The federal estate tax — mostly a non-event now. The One Big Beautiful Bill Act (2025) permanently set the federal estate, gift, and generation-skipping exemption at $15 million per individual for 2026 ($30 million for a married couple using portability), indexed for inflation from 2027. Estates below that owe no federal estate tax; only the value above it is taxed, at 40%. In practice, well under 0.2% of estates are affected. A few features still matter for larger estates: the unlimited marital deduction (you can leave any amount to a U.S.-citizen spouse tax-free), portability (a surviving spouse can use a deceased spouse's unused exemption, but must file Form 706 to elect it), and the annual gift exclusion ($19,000 per recipient in 2026, or $38,000 for a couple splitting gifts) that lets you move money out of a taxable estate without touching the lifetime exemption.
But don't ignore the states. Roughly a dozen states plus D.C. impose their own estate or inheritance taxes, often with far lower thresholds — around $7.35 million in New York, and closer to $1–2 million in states like Massachusetts and Oregon. A family well under the federal line can still owe state death taxes, especially if they own property in multiple states. Check your state's rules.
The concept that matters most for the rest of us: step-up in basis. When you die, most assets in your estate have their cost basis reset to fair-market value on the date of death. For an heir, that erases the capital-gains tax on all the appreciation that happened during your lifetime. If you bought stock for $100,000 that's worth $500,000 at your death, your heir's basis becomes $500,000 — they can sell immediately and owe zero capital-gains tax on that $400,000 of growth. This single rule reshapes end-of-life planning: it can be better to hold highly appreciated taxable assets until death (for the step-up) than to sell or gift them during life. Now let's see how each account fares.
Taxable / brokerage accounts — the winner. These get the full step-up in basis described above. Appreciated stocks, funds, and real estate pass to heirs with a fresh cost basis, wiping out a lifetime of unrealized gains. This makes taxable assets, counterintuitively, one of the best things to leave behind — and argues for spending them last if legacy is a goal (a nuance to the withdrawal-sequencing logic in Chapter 20).
Traditional 401(k)s and IRAs — the taxed inheritance. Pre-tax retirement accounts get no step-up. They're "income in respect of a decedent" (IRD): every dollar the heir withdraws is taxed as ordinary income, just as it would have been for you. Worse, under the SECURE Act's 10-year rule (2019), most non-spouse beneficiaries must fully empty an inherited IRA/401(k) within 10 years of your death — and if you had already started RMDs, they must also take annual distributions during those years (the IRS finalized this in 2024). That can dump a large taxable inheritance onto an heir during their own peak-earning, high-bracket years. (Note: if federal estate tax was paid on the account, heirs can claim a §691(c) income-tax deduction for it — an often-missed offset.)
Roth accounts — the best of both. Roth IRAs and Roth 401(k)s are included in your gross estate, and non-spouse heirs are subject to the same 10-year emptying rule — but every withdrawal is tax-free, and because you never had RMDs on a Roth, heirs generally face no required annual distributions during the 10 years. That means an heir can let an inherited Roth grow tax-free for a full decade and then withdraw the whole thing tax-free. Roth is, by a wide margin, the best retirement account to inherit — which strengthens the case for lifetime Roth conversions (Chapter 13) as an estate strategy, not just an income-tax one.
Spouses get special treatment. A surviving spouse who inherits an IRA or 401(k) can roll it into their own IRA and treat it as theirs — no 10-year clock, RMDs based on their own age. Spouses are also the only heirs who can inherit an HSA and keep it as an HSA. The 10-year squeeze applies mainly to non-spouse beneficiaries.
HSAs — great for a spouse, brutal for anyone else. The HSA's death treatment is unusually lopsided. If your spouse is the named beneficiary, the HSA simply becomes their HSA — fully intact, still tax-advantaged. If anyone else inherits it, the account stops being an HSA on the date of death, and its entire fair-market value becomes taxable income to that beneficiary in that year — no step-up, no spreading it out. So an HSA you didn't spend can hand a non-spouse heir a big one-year tax bill. The planning response: name your spouse, spend the HSA down in your lifetime (it's tax-free for medical costs), or leave it to charity if no spouse survives.
A quick word on the others. Life insurance proceeds pass income-tax-free to beneficiaries (though the death benefit is in your taxable estate unless the policy is held in an irrevocable trust). And across all these accounts, beneficiary designations control — the person named on the account overrides your will. An outdated beneficiary form (an ex-spouse, a deceased relative) can send an account to the wrong person entirely, so review them after every major life event.
Putting it together. For most families the estate-tax exemption makes federal estate tax irrelevant, so legacy planning becomes about income tax character and step-up: - Leave to heirs: taxable/brokerage assets (step-up wipes the gains) and Roth accounts (tax-free, and can grow another decade). - Spend down or convert yourself: traditional IRAs/401(k)s, whose full ordinary-income tax would otherwise land on your heirs during the compressed 10-year window. - Name a spouse on the HSA — or use it up.
This is the mirror image of in-retirement sequencing (Chapter 20): the accounts that are cheapest to spend from can be the most valuable to keep for heirs, and vice versa. Coordinating the two — spending, conversions, and legacy — is where a good plan (and a good tool) earns its keep.
One inheritance, three tax fates
Each account below holds $400,000 the day Maria dies and passes to her daughter, who is in the 32% bracket. Same headline value — wildly different after-tax inheritance:
| Account ($400k) | How the heir is taxed | Heir keeps |
|---|---|---|
| Taxable brokerage (basis $150k) | Step-up resets basis to $400k; she sells at ~$0 gains tax | ~$400,000 |
| Traditional IRA | Fully ordinary income across the 10-year window, ~32% | ~$272,000 |
| Roth IRA | Tax-free, and can grow another 10 years first | $400,000+ |
The traditional IRA hands the daughter a ~$128,000 tax bill the other two avoid entirely — often landing during her own peak-earning years. That's the whole legacy playbook in one row: spend down or convert the pre-tax bucket yourself, and leave the step-up (taxable) and tax-free (Roth) dollars to your heirs.
The step-up also changes how you fund spending, not just what you leave. If a taxable position is destined for a step-up, selling it in your seventies pays a tax that would have been forgiven a few years later. Borrowing against it instead — and settling the loan from the estate — preserves the forgiveness while still funding the spending. That is the whole of “buy, borrow, die,” and it is the ordinary interaction of two ordinary rules rather than anything exotic. It also carries real costs and a policy risk, since the step-up has been a live reform target for years: Chapter 18 weighs both.