Estate
Estate basics: step-up in basis, beneficiaries and estate tax
How assets pass at death, why beneficiary designations matter more than many wills, how the step-up in basis works, and when federal or state estate taxes apply.
Education, not advice. This guide explains general rules with invented examples. It isn't financial, tax or legal advice for your situation. Tax figures are for 2026 and come from published IRS, SSA and CMS sources. Rules change, so check current figures before you act.
Estate planning sounds like something for the very wealthy. In practice, every household with a retirement account, a home or a bank account has an estate plan, whether they've written one or not. The law and your account paperwork fill in whatever you leave blank.
This guide covers the basics that affect most families: how assets pass, why the step-up in basis matters, and when estate taxes apply. It isn't legal advice. An estate attorney can tell you how your state's rules apply to you.
How assets pass at death
Assets pass in one of a few ways, and a will controls only some of them:
| How the asset is held | Who receives it | Does the will control it? |
|---|---|---|
| Retirement account or life insurance with a named beneficiary | The named beneficiary | No |
| Bank or brokerage account with a transfer-on-death or payable-on-death beneficiary | The named beneficiary | No |
| Jointly owned with right of survivorship | The surviving owner | No |
| Held in a living trust | Whoever the trust names | No |
| In your name alone, with no beneficiary | Whoever your will names, through probate | Yes |
| In your name alone, with no will | Your heirs under state law, through probate | No |
For many retirees, most of their money sits in accounts with beneficiary designations. That paperwork, not the will, decides who gets it.
Check your beneficiary designations
Beneficiary forms are easy to forget and easy to get wrong. Common problems:
- An ex-spouse or a parent who has died is still named.
- No contingent beneficiary is named, so the account falls back to the estate.
- A minor child is named directly, which can require a court-supervised guardian.
- Designations don't match the will's intentions, such as an equal split among children.
Reviewing every account's beneficiaries after a marriage, divorce, birth or death is one of the simplest and most useful estate tasks.
The step-up in basis
When you sell an investment, you pay tax on the gain: the sale price minus your cost basis. When someone inherits an investment, its basis usually resets to its value on the date of death. Gains built up during the original owner's life are never taxed.
A worked example
Ruth bought shares of a stock index fund for $100,000. They're now worth $400,000.
| What happens | Recipient's cost basis | Taxable gain if sold for $400,000 |
|---|---|---|
| Ruth gives the shares to her son during her life | $100,000 | $300,000 |
| Her son inherits the shares at Ruth's death | $400,000 | $0 |
If her son sold gifted shares, a $300,000 long-term gain taxed at 15% would cost about $45,000 in federal tax, and possibly state tax too. Inherited shares can be sold right away with no tax on the past gain.
This is why highly appreciated investments are often held until death, and why harvesting gains may not be worthwhile for money you'll leave to heirs.
Married couples
How much of a couple's property gets a step-up at the first death depends on the state:
- In most states, jointly owned property gets a step-up on the half that belonged to the spouse who died.
- In community property states, both halves of community property can get a step-up at the first death.
Retirement accounts don't get a step-up
Traditional IRAs and 401(k)s are pre-tax money, so there's no basis to step up. Heirs pay income tax on what they withdraw. Most non-spouse heirs must also empty an inherited account within a set number of years. That can push a large inherited IRA into high brackets during the heir's peak earning years.
Roth accounts pass to heirs tax-free in most cases. That's one reason Roth conversions can make sense for money you expect to leave. See Roth conversions.
Federal estate and gift tax
In 2026, each person can pass $15,000,000 free of federal estate and gift tax. The amount is adjusted for inflation from 2027. Above it, the top rate is 40%.
A few rules make it simpler for most families:
- Spouses. Anything left to a US-citizen spouse passes free of estate tax.
- Portability. A surviving spouse can use the unused exclusion of the spouse who died first, if the executor elects it on an estate tax return. Filing to elect it can be worthwhile even when no tax is due.
- Annual gifts. You can give up to $19,000 per recipient in 2026 without using any of your exclusion or filing a gift tax return.
Very few households owe federal estate tax at these levels. State estate taxes are more common.
State estate and inheritance taxes
Several states and DC have their own estate tax, often with a much lower exemption. A few states tax heirs instead, through an inheritance tax. Examples for 2026:
| State | Tax | 2026 exemption or rate |
|---|---|---|
| Oregon | Estate tax | Estates over $1,000,000 |
| Massachusetts | Estate tax | Estates over $2,000,000 |
| New York | Estate tax | Estates over $7,350,000 |
| Pennsylvania | Inheritance tax | 4.5% for children and grandchildren, 12% for siblings, 15% for most others |
State estate taxes count assets that many people overlook, such as the full value of a home, life insurance death benefits and retirement accounts. A household well below the federal exclusion can still owe state tax.
Documents most households need
- A will, to name who receives anything without a beneficiary, and a guardian for minor children.
- Financial power of attorney, so someone you trust can manage money if you can't.
- Healthcare directive and healthcare proxy, to record your wishes and name who decides for you.
- Beneficiary designations on every retirement account, life insurance policy and, where offered, bank and brokerage accounts.
- A living trust, for some households, to avoid probate, manage assets for heirs or keep matters private.
How the app helps
The Estate screen shows where each asset would go based on its beneficiaries, titling and your will, in both orders of death for a couple. It estimates federal and state estate taxes, the step-up in basis, and the income tax heirs might owe on inherited pre-tax accounts at rates you enter. A Documents tab tracks which documents you have and when you last reviewed them.
It's an illustration to bring to an estate attorney, not a legal document.
Frequently asked questions
Does a will avoid probate?
No. A will directs probate. Assets with beneficiaries, joint owners or a trust usually avoid it.
Should I name my estate as beneficiary of my IRA?
Usually not. Heirs then often lose the more flexible payout options available to named individuals. Ask an attorney if you have a specific reason.
Do heirs pay tax on life insurance?
Life insurance proceeds are generally free of income tax to the beneficiary. The death benefit can count toward a taxable estate, though, at the federal or state level.