I test drove both 4.0 and 4.7 WJs with the stock tires. Now, I freely admit that my right foot carries about 80% of my body weight, but I felt the 4.0 was a little out of its league with the bulk of the WJ. I felt much better about the 4.7. Adding a lift and bigger tires isn't going to make that any better, even with re-gearing. The WJ is not a light vehicle, and my opinion is that the 4.0 isn't up to it, even though it is a fantastic motor. The 4.7 has more torque than its horsepower rating would lead you to believe. The 4.7 HO is even better, if you can find one of those. That will help keep it driveable if you put bigger tires on.
Depending on what they/you want out of the 4x4 system, you can also get the 4.7 with QuadraDrive, which seems to be thought of as the better choice by people that know what they are doing.
Not available on the 4.0.
Gas mileage-wise, you're probably not going to see anything like 17 or 18mpg with bigger tires, either way.
With my heavy foot, I run about 14-15 in city driving and can hit 18 on a long interstate run with no traffic and short distance from the gas station to the highway, IF I'm willing to settle for 65. My buddy squeezed 20 out of the same freeway trip in the same vehicle, when I let him borrow it, but I have no clue how he does it. I suspect he just runs 60mph. That is a stock WJ, 4.7 with QuadraDrive and a set of Bridgestone Duellers.
Since it wasn't mentioned, your parents are getting rid of both their vehicles and getting a single WJ, which they intend to lift. Presumably that means they intend to offroad it, since they shouldn't need a lift in the city (and lift + bigger tires increases operating costs, which seems to be important to them). It is generally considered a bad idea to offroad your daily driver. Because what do you do when you break an axle or blow something up? If that is their intention, it might be wise to keep around one of their vehicles to take care of daily driver duties.