Wealth Insights
Inheritance tax: What it is, how it works and ways to plan

Article 10 min read Updated October 28, 2025

Though you may not have immediate tax implications, planning for the long term can help.

Everything about the baby boom generation is big. From its sheer size in numbers to its huge impact on culture and business, the baby boom generation has fundamentally reshaped America. And the impact will continue long into the future, due in part to the unprecedented $78 trillion in estimated wealth Baby Boomers will transfer to their children, heirs and philanthropic causes.

Baby Boomers, unsurprisingly, are not following the traditional norms in either their approach to retirement or in their designation of what will happen to their assets after they are gone. “Formerly, the typical approach was people retired at a standard age, began to draw their pension and Social Security benefits, and were fine”, says Tom Lasley, a senior wealth strategist at Regions Bank. “Now, many people are working much longer, and there is not one consistent age at which everyone retires. Many Baby Boomers are going into retirement in stages, and often working past the old traditional retirement age. They also are living longer.” This makes it much harder to predict how and when the younger generations will inherit their wealth.

Potential tax consequences of an inheritance

Beyond just working and living longer than previous generations, many Baby Boomers want to actually see during their lifetimes their accumulated wealth make a positive impact on their loved ones and the causes they support in their communities. Lasley notes that these desires, along with the higher wealth transfer tax exemptions, are resulting in many more people looking at lifetime transfers of wealth as part of their overall wealth transfer plan.

Regardless of how and when someone wants to transfer their assets, it is critical for their heirs to be educated about the potential tax implications of an inheritance. There is one common question in particular that Lasley gets from those who inherit assets: Will there be income tax on my inheritance?

“In most cases, there typically are no immediate income tax consequences if someone passes away and transfers wealth to you from their estate,” says Lasley.

There may be inheritance or estate taxes, however, depending on the size of the deceased’s estate and the state in which they lived. The “One Big Beautiful Bill Act” increased the current federal estate tax exemption from $13.99 million per person (2025) to $15 million (2026). Thereafter, there will be an inflationary adjustment to this number each year. As a result, the federal estate tax will apply to few people.

While there are typically no immediate income tax concerns when assets are transferred to children or a spouse, there are potential consequences after the transfer happens if the heir decides to sell the asset.

For example, when a child or spouse inherits an investment account, they receive what is known as a step-up in basis. Here’s what that might look like:

10 years ago: Let’s say a husband purchased a stock for $100 a decade ago and the stock’s value doubles to $200 by the time of his death and his wife inherits it.
Today: The wife who inherits the stock receives a step-up in basis to $200. This simply means whenever the wife opts to sell the stock, the capital gains assessed on the sale will be based on the increase in value from the time the wife inherited it.
Later: Say the wife sells the stock when it is worth $250, the capital gains taxes will apply to the $50 increase since she inherited it rather than the $150 increase from when her husband originally purchased the stock.

The same step-up in basis also applies to real estate and business inheritances.

Tax implications of inherited IRAs and 401(k)s

There are significant income tax implications when a beneficiary takes distributions from an inherited IRA or qualified retirement account, such as a 401(k) account. One of the benefits of investing funds in an IRA or a 401(k) is that the income taxes on the account investments are deferred until funds are withdrawn. The deferral, however, does not last forever, nor do they go away when the original owner dies.

“The income taxes that the decedent deferred on an IRA during their lifetime still have to be paid. If they were not paid during that lifetime by leaving the funds in the IRA, then whoever takes the funds out of the account will have to pay them,” says Lasley. “Under current federal tax law, there is no step-up in basis with these retirement accounts.”

There are also rules that require the beneficiary to withdraw the funds over a set period of time, during which time the income taxes will have to be paid. Formerly, the children who inherited the IRA or 401(k) from a parent could take withdrawals over their lifetime and therefore pay the taxes over that same lifetime period. While the taxes still had to be paid, the beneficiary could spread the payment out over time. The rules changed under the SECURE Act and SECURE Act 2.0, and the taxes must be paid in a potentially shorter period of time. According to Lasley, “Most adult children who inherit a qualified retirement account from a parent will have to withdraw the funds and pay the income taxes within 10 years of inheriting the account.”

Wealth management principles remain the same

For all the changes to the tax rules, sound wealth management principles have not really changed. The recent tax changes have mostly to do with when taxes are paid and the amounts that will have to be paid, but not really how the taxes are imposed or the differences in how different types of assets are taxed. For example, the differences in the income taxes that will be due on a regular investment account versus a qualified retirement account remain the same. “So, for example, in order to alleviate the potential income tax burden on their children, many parents who have significant charitable interests will leave their IRA to charity, which does not pay income taxes at all, and the investment accounts, which receive a step-up in basis at death, to their children,” says Lasley.

People receiving an inheritance also need wealth planning which includes, but is not limited to, tax planning. “Individuals who inherit a traditional IRA can potentially reduce the total taxes they pay on their own distributions by converting it to a Roth IRA if, for example, they expect to be in a higher income tax bracket when they withdraw money from the Roth IRA,” notes Lasley.

The fundamental principles that guide effective wealth planning still apply when someone inherits assets. This means integrating inherited wealth into an existing financial plan and making sure it supports your short- and long-term goals and appetite for risk.

Critically assessing the assets and making changes to suit your unique needs is an important part of that integration. “Let’s say it’s a taxable account you inherit. Does it still make sense to have the account invested the way it is currently given your age and goals?” says Lasley. “Do you want the vacation residence your parents left you? How does inheritance fit in with your overall financial picture, your taxes and your planning goals for your family? Ultimately, you want to use an inheritance to help you and your family in the best way possible.”