Estate planning is about more than just deciding who inherits your assets. It’s also about how to transfer wealth in the most tax-efficient way possible. One of the most common questions families ask after losing a loved one is simple: “What does this mean for my taxes?” The answer depends on the type of assets being inherited and how the estate is structured. The good news for most families is that estate taxes aren’t something they need to worry about. On the federal level, an estate doesn’t face estate tax unless the total value exceeds roughly $30 million for a married couple. In Indiana, there’s also no state inheritance tax, and only five states in the country still impose one. That means for 99% of families, inheriting assets will not trigger estate or inheritance taxes.
What matters more is how the assets are held and transferred. Different account types create different tax consequences. For example, assets with unrealized capital gains — such as stocks, brokerage accounts, or real estate — receive what’s known as a “step-up in cost basis” at death. This means all the accumulated growth during the original owner’s lifetime becomes tax-free when inherited. The heirs only owe taxes on gains that occur after the date of death. For many families, this makes inherited investments or property nearly tax-free at the time of transfer.
By contrast, qualified retirement accounts like traditional IRAs or 401(k)s are taxed as ordinary income when withdrawn. Non-spouse beneficiaries who inherit these accounts must empty them within ten years under current law, paying income tax on withdrawals as they go. That can create significant tax burdens, especially for children or heirs in higher income brackets.
This is where proactive planning becomes powerful. One strategy is converting portions of a traditional IRA into a Roth IRA while the original owner is in a lower tax bracket. Paying taxes now at a lower rate can save the next generation from paying much more later. Similarly, reviewing account titling, beneficiary designations, and distribution strategies before death ensures a smoother and more efficient transfer of assets.
A few key steps can help make wealth transfer more tax-efficient:
- Understand what types of assets you hold and how each is taxed at death.
- Take advantage of the step-up in cost basis for non-qualified investments and real estate.
- Consider Roth conversions during lower-income years to reduce heirs’ future tax burdens.
- Review beneficiary designations and update them regularly.
- Work with professionals to structure your estate for simplicity, clarity, and long-term efficiency.
Tax-efficient estate planning isn’t only about minimizing taxes — it’s about creating a lasting legacy that aligns with your goals and supports your family for generations. The planning you do now helps to ensure your loved ones aren’t left with unnecessary complexity or avoidable tax bills later.
Financial Enhancement Group is an SEC Registered Investment Advisor.
