Question 1

Do beneficiaries pay federal inheritance tax?

Accepted Answer

No, there is no federal inheritance tax. Beneficiaries pay no federal tax on inherited assets. The deceased's estate may owe federal estate tax (if over $13.61M exemption), but beneficiaries receive the net amount tax-free. Only 6 states have state inheritance taxes.

Question 2

Which states have inheritance tax?

Accepted Answer

Six states: New Jersey, Pennsylvania, Kentucky, Iowa, Maryland, and Nebraska (as inheritance tax states). Rates vary by relationship: children/spouses typically exempt or low rate, siblings 4-15%, other relatives/non-relatives 10-18%. Most other states have no inheritance tax.

Question 3

What is step-up in basis for inherited assets?

Accepted Answer

Step-up in basis resets the cost basis of inherited assets to fair market value at date of death. Example: Parent bought stock at $10, worth $100 at death. Your basis is $100, not $10. Sell at $105: only $5 capital gains, not $95. Saves significant taxes on appreciated assets.

Question 4

Are inherited IRAs taxed differently?

Accepted Answer

Yes, inherited IRAs/401(k)s have special rules. Traditional IRA: distributions taxed as ordinary income to beneficiary. Roth IRA: tax-free distributions (if account held 5+ years). Most beneficiaries must withdraw within 10 years (SECURE Act). Spouse can treat as own IRA. No step-up in basis.

Question 5

Is life insurance inheritance taxable?

Accepted Answer

Life insurance proceeds are generally tax-free to beneficiaries. No federal income tax on death benefit. Not subject to inheritance tax. However, if payable to estate, may be included in estate tax calculation. Interest earned after death is taxable. Consider naming beneficiaries directly.

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