Estate Planning and Taxes: What Families Need to Know Before a Parent Dies

Your parents spent decades building what they have. The last thing anyone wants is for a large portion of that to go to taxes simply because nobody made a plan. Estate planning and taxes are inseparable topics — the decisions made (or not made) while your parent is alive directly determine the tax bill their estate faces when they're gone.

This guide is for adult children who want to understand the basics before meeting with an attorney, and to have an informed conversation with their parent about why this planning matters.

The Federal Estate Tax: Who Actually Owes It

The most common misconception is that the estate tax affects most families. It does not. In 2026, the federal estate tax exemption is approximately $13.6 million per individual. This means an estate must be worth more than $13.6 million before any federal estate tax is owed. Married couples can effectively double this through proper planning, protecting up to $27 million.

If your parents' combined estate — home, retirement accounts, investments, life insurance, and other assets — is below this threshold, federal estate tax is unlikely to be a concern.

However, state estate taxes are a different matter. Twelve states and the District of Columbia impose their own estate taxes, often with much lower exemption thresholds. Massachusetts and Oregon, for example, have thresholds as low as $1 million. If your parent lives in one of these states and owns a home plus retirement accounts, state estate tax can be a real issue even for middle-class families.

States with estate taxes (as of 2026): Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and D.C. Thresholds and rates vary by state.

The Gift Tax: Using It as a Planning Tool

Many parents want to transfer wealth to children or grandchildren while they're alive. The gift tax rules govern how much they can give without tax consequences.

The Annual Gift Tax Exclusion

Each person can give up to $18,000 per recipient per year (2024 amount; indexed for inflation) without any gift tax filing requirement. A parent with three children and six grandchildren can give away $162,000 per year completely tax-free — $18,000 to each of nine people.

This is one of the simplest and most underused tax planning tools available. For parents who have more than they'll need, systematic annual gifting over several years can meaningfully reduce the taxable estate.

The Lifetime Exemption

The annual exclusion is separate from the lifetime gift and estate tax exemption. Gifts above the annual exclusion amount reduce this lifetime exemption, but since the exemption is so high, most families won't trigger gift tax even with large lifetime gifts.

The key deadline: The current high federal exemption is scheduled to sunset at the end of 2025 unless Congress acts. This could cut the exemption roughly in half. For high-net-worth families, this makes pre-2026 planning particularly time-sensitive. Ask an estate attorney about this specifically.

Step-Up in Basis: One of the Most Valuable Tax Benefits After Death

This concept is poorly understood but enormously important. When a parent dies, inherited assets receive a "step-up in basis" to their fair market value at the date of death.

Here is why this matters. Suppose your parent bought stock for $10,000 thirty years ago. It is now worth $200,000. If they sell it during their lifetime, they owe capital gains tax on $190,000 of profit. If they hold it until death and you inherit it, your cost basis becomes $200,000. If you then sell it for $200,000, you owe zero capital gains tax.

The step-up in basis effectively eliminates capital gains on appreciated assets inherited at death. This is one of the most powerful reasons not to rush the transfer of appreciated assets as lifetime gifts — a gift does not receive a step-up in basis, while an inheritance does.

This has a direct implication for how families should think about gifting versus inheriting:

• Gifting appreciated stock while alive: child inherits the parent's original low basis, pays capital gains on the full gain when they sell
• Inheriting the same stock at death: basis steps up to date-of-death value, child may owe little or nothing when they sell

Inherited IRAs and Retirement Accounts: The 10-Year Rule

Retirement accounts are among the most tax-complicated assets to inherit. Since 2020, the SECURE Act changed the rules significantly for most non-spouse beneficiaries.

The 10-Year Rule: If you inherit a traditional IRA or 401(k) from a parent, you must withdraw all of the money within 10 years of their death. Each withdrawal is taxable as ordinary income. There is no requirement to spread withdrawals evenly — but if you wait and take everything in year 10, you could face a very large income tax bill that year.

Planning implication: A parent who has substantial retirement account balances may want to consider Roth conversions — paying tax now to convert traditional IRA money to a Roth IRA. When you inherit a Roth IRA, withdrawals are still subject to the 10-year rule, but they are tax-free because the tax was already paid. Whether a Roth conversion makes sense depends on your parent's current tax bracket versus your expected tax bracket as an heir.

Spouse exception: A surviving spouse who inherits an IRA has different, more favorable rules — they can treat the inherited IRA as their own, delaying required minimum distributions based on their own age.

Trusts and Tax Planning: When They Help and When They Don't

Trusts are often marketed as a tax-savings tool. The reality is more nuanced.

Revocable Living Trusts: No Tax Benefit

A revocable living trust — the most common type — provides no estate or income tax advantages during the parent's lifetime. The trust assets are still part of the taxable estate. The benefit is avoiding probate and maintaining privacy, not reducing taxes.

Irrevocable Trusts: Genuine Tax Planning Tools

An irrevocable trust transfers assets permanently out of your parent's estate. Once assets are in an irrevocable trust, they typically are not part of the taxable estate at death. This can be valuable for estates that exceed the exemption threshold or anticipate future tax law changes.

Common types include:

• Irrevocable Life Insurance Trust (ILIT): Keeps life insurance proceeds out of the taxable estate. Life insurance is frequently overlooked — if a parent owns a $1 million life insurance policy, that $1 million is part of their estate unless it's owned by an ILIT.
• Spousal Lifetime Access Trust (SLAT): One spouse transfers assets to a trust for the benefit of the other spouse. The assets leave the first spouse's estate, but the surviving spouse can still access the funds.
• Charitable Remainder Trust: Provides income during life, with the remainder going to charity at death — the charitable gift creates a partial estate tax deduction.

Setting up irrevocable trusts requires an estate attorney. These are not DIY documents.

What Families Should Do Right Now

You do not need to understand every nuance of tax law. But you do need to create the conditions for a productive conversation with an attorney.

1. Get a rough picture of what your parent owns. List all assets: home value, bank accounts, investment accounts, retirement accounts, and life insurance death benefits. This total is the "gross taxable estate." If it approaches or exceeds your state's estate tax threshold, tax planning is relevant.

2. Find out who owns what. Assets owned jointly with right of survivorship pass directly to the surviving owner — no probate, no estate tax return required. But they still count in the taxable estate.

3. Check beneficiary designations. Retirement accounts and life insurance pass by beneficiary designation, outside the will. A parent who named an ex-spouse as beneficiary twenty years ago may inadvertently leave those assets to the wrong person. This has nothing to do with the will — it overrides it.

4. Ask about gifting systematically. If your parent has more than they need and a taxable estate, annual gifting is one of the simplest strategies. It requires no trust and no attorney.

5. Meet with an estate planning attorney — not a financial advisor. Financial advisors can help with investments and beneficiary designations, but estate tax strategies typically require an attorney. One meeting to review the plan can prevent costly mistakes.

What Goes Into the End-of-Life Planner Workbook

Tracking all of this — accounts, beneficiary designations, trust documents, tax-related decisions — requires a system. The End-of-Life Planning Workbook includes a complete Financial Overview worksheet that lists every account your parent holds along with ownership, beneficiary status, and document location.

It also includes a Document Locator that tells you exactly where the will, trust documents, life insurance policies, and other key papers are stored — so that when you need them, you are not searching through boxes in a crisis.

If your parent's estate involves meaningful assets, start with a conversation about what exists, who it belongs to, and where the documents are. The tax planning comes next — but you cannot plan what you cannot find.

Start documenting your parent's estate with the End-of-Life Planning Workbook — includes financial worksheets, document locators, and step-by-step guidance for adult children.