How Different Inherited Assets Are Taxed—and What That Means for Your Estate Plan
When planning for your death, there’s one issue you may not have thought much about—but that can deeply affect your loved ones: will they owe taxes on what you leave behind?
The answer isn’t simple. It depends on:
The type of assets you own
The value of your estate
Where you live at the time of your death
How your accounts are structured
Understanding how various assets are taxed can help you make informed decisions today that preserve more of your wealth for the people you love.
Let’s break it down clearly.
Estate Taxes: Will They Apply?
There are three things we can never predict with certainty:
When you will die
What your assets will be worth at that time
What the federal estate tax exemption will be
Over the past 25 years, the federal estate tax exemption has ranged from as low as $675,000 to historically high levels.
As of 2026, the federal estate tax applies only to estates exceeding approximately $15 million per person (or $30 million for married couples with proper planning). Estates below that threshold do not owe federal estate tax.
However, if your estate exceeds the exemption amount, taxes must be paid before distributions are made to beneficiaries.
If you are married, it is especially important to review and update planning after the death of the first spouse. Proper planning ensures both spouses’ exemptions are preserved.
Additionally, some states impose their own estate or inheritance taxes—often with lower exemption thresholds. Comprehensive planning requires reviewing both federal and state law.
It’s also important to remember: estate tax is only one piece of the puzzle. Income tax and capital gains tax often have a greater impact on beneficiaries.
Cash and Bank Accounts: The Simple Answer
Cash accounts are generally the simplest from a tax standpoint.
If your beneficiary inherits:
A checking account
A savings account
A money market account
They typically receive the principal income-tax-free.
The only exception is interest earned after your death but before distribution. That interest may be taxable, but the original balance is not.
Because of this straightforward treatment, cash is one of the most tax-efficient assets to inherit.
Investment Accounts: The Step-Up in Basis
Taxable brokerage accounts receive a powerful tax benefit known as a step-up in basis.
Here’s how it works:
If you bought 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 beneficiaries inherit that stock, the tax basis “steps up” to the value at your death—$100,000 in this example.
If they sell it immediately at $100,000, they owe no capital gains tax.
If the asset increases further after inheritance, they pay capital gains tax only on the growth beyond the stepped-up value.
This provision can significantly reduce tax liability and is one reason why gifting appreciated assets during life sometimes requires careful consideration.
Retirement Accounts: More Complex Rules
Retirement accounts such as traditional IRAs and 401(k)s follow different tax rules.
Unlike brokerage accounts, retirement accounts do not receive a step-up in basis.
When beneficiaries inherit a traditional IRA or 401(k):
Withdrawals are subject to ordinary income tax
The tax rate depends on the beneficiary’s income bracket
The SECURE Act significantly changed distribution rules. Most non-spouse beneficiaries must now withdraw the entire account within 10 years of the original owner’s death.
This compressed timeline can increase income taxes if withdrawals push beneficiaries into higher tax brackets.
Spouses have more flexibility. They can roll inherited retirement accounts into their own IRA and delay required distributions.
Roth IRAs offer a key advantage. Although beneficiaries must still distribute the account within 10 years, qualified Roth distributions are generally income-tax-free, since taxes were paid upfront.
Life Insurance: Generally Income-Tax-Free
Life insurance death benefits are typically paid to beneficiaries free of income tax.
If you have a $1 million life insurance policy, your beneficiary usually receives the full $1 million without owing income tax.
However, if you own the policy at death, the death benefit may be included in your taxable estate for estate tax purposes if your estate exceeds exemption thresholds.
For larger estates, advanced planning tools—such as irrevocable life insurance trusts—may help remove life insurance proceeds from the taxable estate.
Strategic Planning Makes the Difference
Understanding how different assets are taxed allows you to structure your estate thoughtfully.
For example:
You may choose to leave tax-efficient assets like brokerage accounts to certain beneficiaries
You may coordinate retirement account distributions strategically
You may adjust beneficiary designations to reduce tax impact
Tax laws evolve, and so do your assets and family circumstances. A plan that worked five years ago may not be optimal today.
How We Help You Protect More of What You Leave Behind
At Starsia Law, we help you create a comprehensive Life & Legacy Plan® that considers not just what you’re leaving—but how it will be taxed and transferred.
We:
Review all asset types
Coordinate beneficiary designations
Help you structure distributions thoughtfully
Keep your plan updated as laws change
Provide ongoing guidance so your loved ones are not left navigating complexity alone
The goal isn’t simply to avoid taxes—it’s to ensure your family keeps as much of what you’ve built as possible.
If you want clarity about how inheritance taxes may affect your family, we invite you to schedule a complimentary 15-minute discovery call with our team.
This article is a service of Starsia Law, a Personal Family Lawyer® Firm. 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. That's why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.