As an heir, understanding the tax implications of inherited property or money is crucial for effective financial planning. Here's what you should know about federal estate taxes, state inheritance taxes, and the "stepped-up" basis.

Federal Estate Tax

The federal estate tax is levied on the transfer of property after someone dies. However, it's important to note that this tax only applies to estates exceeding a certain threshold. For 2026, the federal estate tax threshold is $15 million for individuals. This effectively means that a single person can leave behind $15 million without the estate incurring federal estate taxes. For married couples, this threshold doubles to $30 million. This higher limit was made permanent by the One Big Beautiful Bill Act (OBBBA), and will be adjusted annually for inflation starting in 2027.

If the estate value exceeds the threshold, the excess is taxed, with rates reaching as high as 40% for amounts over $1 million. The estate itself is responsible for paying the estate tax, not the heir.

State Inheritance Tax

While the federal government levies estate taxes, some states impose inheritance taxes. Unlike estate taxes, which are paid by the estate, inheritance taxes are paid by the individual receiving the inheritance. In 2026, only a few states continue to have inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The specific rates and exemptions vary by state, often depending on the heir's relationship to the deceased.

Stepped-Up Basis

One of the most significant tax advantages for heirs is the "stepped-up" basis. This applies to assets like real estate, stocks, and other investments. The "basis" of an asset is essentially its original cost for tax purposes. When you inherit an asset, the basis is "stepped up" to its fair market value on the date of the deceased's death.

Here's how it works: Imagine a stock purchased for $10,000 decades ago is now worth $100,000 when inherited. If the heir sells it for $105,000, they only pay capital gains taxes on the $5,000 increase, not the entire $95,000 gain from the original purchase. This can result in substantial tax savings.

Residence Nil Rate Band

The residence nil rate band (RNRB) can further reduce inheritance tax liability when a home is passed down to direct descendants. The RNRB is added to the basic inheritance tax threshold if certain conditions are met. The home does not need to be specifically mentioned in the will, and can be inherited as part of the estate's residue. The RNRB can still apply even if the home is sold as part of the estate administration, as long as the proceeds go to direct descendants.

Other Important Considerations

• Exemption Portability: A surviving spouse can inherit any unused portion of their deceased spouse's federal estate tax exemption. To elect portability, an estate tax return must be filed even if the estate is under the filing threshold.
• Estate Planning: With the increased estate tax exemption, estate planning is now focused on protecting beneficiaries, avoiding probate, and reducing family conflict.
• Professional Advice: Navigating estate and inheritance tax laws can be complex. Consulting with a qualified financial advisor or tax professional is recommended to ensure you understand your specific situation and can make informed decisions.

By understanding these key tax rules, heirs can manage inherited property and money more effectively, minimizing their tax burden and maximizing their financial well-being.