, the FEGT exemption is $15M for an individual and up to $30M for spouses. Given the size of the FEGT, few people need to worry about it. Also, you can gift up to the amount of the annual exclusion (currently $19K for singles and $38K for spouses) to as many individuals as you wish per year without using any part of your FEGT exemption.
Some states also impose their own estate or inheritance taxes. For example, NY’s estate tax exemption for 2026 is $7.35M per person—much lower than the FEGT. Estates exceeding this threshold may owe NY estate tax on qualifying NY assets. NY also imposes an estate tax “cliff,” such that if the size of your NY taxable estate exceeds the exemption by more than 5%, the entirety of your estate is taxed, as opposed to just the overage. There is no gift tax in NY, but if you die within three years of making the gift, the value of the gift is clawed back into your taxable estate.
Capital Gains Tax: This tax applies when you sell an asset—e.g., real estate, stocks, a business—for more than its cost basis (generally the purchase price plus capital improvements, minus depreciation).
Let’s say you purchased a property for $300K, invested $150K in improvements, and later sold it for $750K: Your cost basis would be $450K, resulting in a taxable capital gain of $300K. If the property was your primary residence, you may qualify for an exclusion of up to $250K for single filers or $500K for married couples, reducing or eliminating the taxable gain.
If you retain the property until death, beneficiaries generally receive it with a stepped-up basis, meaning the property’s tax basis is adjusted to its fair market value at the date of death. If the property is worth $750K at death and is later sold for $800K, capital gains tax would generally apply only to the $50K increase after inheritance.
Income Taxes: Inheriting assets is generally not considered taxable income. For example, inheriting a home worth $500K doesn’t require reporting that value as income on your tax return.
However, income generated by inherited assets is taxable. If you inherit a rental property, you must report and pay income tax on the net rental income. Likewise, if you later sell the inherited property, you may owe capital gains taxes on the property’s appreciated value after you inherited it.
Understanding the differences among estate and gift taxes, capital gains taxes, and income taxes can help you make informed estate planning decisions and better preserve wealth for your beneficiaries.
