Inheritance & Tax Planning

The single most-misunderstood corner of estate planning. Most people don't owe federal estate tax (2026 exemption ~$13.99M individual / $27.98M couple). State estate and inheritance taxes hit at much lower thresholds in ~17 states. Stepped-up cost basis is the headline tax win at death; inherited IRAs got harder under SECURE / SECURE 2.0. Free resources are deep here. For the will see Wills & Online Will Services; for trusts see Living Trusts; for beneficiary forms see Beneficiary Designations; for tax software see Free Tax Software; for the broader index see Estate, Will & End-of-Life Planning.

Federal estate tax (2026)

• Lifetime exemption: ~$13.99M per individual, ~$27.98M per couple in 2026.
• Sunset risk: TCJA-doubled exemption was scheduled to sunset end of 2025; legislation in late 2025 extended the higher exemption (verify current threshold for your filing year — this is one of the most-changed numbers in tax code).
• Portability: surviving spouse can use unused portion of deceased spouse's exemption (must file Form 706 to elect).
• Annual gift exclusion (2026): ~$19,000 per recipient; doesn't touch lifetime exemption.

Practical: most households are not federal-estate-tax-affected.

State estate + inheritance tax (★ check your state)

Roughly 17 states have one or both as of 2026:

• State estate tax (paid by estate): MA ($2M), OR ($1M), WA, CT, HI, IL, MD, ME, MN, NY, RI, VT, DC.
• State inheritance tax (paid by recipient based on relationship): IA, KY, MD, NE, NJ, PA. Spouses + lineal descendants typically exempt or low-rate; siblings / non-relatives hit harder.

Thresholds change; verify against current state tax authority each year a major life event happens.

Stepped-up cost basis (★ ★ the big win)

• At death, most appreciated assets get a basis step-up to fair market value. Heirs can sell immediately with little / no capital-gains tax.
• ★ Applies to: stocks, bonds, mutual funds, real estate, collectibles in non-retirement accounts.
• ★ Does NOT apply to: traditional IRA / 401(k) (already pre-tax); annuities (treated as IRD).
• ★ Community-property states (CA, AZ, NV, TX, WA, WI, ID): double step-up on the entire community asset when one spouse dies, vs half step-up in common-law states.
• ★ Holding appreciated assets until death can be a major estate strategy; gifting them while alive carries over the original basis.

Inherited IRAs / 401(k) under SECURE / SECURE 2.0

• 2020 SECURE Act: most non-spouse beneficiaries must drain inherited IRAs within 10 years (no more lifetime stretch).
• Eligible Designated Beneficiary exceptions (still get stretch): surviving spouse, minor child of decedent (until age of majority + 10), disabled / chronically ill, less than 10 years younger than decedent.
• 2022 SECURE 2.0: RMD age 73 → 75 by 2033; surviving-spouse election as own IRA streamlined; some Roth changes.
• Practical: a non-spouse heir of a $1M traditional IRA may face a forced-distribution tax cliff in years 1–10. Plan: Roth conversions before death, tax-distributed inheritance over 10 years to avoid bracket spike, charitable rollovers (QCDs).

Free resources (★ ★ deep)

• ★ ★ ★ Bogleheads wiki — free; the deepest free personal-finance and inheritance-tax library on the public internet; pages on stretch IRA, SECURE Act, stepped-up basis, gifting, state estate tax, charitable giving, IRMAA, Roth conversions. The single most valuable free resource.
• ★ ★ AARP estate-planning library — free.
• ★ IRS Publications — free; Pub 559 (Survivors, Executors, Administrators), Pub 590-B (IRAs), Pub 525 (Income), Pub 950 (Gift Tax). Authoritative.
• ★ Investopedia — free; consumer-grade overviews.
• Kitces.com — free + paid; advisor-flavored deep articles; great inherited-IRA / Roth-conversion modeling.
• NerdWallet, SmartAsset — free; consumer overviews.

Charitable strategies (income + estate-tax friendly)

• Qualified Charitable Distribution (QCD) — IRA owners 70½+ can direct up to ~$108K (2026, indexed) directly from IRA to charity; counts toward RMD; not income.
• Donor-advised fund (DAF) — Schwab Charitable, Fidelity Charitable, Vanguard Charitable; deductible at contribution; granted to charities over time.
• Charitable remainder trust (CRT) — paid; attorney-drafted; income to you/heirs, remainder to charity.
• Bequest in will — free; simplest.

Tools / software

• ★ FreeTaxUSA — free federal + cheap state; handles Form 706 (estate tax) only via export to advisor, but handles Form 1040 with inherited-IRA RMDs cleanly. See Free Tax Software.
• ★ IRS Direct File — free; expanding 2024–26 state-by-state; basic returns.
• TurboTax / H&R Block / TaxAct — paid; have estate / inheritance modules.
• Cash App Taxes — free; basic returns.
• OpenTaxSolver — free OSS; advanced filers.
• ★ Beancount / GnuCash / Actual Budget — free OSS; track inherited-asset cost basis through year-by-year drawdown — the part most heirs lose track of. See Plain-Text Accounting (Beancount), Double-Entry (GnuCash).

License / pricing

• Bogleheads, AARP, IRS, Investopedia, NerdWallet, SmartAsset: free.
• Kitces: free + paid premium.
• FreeTaxUSA: free federal, paid state (~$15).
• IRS Direct File: free.
• TurboTax, H&R Block, TaxAct: paid + free tiers.
• OpenTaxSolver: free OSS.
• DAF (Schwab / Fidelity / Vanguard): free to open; expense ratios on funds.

Pick this if…

• Default free reference: Bogleheads wiki, then IRS Pub 559 + 590-B for the specific situation.
• Estate near or above $13.99M (2026): estate-planning attorney + tax advisor; stop reading and call.
• Living in a state with estate / inheritance tax: check state-specific threshold annually.
• Inheriting an IRA: model the 10-year drawdown vs your tax bracket; consider partial Roth conversions on remaining accounts.
• Charitably inclined, RMD age: QCDs are a tax-free win.
• Tracking inherited cost basis through retirement: Beancount or GnuCash; do not rely on the broker to remember.
• Filing the deceased's final 1040: FreeTaxUSA or IRS Direct File usually suffices.