Tax season is here, and while most people focus on W-2s and 1099s, there’s another piece of the puzzle that often gets overlooked: your estate plan. The truth is, the decisions you’ve made, or haven’t made, about trusts, gifts, and beneficiary designations can have a real impact on what you owe the IRS this year.
We see it all the time. Clients come in prepared to discuss wills and asset protection, only to realize mid-conversation that their estate planning choices directly affect their current tax situation. Whether you’ve established a trust, made significant gifts, or inherited assets from a loved one, these elements don’t exist in a vacuum. They show up on your tax return in ways that can either help or hurt you.
So before you rush to file your 2025 taxes, let’s walk through exactly how your estate plan connects to your tax obligations, and what you can do to stay ahead.
Understanding the Connection Between Estate Planning and Income Taxes
Many people assume estate planning is purely about what happens after you’re gone. That’s only part of the story. The structures you put in place, like trusts, powers of attorney, and beneficiary designations, can create tax obligations during your lifetime too.
At its core, estate planning is about controlling how your assets are managed and distributed. But the IRS has specific rules about how income generated by those assets gets taxed along the way. For example, if you’ve created an irrevocable trust, that trust may be treated as a separate taxpayer with its own filing requirements. And if you’ve transferred assets to family members through gifting strategies, there are annual and lifetime exclusion limits to track.
Here’s the key takeaway: estate planning and income taxes aren’t separate conversations. They’re intertwined. The choices you make to protect your assets and provide for your beneficiaries carry tax consequences that can show up every April.
We work with clients to ensure their estate plans minimize tax burdens while achieving their goals, but that only works when you understand how the two areas intersect. Ignoring these connections can lead to unexpected tax bills, missed deductions, or even penalties for failing to file required forms.
Key Estate Plan Elements That Impact Your Tax Return
Not every component of your estate plan will affect your taxes equally. Some elements create annual reporting obligations, while others only become relevant in certain situations. Let’s break down the most common ones.
Trusts and Their Tax Reporting Requirements
Trusts are powerful estate planning tools, but they come with real tax responsibilities. The type of trust you have determines who pays taxes on the income it generates.
Revocable living trusts are the most straightforward. Since you maintain control over the assets, the IRS treats the trust income as your personal income. You report it on your individual return, and no separate trust tax return is required while you’re alive.
Irrevocable trusts are a different story. Once you transfer assets into an irrevocable trust, you give up control, and that means the trust becomes its own taxpaying entity. The trust must file Form 1041 annually if it earns more than $600 in income. Depending on how the trust is structured, the income may be taxed at the trust level (which hits the highest tax brackets quickly) or passed through to beneficiaries who report it on their personal returns.
More specialized trusts, like a Charitable Remainder Trust or Grantor Retained Annuity Trust, have their own unique tax treatment. An Irrevocable Life Insurance Trust (ILIT) may not generate taxable income in most years, but improper administration can create unexpected tax exposure.
The bottom line? If you have a trust, make sure you understand its tax filing requirements before April rolls around.
Gifts Made During the Tax Year
Gifting is a popular strategy for reducing the size of your taxable estate, but it comes with rules you need to follow. In 2025, the annual gift tax exclusion allows you to give up to $18,000 per recipient without triggering any gift tax or reporting requirement.
Give more than that to any single person, and you’ll need to file Form 709 (the gift tax return) with your income tax return. Now, filing the form doesn’t necessarily mean you’ll owe taxes, it simply reduces your lifetime gift and estate tax exemption. But failing to file when required can create problems down the road.
Strategic gifting can be a smart way to transfer wealth while you’re alive, especially for families looking to avoid probate and minimize future estate taxes. We often advise clients on how to structure gifts in ways that accomplish their goals without creating unnecessary tax headaches.
Inherited Assets and Their Tax Implications
If you received an inheritance in 2025, you’re probably wondering what it means for your tax return. The good news is that inherited assets generally aren’t considered taxable income. You won’t owe income tax simply because a loved one left you money or property.
But, and there’s always a but, the income generated by those inherited assets is a different matter.
Let’s say you inherited a brokerage account. The stocks and bonds themselves aren’t taxable income, but any dividends or interest earned after the transfer belongs to you and must be reported. The same goes for inherited rental property: the property transfer isn’t taxed, but rental income is.
One significant tax benefit to understand is the “step-up in basis.” When you inherit appreciated assets like stocks or real estate, the cost basis gets reset to the fair market value at the date of the decedent’s death. This can dramatically reduce capital gains taxes if you decide to sell. For example, if your parent bought a house for $100,000 decades ago and it’s worth $400,000 when they pass, your basis becomes $400,000, not the original purchase price. Sell it for $410,000, and you’re only taxed on $10,000 in gains.
Understanding this step-up in basis is crucial for making smart decisions about inherited assets. We’ve seen beneficiaries unknowingly trigger large tax bills by making hasty moves without consulting a professional first.
Retirement Account Distributions and Beneficiary Designations
Retirement accounts, IRAs, 401(k)s, and similar plans, often represent a significant portion of a person’s estate. How these accounts are handled, both during your lifetime and after, has major tax implications.
If you inherited a retirement account, the SECURE Act rules that took effect in recent years have changed the game considerably. Non-spouse beneficiaries (with limited exceptions) must now withdraw the entire balance within 10 years of the original owner’s death. These distributions are generally taxable as ordinary income, which means poor planning can push you into a higher tax bracket.
For 2025, you’ll need to determine whether any distributions you received should be reported and how to minimize the tax impact going forward. Spreading out withdrawals strategically, rather than taking a lump sum, can make a significant difference in your total tax liability over the 10-year period.
Your own retirement accounts also intersect with estate planning through beneficiary designations. These designations override whatever your will says, which is why keeping them current matters. We’ve seen families discover too late that an ex-spouse was still listed as the primary beneficiary on a 401(k), creating both legal headaches and unintended tax consequences.
An IRA Stretch Trust can help beneficiaries manage inherited retirement assets in a tax-efficient manner while providing asset protection. It’s one of several tools we use to help families navigate the complexities of retirement account inheritance.
Steps to Take Before Filing Your 2025 Taxes
With filing season underway, now is the time to gather your documents and make sure nothing falls through the cracks. Here’s a practical checklist:
1. Review any trusts you’re involved with. Are you a grantor, trustee, or beneficiary? Determine whether the trust requires its own tax return (Form 1041) or whether income passes through to your personal return.
2. Gather documentation for gifts made in 2025. If you gave more than $18,000 to any individual, you’ll need to file Form 709. Even if no tax is due, the form is required.
3. Identify inherited assets. Pull together statements showing the date-of-death value for any inherited property or accounts. This establishes your basis for future sales.
4. Calculate retirement account distributions. If you inherited a retirement account or took required minimum distributions from your own accounts, make sure you have the 1099-R forms that report those amounts.
5. Update your estate plan. Tax season is a natural reminder to review beneficiary designations, trust documents, and powers of attorney. Changes in tax law, family circumstances, or financial situations may warrant updates.
6. Schedule an estate plan annual review. We recommend clients review their estate plans at least once a year. This ensures your documents still align with your goals and that you’re taking advantage of current tax-saving opportunities.
Taking these steps now can prevent surprises, and potentially save you money on your 2025 return.
When to Consult an Estate Planning or Tax Professional
Tax law and estate planning law overlap in complicated ways. While some situations are straightforward, others absolutely require professional guidance.
You should consider consulting an estate planning attorney or tax professional if:
- You’ve established or are a beneficiary of a complex trust (irrevocable trust, ILIT, charitable trust, etc.)
- You made substantial gifts that exceed the annual exclusion
- You inherited significant assets, especially retirement accounts or real estate
- You’re uncertain about basis calculations for inherited property
- Your financial situation or family circumstances changed significantly in 2025
- You want to carry out strategies to minimize estate taxes for your heirs
The intersection of estate planning and taxes isn’t always intuitive. What seems like a simple decision, like how to title an asset or when to take a distribution, can have ripple effects you won’t see until it’s too late.
Our team at Meurer & Potter Law Office works with clients to create estate plans that minimize tax burdens while achieving their personal goals. We advise on trust options, gifting strategies, and methods to avoid probate court and prevent disputes among loved ones. If you’re unsure how your estate plan affects your taxes, or if you don’t have an estate plan at all, this is a good time to reach out.
Conclusion
Your estate plan and your taxes are more connected than most people realize. The trusts you’ve created, the gifts you’ve made, the assets you’ve inherited, and the beneficiaries you’ve designated all have potential tax consequences that can show up on your 2025 return.
Don’t wait until you’re sitting down with your tax software, or worse, getting a letter from the IRS, to think about these issues. Take time now to review your estate planning documents, gather the right records, and consult with professionals who understand both sides of the equation.
We’re here to help. Whether you need to create an estate plan from scratch, update existing documents, or simply understand how your current plan affects your taxes, our compassionate attorneys at Meurer & Potter Law Office can guide you through the process. A little planning today can save significant money and stress tomorrow.
