I’m 80 and I need to get my financial ducks in a row. I have $650,000 in investments, $250,000 in life insurance and about $150,000 equity in my home, plus good long-term-care insurance. All of this goes to my son. What’s the best way to protect him from heavy taxes when he inherits?
Octogenarian Mom
You’re probably worrying more than you ought to.
Under Internal Revenue Service rules, the lifetime estate-tax and gift-tax exclusion for 2026 is about $15 million (or $30 million for married couples). You can also give $19,000 per child per year (or $38,000 per year for married couples) without having to include the cash gift in his annual return to the IRS. So your son won’t be hit by a massive federal estate tax. Even if current law changes, your estate appears far below any likely federal taxable level.
The gift tax applies to the wealth transfer over your lifetime and is paid by the donor or estate; an estate tax is levied on the estate of the deceased. Starting in 2026, the lifetime exclusion per person will be roughly $15 million ($30 million for married couples). So far, so good.
Inheritances themselves are not considered taxable income, so your son will not owe income tax simply for receiving money, investments, or property from you — you’re not the only one to misunderstand how federal estate tax works. Potential capital gains from your investments and any increase in value of your home are the two main issues. However, if part of your investments are held in traditional retirement accounts such as IRAs or 401(k)s, your son would generally have to withdraw the money within 10 years, and those withdrawals would be taxed as ordinary income.
A handful of U.S. states impose an inheritance tax on certain inherited assets, though most offer exemptions or reduced rates for close relatives like children and spouses. State law matters more than federal law for estates your size, so confirming your state’s inheritance-tax rules is important. The good news: many states exempt children from inheritance tax.
Life-insurance death benefits are generally free of income tax for the beneficiary. Although the policy’s value can count toward the size of your estate, that is not a concern here, given that your estate is well below the lifetime taxable threshold. Please make sure that your son is named directly as the beneficiary on the policy, rather than making the policy payable to your estate. And always keep your beneficiary designations current.
Here’s the bottom line: Most states that carry an inheritance tax exempt spouses and, relevant in your case, children, and/or they provide generous credits. If you do live in a state without an inheritance tax, your son would likely not owe any state tax on the inheritance itself, even if he lives in another state.
I have more good news for you: Inherited investments generally receive a “step-up in basis,” meaning that their “cost basis” for tax purposes resets to their fair market value on the date of your death, and not on the date when you purchased them. This holds true for stocks, real estate and other assets that increase in value over time.
If you purchased an investment for $100,000 and it is worth $500,000 when your son inherits it, the $400,000 increase in value is effectively wiped out in the eyes of the IRS. If your son sells the property or stocks shortly after inheriting them, he would probably owe little or no capital-gains tax. The step-up in basis typically does most of the tax-saving work.
To take advantage of this, as I explained to this woman who was contemplating gifting her $500,000 home to her daughter, it is typically not a good idea to gift appreciated investments to your loved ones during your lifetime unless there is a compelling reason to do so (for example, if assets greatly exceed estate-tax limits or special planning goals apply). Holding onto appreciated assets until death can reduce the tax implication due to the step-up in basis, which resets the cost basis of those inherited assets to their fair market value at the original owner’s date of death — and not on the date they were originally acquired.
Now that we have that (mostly) settled, it’s important for you to make a will or a trust, even if you only have one heir. You also need a contingency plan if something — God forbid — ever happened to your son and he predeceased you. Nobody wants to think about such eventualities, but it’s best to account for all possible scenarios in legal documents.
A will should be adequate enough, especially if you add your son as the beneficiary on a transfer-on-death deed on your home, as well as adding him as a beneficiary on your life-insurance policy and other retirement, brokerage or banking accounts. But putting any additional assets in a trust would also help avoid probate. A revocable living trust can help simplify the management of your finances if you become incapacitated and would typically allow your son to access his inheritance more quickly than if they had gone through probate.
Appoint an executor. An executor has a fiduciary duty to act in your best interests and is required to produce an inventory of the assets, cash flows, expenses, sales and other matters (such as tax documents). In addition to a will or trust, consider a durable financial power of attorney, a healthcare proxy, and advance healthcare directive. Planning for if/when you are in decline is just as important as planning your legacy. You can also consult with the National Academy of Elder Law Attorneys and/or the National Association of Estate Planners & Councils.
I wish you many more years of good health to enjoy with your son.
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Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: finance.yahoo.com
