Estate and Inheritance Planning: A Complete Guide for 2026

The landscape changed in 2025

Before the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, estate planning operated under a constant sunset cloud. The 2017 Tax Cuts and Jobs Act (TCJA) doubled the estate tax exemption but set it to expire at the end of 2025 — reverting to roughly $7 million per person in 2026. Countless high-net-worth families rushed to make gifts, set up trusts, and execute large transfers before the deadline.

OBBBA changed the calculus permanently:

  • $15 million per person exemption starting January 1, 2026 (up from $13.99M in 2025)
  • $30 million per married couple with proper planning (portability)
  • Indexed for inflation starting 2027
  • No sunset provision — unlike TCJA, OBBBA doesn’t automatically expire
  • 40% top federal estate tax rate unchanged

For the vast majority of families, federal estate tax is now a non-issue. In 2023, only about 7,100 estate tax returns were filed, and only 4,000 were taxable — fewer than 0.2% of deaths. With the OBBBA’s higher permanent exemption, that number will be even smaller going forward.

But federal estate tax is only part of inheritance planning. Three other issues matter more for most families.

1. Step-up in basis

When you inherit an appreciated asset — a stock, real estate, a business interest — its cost basis is reset to its fair market value at the date of the original owner’s death. All accumulated capital gains during the decedent’s life disappear for tax purposes.

Example: Your parent bought stock in 1985 for $10,000. At their death in 2026, it’s worth $500,000. You inherit the stock and sell it immediately for $500,000.

  • Without step-up: You’d owe capital gains tax on $490,000 of gain
  • With step-up: Your basis is $500,000, your sale price is $500,000, your gain is $0
  • Tax saved (at 15% LTCG): $73,500

This provision, in Section 1014 of the Internal Revenue Code, is one of the most powerful wealth-transfer mechanisms in the tax code. OBBBA did not change it — step-up in basis remains fully intact.

Strategic implications:

  • Hold appreciated assets until death. Selling during life triggers capital gains tax; holding until death eliminates that tax via step-up.
  • Don’t gift appreciated assets during life. Gifts carry over the donor’s basis to the recipient, preserving the accumulated gain for future taxation. Bequests (inheritance at death) get step-up.
  • Coordinate with Roth conversions. Traditional IRAs don’t get step-up — beneficiaries still owe ordinary income tax on withdrawals. Converting to Roth during life (paying tax now) may create more after-tax wealth for heirs than holding traditional IRA + using the same dollars for other assets.
  • Community property double step-up. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), both spouses’ halves of community property receive step-up at the first spouse’s death. In common-law states, only the deceased spouse’s half gets step-up.

Why this matters more than federal estate tax: Most families have millions in unrealized gains on long-held homes, stocks, and businesses. Properly structured bequests eliminate that capital gains tax entirely for heirs. For a typical family with $2M in appreciated real estate and stocks, step-up is worth more than any federal estate tax planning.

2. Inherited IRA rules (SECURE Act)

The SECURE Act of 2019 fundamentally changed how inherited retirement accounts work. For deaths after December 31, 2019, most non-spouse beneficiaries are subject to the 10-year rule: the entire balance of the inherited account must be distributed by December 31 of the 10th year following the original owner’s death.

This eliminated the “stretch IRA” strategy, where beneficiaries could take small annual distributions over their lifetime, keeping the account growing tax-deferred for decades.

Two scenarios for non-eligible designated beneficiaries (most non-spouse heirs):

If owner died before their RMD required beginning date (RBD):

  • No annual RMDs required during years 1-9
  • Entire account must be fully distributed by end of year 10
  • Beneficiary can choose any distribution schedule (lump sum, spread over 10 years, back-loaded)

If owner died on or after their RBD:

  • Annual RMDs required in years 1-9, calculated on beneficiary’s life expectancy
  • Entire account must be fully distributed by end of year 10
  • IRS granted penalty waivers for missed RMDs 2021-2024, but annual RMDs are now required starting 2025

Eligible Designated Beneficiaries (EDBs) — five categories exempt from the 10-year rule and allowed to use lifetime stretch:

  1. Surviving spouse (separate rules and options apply)
  2. Minor child of the account owner (only until age 21, then 10-year rule kicks in)
  3. Disabled individual (as defined by IRC §72(m)(7))
  4. Chronically ill individual (as defined by IRC §7702B(c)(2))
  5. Individual not more than 10 years younger than the original owner

Roth IRAs: Same 10-year rule applies, but distributions remain tax-free. No annual RMDs required during years 1-9 because Roth IRAs have no RMDs during the original owner’s lifetime.

Strategic implications:

  • Roth conversions for wealth transfer. Converting traditional IRA to Roth during your lifetime means heirs inherit tax-free dollars. They still must distribute within 10 years, but pay no tax on distributions.
  • Life insurance to replace IRA value. For high-net-worth families, permanent life insurance (especially in irrevocable life insurance trusts) provides heirs with tax-free replacement for the income tax they’ll owe on inherited traditional IRAs.
  • Trust beneficiaries complicated. Naming a trust as IRA beneficiary can work but requires careful drafting. “See-through” conduit or accumulation trusts each have specific rules for how the 10-year rule applies.
  • Charitable remainder trusts (CRTs). For charitably-inclined beneficiaries, leaving an IRA to a CRT can spread tax impact over decades and provide charitable deduction.

3. State estate and inheritance taxes

Twelve states plus DC levy estate taxes. Five states levy inheritance taxes (taxes paid by beneficiary, based on relationship to decedent). Maryland is the only state that levies both.

State estate tax exemptions (2026, approximate):

  • Oregon: $1 million (lowest in the country, not indexed for inflation, top rate 16%)
  • Rhode Island: ~$1.8 million (CPI-indexed)
  • Massachusetts: $2 million (not portable, not indexed, top rate 16%)
  • Minnesota: $3 million
  • Washington: $3,076,000 for 2026 (split-year: top rate 35% Jan 1–June 30, 2026; reverts to 20% July 1, 2026 onward under SB 6347; no spousal portability)
  • Illinois: $4 million (not portable)
  • DC: ~$4.87 million
  • Hawaii: $5.49 million (top rate 20% over $10 million)
  • Vermont: $5 million (flat 16% rate)
  • Maryland: $5 million (only state with both estate and inheritance tax)
  • Maine: ~$7 million (CPI-indexed)
  • New York: $7.35 million (with a “cliff” — exceed exemption by 5%, and full estate is taxed at up to 16%)
  • Connecticut: matches federal ($15 million in 2026), flat 12% rate

States with inheritance tax:

  • Kentucky (0-16%, with exemptions varying by relationship to decedent)
  • Maryland (0-10%)
  • Nebraska (1-15%, with graduated rates based on relationship)
  • New Jersey (0-16%)
  • Pennsylvania (0-15%)

Note: Iowa repealed its inheritance tax effective January 1, 2025.

Strategic implications:

  • State of domicile matters enormously. A $5M estate passing in Oregon faces substantial state estate tax but zero federal estate tax. The same estate in Florida faces zero of either.
  • Residency planning. Some retirees relocate from high-estate-tax states (Oregon, Washington, New York, Massachusetts) to no-state-tax states (Florida, Texas, Nevada, Wyoming) specifically for estate tax reasons.
  • Property in multiple states. Owning real estate in a state you don’t live in can subject your estate to that state’s estate tax for that property. Particularly relevant for vacation homes.
  • State exemptions rarely portable. Unlike federal exemption, most state estate tax exemptions aren’t portable between spouses. A couple may lose one spouse’s full exemption if assets aren’t structured correctly.

Beneficiary designation strategy

Beneficiary designations on retirement accounts, life insurance, and transfer-on-death accounts bypass your will or trust. They control directly, regardless of what other documents say.

Key beneficiary rules:

  • Primary and contingent beneficiaries. Always designate both. Without contingent, if your primary beneficiary predeceases you or disclaims, the asset may pass through probate.
  • Per stirpes vs. per capita. “Per stirpes” means if a beneficiary dies before you, their share passes to their descendants. “Per capita” means the share is redistributed among surviving beneficiaries only.
  • Spouse consent for 401(k). Most qualified plans (401(k), 403(b)) require spousal consent to name anyone other than spouse as primary beneficiary.
  • IRA beneficiaries. No spousal consent required for IRAs (unless in community property state). You can freely designate anyone.
  • Review after life events. Divorce, remarriage, births, deaths — all should trigger beneficiary designation review. Ex-spouse still named as beneficiary can inherit your IRA regardless of your will or divorce decree.
  • Avoid naming your estate. Naming “my estate” as beneficiary subjects retirement accounts to probate and the more restrictive 5-year distribution rule for non-designated beneficiaries.

Wills and trusts — the foundation

Wills distribute probate assets (assets not otherwise transferred via beneficiary designation or joint ownership). They go through probate, which is public and can be costly.

Revocable living trusts allow probate avoidance. Assets titled in the trust pass directly per trust terms, typically faster and more privately than through probate.

Irrevocable trusts provide stronger asset protection and tax advantages but give up control. Common types:

  • Irrevocable Life Insurance Trust (ILIT): Keeps life insurance proceeds outside your estate
  • Grantor Retained Annuity Trust (GRAT): Transfers future appreciation to beneficiaries with minimal gift tax
  • Spousal Lifetime Access Trust (SLAT): Transfers assets to benefit of spouse while removing from donor’s estate
  • Qualified Terminable Interest Property (QTIP) Trust: Provides surviving spouse income while controlling ultimate disposition
  • Charitable Remainder Trust (CRT) / Charitable Lead Trust (CLT): Combines charitable giving with family wealth transfer

Most estates under $15M (single) / $30M (MFJ) won’t need complex irrevocable trusts for federal estate tax reasons. But residents of high-estate-tax states and those with specific goals (asset protection, second marriage considerations, spendthrift beneficiaries) may still benefit.

The lifetime gift strategy

Annual gift exclusion for 2026: $19,000 per recipient, unchanged from 2025.

Key mechanics:

  • You can give $19,000 to each of any number of recipients without gift tax consequences or reducing your lifetime exemption
  • Married couples can split gifts, effectively giving $38,000 per recipient
  • Excluded from the $19,000 limit: direct payments of tuition to educational institutions, direct payments of medical expenses to healthcare providers
  • Non-citizen spouse annual exclusion: $194,000 for 2026

Strategic lifetime gifting:

  • Remove future appreciation from your estate. A $19,000 gift today that grows to $100,000 is $100,000 removed from your estate.
  • Use lifetime exemption proactively. You can gift above $19,000 per recipient by using your $15M lifetime exemption (reducing your eventual estate tax exemption).
  • Gift tax return required for gifts above $19,000 to a single recipient (Form 709), even if no tax is due. Tracks lifetime exemption usage.
  • Tuition and medical payments. Unlimited when paid directly to providers. Powerful for grandparents funding education.

Gift vs. inheritance trade-off: Gifts carry over donor’s basis to recipient (no step-up). Inheritance gets step-up. Gift during life makes sense for estate-tax-threatened households with large estates; inheritance at death generally makes sense for most others.

Generation-Skipping Transfer (GST) tax

Transfers to grandchildren or more distant descendants can trigger an additional 40% GST tax, on top of estate/gift tax. The GST exemption matches the estate/gift exemption at $15 million in 2026.

Without proper planning, a bequest to a grandchild could face both estate tax AND GST tax on the same dollars — effective rate approaching 65%.

Strategic uses:

  • Generation-skipping trusts. Structured to benefit multiple generations without triggering GST tax at each generational transfer
  • Dynasty trusts. Extended-term trusts (50+ years in many states) that compound wealth across generations free of transfer taxes
  • Direct skips vs. taxable terminations. Different GST rules apply depending on transfer structure

For most families below the $15M threshold, GST tax isn’t a concern. For those above, it’s often the most complex part of estate planning.

Putting it all together: a practical framework

For most families (estate under $15M single / $30M MFJ):

  • Federal estate tax is not a concern
  • Focus on step-up in basis strategy
  • Review beneficiary designations periodically
  • Consider state estate tax exposure if residing in or owning property in a state with one
  • Simple will and possibly revocable living trust cover most needs
  • Roth conversion planning particularly valuable for minimizing heirs’ income tax on inherited IRAs

For families above federal thresholds:

  • Federal estate tax planning becomes relevant
  • More sophisticated trusts (ILITs, SLATs, GRATs) may provide substantial savings
  • Annual gifting to family members + paying tuition/medical directly can systematically reduce estate
  • Life insurance in ILIT provides estate-tax-free liquidity
  • GST tax planning for transfers to grandchildren
  • Professional estate planning attorney and tax advisor essential

For families in high-estate-tax states:

  • State estate tax may apply even when federal doesn’t
  • Residency planning may be worth considering
  • State-specific irrevocable trusts may help
  • Property in multi-state estates needs careful handling

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Frequently asked questions

Has OBBBA changed step-up in basis?

No. Step-up in basis under IRC Section 1014 remains unchanged under OBBBA. Inherited assets continue to receive a new cost basis equal to fair market value at the date of the decedent's death. Proposals to eliminate or limit step-up have been floated over the years but have not been enacted. As of 2026, step-up in basis is fully intact.

What happens to my IRA if I die without a beneficiary designation?

It defaults based on the plan document — often to your estate, making it a non-designated beneficiary subject to more restrictive rules (5-year rule if you died before RBD; life expectancy based on your age if after RBD). Your IRA would go through probate as part of your estate. This is why always designating a human beneficiary matters.

Should I convert traditional IRA to Roth for inheritance purposes?

Often yes, if you can pay conversion tax from non-IRA funds and your heirs would be in higher or equal brackets than you. Roth conversions shift tax burden from heirs to you, and eliminate the ordinary-income taxation they'd face on inherited traditional IRA distributions. Heirs also benefit from tax-free growth during the 10-year distribution window. Model this carefully — it's not universally optimal, especially if you expect to be in a lower bracket than heirs.

Does my surviving spouse get to keep my unused estate tax exemption?

Yes, through 'portability.' If you die with unused federal estate tax exemption (say you used only $5M of your $15M), your surviving spouse can elect to add your unused $10M to their own exemption, effectively giving them $25M of exemption. Portability must be elected on a timely-filed Form 706 estate tax return — it's not automatic. Critical deadline: within 9 months of death (15 months with extension).

What's the real cost of inherited traditional IRAs to beneficiaries?

Full ordinary income tax on every dollar withdrawn, plus forced withdrawal within 10 years (for non-eligible designated beneficiaries). Beneficiaries typically receive these distributions during their peak earning years, often at higher marginal rates than the original owner. A $1M inherited traditional IRA might net only $630-700K after federal and state income tax. This is why Roth conversion planning matters so much for wealth transfer.

Are life insurance proceeds subject to estate tax?

Proceeds are income-tax-free to the beneficiary regardless of amount. But for estate tax, proceeds are included in the decedent's estate if the decedent owned the policy at death. An Irrevocable Life Insurance Trust (ILIT) structured properly removes the policy from the decedent's estate, keeping proceeds outside estate tax even for very large estates.

What about digital assets — crypto, online accounts?

Increasingly important for estate planning. Cryptocurrency wallets without recorded private keys are effectively lost at death. Online accounts (email, social media, financial accounts) require specific access planning. Create a secure, executable list of accounts and access credentials for your executor/successor trustee. Many states have enacted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) to provide legal framework, but practical access still requires planning.

How do I leave money to a minor child?

Several options: (1) Uniform Transfers to Minors Act (UTMA) account — simple but child gets full access at age of majority (18-21). (2) Trust — more control, preserves restrictions through whatever age you specify. (3) 529 plan — for education specifically, tax-advantaged growth. Most advisors recommend trusts for substantial inheritances to minors to prevent an 18-year-old from accessing large sums.

What about charitable bequests from IRAs?

Highly efficient. A charity receiving an IRA bequest pays no income tax on the distribution (charities are tax-exempt). Compare to a human beneficiary who'd owe ordinary income tax on the same inheritance. If you're making both charitable and family bequests, leave IRA to charity and other assets to family — eliminates the income tax burden on the most tax-inefficient asset.

Do I need a new estate plan now that the exemption is permanently higher?

Review, yes. Older estate plans often contain 'formula clauses' that reference the federal estate tax exemption — these can allocate assets in unintended ways at today's higher exemption. A plan drafted when the exemption was $5M and refers to 'the full federal exemption' now allocates $15M rather than the $5M originally intended. Review with your estate planning attorney every 3-5 years or after major life events.

Sources

Chris Gammill is the founder of Ignis Tools and writes about tax-aware retirement planning. Research and drafting assisted by AI tools; all figures and claims verified by the author against primary sources.

  1. IRS — Tax inflation adjustments for tax year 2026 — retrieved 2026-04-21
  2. IRS — Frequently asked questions on gift taxes — retrieved 2026-04-21
  3. IRS — Retirement plan and IRA required minimum distributions FAQs — retrieved 2026-04-21
  4. IRS Publication 551 — Basis of Assets — retrieved 2026-04-21
  5. Tax Foundation — Estate and Inheritance Taxes by State — retrieved 2026-04-21

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