When you think about estate planning, you probably focus on who will receive your assets.
But an equally important question is:
Will your beneficiaries owe taxes on what they inherit?
The answer depends on three main factors:
- The type of asset you leave behind
- The total value of your estate
- The laws in effect at the time of your death
Not all inherited assets are taxed the same way. Some pass tax-free. Others come with income tax consequences. Understanding these differences allows you to plan strategically and protect more of your wealth for the people you love.
Let’s break it down in simple terms.
Federal Estate Tax: Does It Apply to You?
As of 2026, the federal estate tax applies only to very large estates.
The federal exemption is approximately $15 million per person (or roughly $30 million for a married couple with proper planning). If your estate is below that amount, no federal estate tax is due.
However, there are three important things no one can predict with certainty:
- When you will pass away
- What your total assets will be at that time
- What the federal exemption amount will be in the future
The exemption has changed dramatically over the years, and it can change again.
If your estate exceeds the exemption amount at your death, estate taxes must be paid before your beneficiaries receive their inheritance.
If you are married, proper planning after the first spouse’s death is critical to preserve both spouses’ exemptions.
In addition, some states impose their own estate or inheritance taxes with lower thresholds. Even if federal tax does not apply, state-level taxes may need to be considered.
But estate tax is only one piece of the puzzle. Income tax and capital gains tax often matter more for most families.
Cash and Bank Accounts: Usually Tax-Free
If your beneficiary inherits money from:
- A checking account
- A savings account
- A money market account
They typically receive the full amount without paying federal income tax.
For example, if you leave $50,000 in a savings account, your beneficiary receives $50,000.
The only exception is interest earned after your death but before distribution. That interest may be taxable. The principal itself is not.
Cash is one of the simplest assets to inherit from a tax perspective.
Investment Accounts: The Step-Up in Basis Advantage
Taxable brokerage accounts often receive very favorable treatment because of something called a step-up in basis.
Here’s how it works:
If you purchased stock for $10,000 and it grows to $100,000 during your lifetime, you would normally owe capital gains tax on the $90,000 gain if you sold it.
However, when your beneficiary inherits that stock, their new tax basis becomes the value on the date of your death – in this example, $100,000.
If they immediately sell it for $100,000, there is no capital gains tax owed.
If they sell later for more than $100,000, they only pay capital gains tax on the growth that occurs after inheritance.
This step-up in basis can significantly reduce taxes and is one of the most powerful planning tools available.
It also means that sometimes holding appreciated assets until death is more tax-efficient than gifting them during your lifetime.
Retirement Accounts: Income Tax Still Applies
Retirement accounts are treated differently.
Traditional IRAs and 401(k)s do not receive a step-up in basis.
When a beneficiary inherits a traditional retirement account, they must pay ordinary income tax on distributions.
For example, if your child inherits a $500,000 IRA, every dollar withdrawn is taxable as income.
Current law generally requires most non-spouse beneficiaries to withdraw the full account within 10 years of your death. This can push beneficiaries into higher tax brackets if withdrawals are not carefully planned.
Spouses have more flexibility and may roll the inherited account into their own IRA.
Roth IRAs are different. Although beneficiaries still typically follow the 10-year distribution rule, qualified withdrawals from a Roth IRA are generally income tax-free.
Retirement accounts require careful planning because they often carry the highest income tax consequences.
Life Insurance: Generally Income Tax-Free
Life insurance death benefits are typically received income tax-free by beneficiaries.
If you have a $1 million policy, your beneficiary usually receives the full $1 million without owing income tax.
However, if you own the policy at your death, the death benefit may be included in your taxable estate for estate tax purposes if your estate exceeds the exemption amount.
For larger estates, advanced planning strategies may be used to remove life insurance from the taxable estate.
Why Asset Coordination Matters
Every type of asset is taxed differently.
That means proper estate planning is not just about deciding who gets what. It is about coordinating:
- Estate tax exposure
- Income tax consequences
- Capital gains planning
- Beneficiary designations
- Timing of distributions
For example, you may choose to leave taxable investment accounts to one beneficiary and retirement accounts to another, depending on their financial situation and tax bracket.
Strategic planning can make a meaningful difference in what your loved ones ultimately receive.
The Bottom Line
Most families will not owe federal estate tax.
However, income taxes and capital gains taxes still matter. Without proper planning, beneficiaries can unintentionally face unnecessary tax burdens.
As an estate planning attorney, I help families create comprehensive plans that consider not only what is being transferred, but how it will be taxed.
Tax laws change. Your assets change. Your family circumstances change.
A well-designed estate plan takes all of that into account so your loved ones receive the maximum benefit – with minimal confusion, delay, or tax exposure.
If you would like to review how your assets would be taxed if something happened to you today, the first step is a thoughtful planning conversation.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. The Life & Legacy Planning Session will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today. you love means planning with clarity – not guesswork.