What an Inheritance Actually Costs You in Tax

1. The inherited retirement account, and the rule that started being enforced in 2025

This section is first because it is the only part of an inheritance with a penalty attached, and because the rule changed after most guidance was written.

Since the SECURE Act, a non-spouse beneficiary who is not an eligible designated beneficiary must empty an inherited IRA or 401(k) within ten years. What was unsettled until July 2024 was whether anything had to come out in years one to nine. The final regulations settled it, and the answer depends on one fact about the person who died.

The Roth row follows from the rule rather than from a separate provision: a Roth IRA owner never has a required beginning date, so a Roth beneficiary is always on the second row (IRS Publication 590-B). That is also why letting an inherited Roth run the full ten years is the right move where you have a choice — it compounds untaxed and nothing forces a withdrawal.

The penalty is real and the grace period is over. The excise tax on a missed distribution was waived for 2021, 2022, 2023 and 2024 while the rules were unsettled. The final regulations apply from 1 January 2025 (Notice 2024-35), so 2025 was the first year a missed annual distribution was chargeable and 2026 is the second. Anyone who inherited from an owner past their required beginning date and read guidance written before mid-2024 has probably missed two.

Eligible designated beneficiaries escape the ten-year rule and take life expectancy payments instead. There are five: a surviving spouse, a minor child of the owner, a disabled individual, a chronically ill individual, and anyone not more than ten years younger than the owner (IRS). Two traps in that list: a grandchild, niece or nephew is not a minor child of the owner and does not qualify; and a minor child who does qualify switches to the ten-year rule on reaching the age of majority, with the ten years running from then.

A surviving spouse has options nobody else has — treating the account as their own, rolling it into their own IRA, or delaying distributions until the deceased would have reached the relevant age. Those are worth comparing rather than defaulting to the first one a custodian offers.

2. Who actually owes tax, which is almost nobody

Three separate taxes get confused with one another, and only the third reaches most people.

Federal estate tax is paid by the estate, not by you, and only above the basic exclusion amount — $15,000,000 per decedent for 2026, against $13,990,000 for 2025 (Revenue Procedure 2025-32). The reversion to roughly half that level, which had been scheduled for 2026 and which a great deal of published guidance still describes, did not happen: the 2025 reconciliation act amended the statute directly (IRS). A married couple can shelter twice the amount, but only if the first estate files to preserve it — the unused exclusion transfers to the survivor only on a timely Form 706, due nine months after death, with a simplified late election available up to the fifth anniversary (Instructions for Form 706, Rev. Proc. 2022-32). The top rate is 40%.

How rare is it? The IRS received 7,195 estate tax returns in 2024, down 20% from 9,024 in 2023, with net estate tax just over $23.3 billion (IRS Publication 5332). Returns filed is much larger than estates taxed, because most filings exist to preserve portability. The Tax Policy Center puts taxable estates at well under a quarter of one per cent of deaths (Tax Policy Center).

State inheritance tax is different: it is paid by the recipient and the rate depends on your relationship to the person who died. Five states levy one, and Iowa left the list for deaths on or after 1 January 2025 (Iowa Department of Revenue).

Spouses pay nothing in every one of them, and lineal descendants pay nothing or the lowest rate (Pennsylvania, New Jersey, Kentucky, Maryland, Nebraska statutes). Nothing reaches 18% any more; Nebraska’s 18% band was repealed for deaths on or after 1 January 2023.

State estate taxes are a third thing again, levied on the estate at thresholds far below the federal one. Oregon’s remains $1,000,000 (Oregon Department of Revenue); Massachusetts raised its threshold to $2,000,000 for deaths on or after 1 January 2023, so guidance still pairing the two at a million is three years out of date (Massachusetts). The list of states changes; check your own rather than a summary.

Income tax on what you receive: inherited property is not income. Cash, securities and real estate arrive untaxed (IRS). The exceptions are what the assets do afterwards, and one category that never got taxed in the first place — a traditional IRA, a 401(k), accrued savings bond interest — which is taxable as you draw it.

3. The step-up in basis

Property acquired from someone who died generally takes a basis equal to its fair market value at the date of death (IRS Publication 551). Appreciation during the previous owner’s lifetime is never taxed to anyone. Inherit stock bought for $20,000 that is worth $150,000 at death, sell it at $150,000, and there is no gain.

Three details are worth knowing and are usually left out.

The alternate valuation date lets an executor value the estate six months after death instead — but only where doing so decreases both the gross estate and the net estate tax (Instructions for Form 706). It is not a free option to pick the higher number for basis purposes.

Community property gets a double step-up. In a community property state, when one spouse dies the whole of the community property, including the survivor’s half, generally takes the date-of-death value as its basis — not just the decedent’s half (IRS).

A revocable trust does not block it. Assets in a revocable living trust are in the settlor’s gross estate, so they step up like anything else. Assets placed in an irrevocable trust outside the gross estate generally do not — which is the trade-off such trusts make.

When you sell, the gain is always long-term regardless of how briefly you held it; report it with “INHERITED” in place of an acquisition date (Instructions for Form 8949). Get a date-of-death valuation while it is easy to obtain. Reconstructing one years later is the expensive way to do it.

4. What goes through probate, and what does not

A great deal passes outside probate by operation of law or contract: property held jointly with right of survivorship, anything with a named beneficiary such as a retirement account or life insurance policy, payable-on-death and transfer-on-death registrations, and assets already in a living trust (Massachusetts, California Courts). A beneficiary designation beats a will, which is why an out-of-date designation on an old 401(k) is one of the more common and least recoverable estate mistakes.

On how long probate takes and what it costs, be careful what you repeat. No federal source publishes anything — federal courts have no probate jurisdiction — and no court system publishes a measured average. What exists is guidance and statutory fee schedules: California’s Judicial Council says the process “typically takes 9 to 18 months” (California Courts), Minnesota’s says most estates are expected to complete within 18 months (Minnesota Judicial Branch), and an Alameda County court page puts cost at 4% to 7% of estate value with a statutory executor fee of 2% to 4% (Superior Court of California, Alameda County). Those are one state’s numbers and a fee structure, not statistics — and the widely circulated “3% to 7%” understates the floor the only court source that gives a range actually states.

5. The debts, which are usually not yours

The starting position is simple: you are not responsible for someone else’s debt (CFPB). Debts are paid from the estate, and where the estate cannot pay, they generally go unpaid. Four situations change that — you were a joint account owner, you co-signed, you are a spouse in a community property state for certain marital debts, or your state has a necessaries statute covering a spouse’s healthcare costs. Being an authorized user on a credit card is not one of them.

Debt collectors may contact someone who is not the surviving spouse, the parent of a deceased minor or the personal representative only to locate the personal representative. They may not discuss the debt or imply that person owes it. You can require written validation, dispute within 30 days, and put communication limits in writing.

Medicaid estate recovery is the exception that surprises families. States must recover the cost of nursing facility care, home and community-based services, and related hospital and drug services for people who received them from age 55. But they may not recover from an estate survived by a spouse, a child under 21, or a blind or disabled child of any age, and every state must have a hardship waiver process (Medicaid.gov).

6. Settling it: the filings and the deadlines

The final income tax return is an ordinary Form 1040 marked deceased, due on the normal deadline for the year of death, signed by the personal representative (IRS Topic 356). If a refund is due and you are not a surviving spouse filing jointly or a court-appointed representative, Form 1310 comes with it.

Income the estate earns after death is separate: an estate that generates more than $600 in a year files Form 1041 and needs its own employer identification number (IRS). Watch the bracket — estates and trusts reach the top 37% rate at just $16,000 of taxable income for 2026 (Revenue Procedure 2025-32). Figures of $15,200 and $15,650 belong to 2024 and 2025. That compression is the reason distributing income to beneficiaries usually beats accumulating it in the estate.

Social Security pays a one-time death payment of $255 to an eligible surviving spouse or child, and you must claim it within two years (SSA). No monthly benefit is payable for the month of death, so a payment arriving after death has to go back — tell the bank rather than letting it be clawed back later (SSA).

Life insurance paid to a beneficiary is not taxable income, but any interest paid on delayed proceeds is (IRS). Separately, proceeds are in the decedent’s gross estate if they were payable to the estate or if the decedent held any incident of ownership — the power to change the beneficiary, borrow against it, cancel or assign it. That is why policies intended to sit outside an estate are owned by someone else or by a trust.

7. The numbers people quote about inheritance, and where they come from

This subject attracts statistics that are repeated far more often than they are checked, and an earlier version of this page repeated four of them. They are worth naming because you will meet them elsewhere.

“Americans inherit about $765 billion a year, according to the Federal Reserve.” The Federal Reserve publishes no such figure. Its own estimate is that inheritances and gifts together averaged about $350 billion a year in 2016 dollars over 1995 to 2016 (Federal Reserve, FEDS Notes). The $765 billion is a projection for the single year 2020 by a law professor writing for Brookings — a different body, a different quantity and six years ago.

“One third of heirs spend the entire inheritance within two years.” This descends from a real study — Zagorsky’s 2012 analysis of the National Longitudinal Survey of Youth — whose headline finding was the opposite in tone: roughly half of inherited money is saved (Journal of Family and Economic Issues). The one-third is 34.9% of recipients who saw a decline or no change in their wealth, which is not the same as spending the inheritance, and there is no two-year window anywhere in the study. The genuine spend-it-all figure is size-dependent: over 40% for inheritances under $1,000, falling to 18.7% at $100,000 and above (Ohio State University).

“70% of inherited wealth is gone by the second generation, 90% by the third.” This comes from a 2003 book by two principals of a family-wealth consultancy, based on interviews the firm conducted. There is no published sampling frame, response rate, control group or replication, and “failure” is defined as heirs losing control of assets rather than measured wealth destruction. It is marketing, not research, and it should not be cited as a finding.

“The median inheritance is $46,200.” The Survey of Consumer Finances collects inheritance data but the Federal Reserve publishes no median. The figure appears only on commercial sites, where it is described as an average — so the version in circulation also converts a mean into a median. What the Fed does publish is a distribution: 55% of inheritances are under $50,000 and about 6% exceed $500,000 (Federal Reserve).

The practical point is not that inheritance is small. It is that decisions about your own inheritance should rest on your own figures, because the population statistics are weaker than their confident repetition suggests.

8. The mistakes that cost the most

Missing the annual distribution from an inherited retirement account. If the owner died on or after their required beginning date, something must come out every year, and the penalty waivers ended with 2024.

Emptying an inherited Roth early. Nothing forces a withdrawal before year ten and the growth is untaxed. Where you hold both, draw the traditional account and leave the Roth.

Not filing to preserve a first spouse’s unused exclusion. It transfers only on a timely Form 706, and the late relief runs out at the fifth anniversary.

Letting a beneficiary designation go stale. It overrides the will, and no amount of estate planning fixes an old form at a former employer.

Not getting a date-of-death valuation. Reconstructing one later is expensive and weaker if questioned.

Paying a deceased relative’s debts from your own money. You are generally not liable, and a collector may not tell you otherwise.

Accumulating income inside the estate. The top 37% rate arrives at $16,000 of taxable income for 2026.

Assuming the exemption halved in 2026. It did not, and a good deal of published guidance — including at least one page on irs.gov reviewed this month — still says it did.

9. Go deeper: the decision behind each section

Each decision above has a page of its own. Start with the inheritance decision engine to sequence the account, tax and timing questions against your own case. The estate planning checklist covers the documents from the other side, the Roth conversion guide covers drawing a traditional inherited account across low-income years, and the widowhood guide covers the surviving-spouse options that no other beneficiary has. The decision tools run the numbers for your own case.

10. Common questions

Do I pay income tax on an inheritance? Not on receipt. Cash, securities and property arrive untaxed. What is taxable is income the assets generate afterwards, and money that was never taxed — a traditional IRA, a 401(k), accrued savings bond interest — as you draw it.

I read that the estate tax exemption halves in 2026 — is that right? No. It is $15,000,000 per decedent, and the scheduled reversion was removed by statute in 2025.

Do I have to take money out of an inherited IRA every year? If the original owner died on or after their required beginning date, yes, in years one to nine as well as emptying it by year ten. If they died before it, or it is a Roth, no — only the year-ten deadline applies.

When did the IRS start enforcing that? 2025. The excise tax on a missed distribution was waived for 2021 through 2024 while the regulations were being finalised.

Which states tax me as the heir? Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa left the list for deaths from 2025. Spouses are exempt everywhere and lineal descendants pay nothing or the lowest band.

Does putting assets in a revocable trust lose the step-up? No. Revocable trust assets are in the settlor’s gross estate and step up. Irrevocable trust assets outside the estate generally do not.

How long does probate take? There is no published average anywhere. California’s courts say 9 to 18 months and Minnesota’s expects most estates inside 18 — guidance from two states, not a national figure.

Sources

Every figure links to the body that publishes it. Where a widely repeated statistic turned out to be misattributed, distorted or unsourced, this page says where it actually comes from rather than dropping it silently — those numbers are common enough that a reader will meet them again. Note that the IRS’s own standing Estate and Gift Tax FAQ page still described the 2026 reversion as happening at the time of writing; the Revenue Procedure is the reliable source, not the explainer page.

• Estate and gift tax: Revenue Procedure 2025-32 · IRS, what’s new in estate and gift tax · Instructions for Form 706 · Rev. Proc. 2022-32, late portability · IRS Publication 5332 · Tax Policy Center
• Inherited accounts: Publication 590-B · final regulations, IRB 2024-33 · Notice 2024-35
• Basis and sale: Publication 551 · Instructions for Form 8949 · IRS, gifts and inheritances · IRS, life insurance proceeds
• State taxes: Pennsylvania · New Jersey · Kentucky · Maryland · Nebraska statutes · Iowa · Massachusetts · Oregon
• Probate, debts and recovery: California Courts · Alameda County Superior Court · Minnesota Judicial Branch · Massachusetts · CFPB · Medicaid.gov
• Filings and benefits: IRS Topic 356 · IRS, responsibilities of an estate administrator · SSA lump-sum death payment · SSA, what to do when someone dies
• The circulated statistics: Federal Reserve FEDS Notes · the same note, distribution table · Zagorsky 2012 · Ohio State University