Getting your Trinity Audio player ready... |
Whether we are set to receive or pass our assets, life’s two inevitabilities are today’s focus. Death and taxes, while not the most cheerful of topics, are worth talking about.
There are 4 areas worth covering today, as we want to make sure you (or your beneficiaries) are aware of what’s to come.
- The Federal Estate Tax
- State Estate and Inheritance Tax Rules
- Non-Qualified Assets & Tax Treatment
- Pre-Tax (Traditional) & Roth Assets
Whether a few or all of these will affect you will depend on a variety of factors. Let’s cover one by one.
1.Federal Estate Tax
Here is the good news for most families: the federal estate tax is not something you will ever have to worry about.
In 2026, individuals can pass up to $15 million free of federal estate tax and that exemption amount is indexed for inflation going forward. Above that threshold, the top marginal rate is 40%.
If you are married, your combined exemption in 2026 is effectively $30 million thanks to a provision called portability. When the first spouse dies, any unused exemption can be “ported” to the surviving spouse. That is a meaningful planning lever, but it only works if the surviving spouse files an estate tax return to claim it.
It is also worth knowing that the federal estate tax is a tax on the estate itself, not on you as the recipient. The estate pays the bill before assets are distributed, typically within nine months of death.
If you want to start transferring wealth during your lifetime, you can give up to $19,000 per person in 2026 without touching your lifetime exemption. Gifts above that amount get reported on IRS Form 709 and chip away at what is left of your exemption down the road.
Actionable Steps
- If your estate is well below $15 million, federal estate tax planning is not your primary concern. Focus on income tax efficiency instead.
- If you are widowed, confirm that a portability election was filed. Missing that step can permanently forfeit your spouse’s unused exemption.
- If annual gifting fits your goals, a systematic gifting strategy can reduce the size of your taxable estate over time.
2. State Estate and Inheritance Tax Rules
This is where things get more complicated, and where many families get caught off guard.
Several states have their own estate taxes with exemptions far lower than the federal level. Oregon’s exemption, for example, sits at just $1 million. Washington’s is $2.2 million. If you own real estate or have significant assets in one of these states, you may have a state estate tax problem even if you have no federal estate tax problem.
There is another important difference: most states do not offer portability. That means when the first spouse dies, their state exemption is gone if it was not used. This is a planning gap that catches many couples off guard.
On top of estate taxes, some states layer on an inheritance tax, which is paid by the person receiving the assets rather than the estate itself. Pennsylvania is a good example of how this works:
- Transfers to a spouse: 0%
- Transfers to children and grandchildren: 4.5%
- Transfers to siblings: 12%
- Transfers to other heirs: 15%
Your relationship to the deceased determines the rate, and you pay the tax based on where the decedent lived or owned property, regardless of where you live.
Actionable Steps
- Know your state’s rules. A quick conversation with your advisor can clarify whether a state-level estate tax is on the table for your situation.
- If you are in Pennsylvania, expect heirs outside the immediate family to face a meaningful tax bill. Factor that into your planning.
- For married couples in states without portability, trust planning may be worth exploring to preserve both exemptions.
3. Non-Qualified Assets & Tax Treatment
Non-qualified assets are things like your brokerage account, real estate, or any investment held outside of a retirement account. The key concept here is basis, which is simply the cost that determines how much gain you have when you eventually sell.
How you transfer those assets, whether as a gift during your lifetime or as a bequest at death, makes a dramatic difference.
Gifting During Your Lifetime
When you give an appreciated asset to someone while you are still alive, they inherit your cost basis, sometimes called a carryover basis. If you bought stock 20 years ago for $10,000 and it is now worth $100,000, your recipient’s basis is still $10,000. When they sell, they owe capital gains tax on the full $90,000 of appreciation.
Bequeathing at Death
This is where the step-up in basis becomes one of the most powerful tools in estate planning. When you pass an appreciated asset at death, the recipient’s basis is reset to the fair market value on your date of death.
Using the same example: if that $100,000 stock position passes through your estate, the recipient’s new basis is $100,000. They can sell it immediately and owe $0 in capital gains tax on any appreciation that occurred while you owned it.
For families with highly appreciated real estate or a concentrated stock position held for decades, the step-up can save tens of thousands of dollars in taxes.
One exception worth knowing: non-qualified annuities do not receive a step-up in basis. A non-spouse beneficiary generally must withdraw the full value within five years and pay ordinary income tax on all gains. That is a very different outcome compared to a standard brokerage account.
Actionable Steps
- Think carefully before gifting highly appreciated assets during your lifetime. In many cases, holding them until death and allowing the step-up to apply is the better tax outcome.
- If you hold non-qualified annuities, talk with your advisor about how beneficiaries will be taxed and whether repositioning those assets makes sense.
- Keep detailed records of your cost basis. Your heirs will need it, and many people do not have this information readily available.
4. Pre-Tax (Traditional) & Roth Assets
Retirement accounts come with their own set of inheritance rules, and they depend heavily on who is doing the inheriting.
Inheriting a Traditional IRA or 401(k)
If you inherit a pre-tax retirement account as a spouse, you have the most flexibility of any beneficiary. You can roll the funds into your own IRA, treat the account as your own, and delay Required Minimum Distributions until you reach age 73 or 75 depending on your birth year.
For most non-spouse beneficiaries, the rules changed dramatically with the SECURE Act. You are generally required to empty the account within 10 years of the original owner’s death. Every dollar you pull out is taxed as ordinary income. If you inherit a large IRA and your own income is already high, that can push you into a very expensive tax situation.
The strategic question for non-spouse beneficiaries is not whether to take distributions, but when. Spreading withdrawals across the 10 years, and timing them around lower-income years, can make a real difference.
Inheriting a Roth IRA or Roth 401(k)
Inherited Roth accounts are a much better outcome for your heirs. Distributions are generally tax-free as long as the account was open for at least five years. Non-spouse beneficiaries still face the 10-year rule, but since there is no tax on withdrawals, the urgency to manage the timing is far lower.
A spouse has an even better option: they can roll the inherited Roth into their own Roth IRA. Once there, it continues to grow tax-free with no required distributions during their lifetime. That is a significant advantage, and it is one more reason why Roth conversions during your working years or early in retirement can pay dividends for the next generation.
Actionable Steps
- If you are a surviving spouse who inherited a retirement account, confirm whether a spousal rollover has been completed. Leaving assets in an inherited IRA limits your flexibility.
- Non-spouse beneficiaries should plan their 10-year distribution schedule early. Pulling everything out in year 10 is an option, but may not be the optimal one.
- Consider who is named as your IRA beneficiary. Leaving a large pre-tax account to a high-income adult child creates a different outcome than leaving it to a spouse or a charity.
The Bottom Line
Most people never sit down and think through what actually happens to their assets when they die. They set up a will, name some beneficiaries, and move on. But the tax treatment of what you leave behind can vary enormously based on the type of asset, how it is titled, who receives it, and what state you live in.
Understanding the four areas above does not require a law degree. It requires sitting down with someone who can walk through your specific picture and help you make intentional decisions rather than expensive default ones.
If any of this raises questions about your own situation, that is a good sign. It means there is planning left to do.