A client asked me last week, “Am I going to get hit with a death tax?”
The term “death tax” gets thrown around a lot, and it sounds scary. But here’s the good news: most people won’t ever pay a federal death tax.
What Is the “Death Tax” Anyway?
When people say “death tax,” they usually mean the federal estate tax. This tax only applies if your estate is worth more than a very high threshold, which, for 2025, is:
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$13.99 million for individuals
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$27.98 million for married couples
If your estate is under those amounts, you won’t owe any federal estate tax. But that doesn’t mean that death will be tax-free.
What About State Death Taxes?
Many people get confused because some states have their own estate or inheritance taxes, separate from the federal government.
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Most states don’t have any estate or inheritance tax at all.
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But some do, like Pennsylvania, New Jersey, Kentucky, Maryland, and a few others, and their rules and exemption amounts vary widely.
So even if you’re safe from the federal estate tax, you might still face state-level taxes depending on where you live or where your property is located.
Death Taxes Aren’t Just Estate Tax
Here’s what people need to pay attention to: the real “death taxes” that many families face often aren’t the federal estate tax at all.
They come from things like:
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Capital gains taxes on inherited property without a step-up in basis
Most inherited assets get a step-up in basis, meaning the ‘cost basis’ resets to the fair market value on the date of death. But in certain cases, that step-up doesn’t apply. If you inherit a rental property, stock, or other asset that was gifted before death, held in an irrevocable trust, or given by a non-U.S. citizen, you could be stuck with the original low basis.
That means if you sell it, you may owe capital gains taxes on the full appreciation, sometimes hundreds of thousands of dollars in unexpected tax. - Taxes on inherited retirement accounts
If you inherit a traditional IRA, 401(k), or similar retirement plan, that money is pre-tax, so every dollar you withdraw is taxed as ordinary income. And thanks to the SECURE Act, most non-spouse beneficiaries must now follow the 10-year rule, meaning the entire account must be emptied within 10 years of the original owner’s death. In some cases, annual Required Minimum Distributions (RMDs) are still required within that 10-year window, depending on when the original owner passed away and whether they had already started taking RMDs. This can create complicated tax timing and force higher taxable withdrawals in your peak earning years.
These taxes can surprise families who think the “death tax” is just a distant, high-net-worth issue.
Why You Should Plan Even If You’re Not Sure What You’ll Inherit
If you might inherit money or property someday, it’s smart to start planning early, even if you don’t know how much or when.
Why? Because:
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Tax rules are complex and can change over time
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Planning ahead gives you more options to minimize taxes
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Waiting until after you inherit can mean missed opportunities and costly mistakes
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Having a plan brings peace of mind to you and your family
An advisor can help you prepare a strategy for your situation, no matter the size of the inheritance.
What Should You Do?
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Understand your total net worth and where your assets are held.
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Know your state’s tax rules. It matters where you live and where your property is.
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Plan ahead. There are advanced strategies to minimize taxes on your heirs, like trusts, gifting, Roth conversions, and charitable giving.
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Work with a financial advisor who knows the traps and can help you protect your legacy.
Frequently Asked Questions
Will my family have to pay estate tax?
Only if your estate exceeds the federal or applicable state exemption amounts.
What is a step-up in basis?
It’s a tax rule that resets the cost basis of inherited assets to their fair market value at death, reducing capital gains when sold.
Are inherited IRAs taxed?
Yes. Beneficiaries must take distributions and pay income tax on those amounts, unless it’s a Roth IRA.
Final Thoughts
“Death tax” sounds scary, but for most people, it won’t hit their estate at all. That said, taxes related to death can still impact you or your heirs in less obvious ways.
The key is knowing where the traps are and planning ahead to avoid extra costs and confusion.
– Clint Kraft
Founder and Financial Advisor, Kraft Capital