Inheritance
Assets — money, property, or investments — passed from a deceased person to heirs or beneficiaries, either through a will, trust, or state intestacy laws.
What is Inheritance?
Inheritance refers to the assets transferred from a deceased individual to their heirs or beneficiaries. Assets may pass through a will (testate succession) directing specific gifts to named beneficiaries, through a revocable or irrevocable trust that bypasses probate, through beneficiary designations on financial accounts (IRAs, life insurance, 401(k)s) that pass directly to named beneficiaries outside the will, or — when no will exists — through state intestacy laws that determine the distribution order (typically spouse, then children). Inherited assets generally receive a 'step-up in basis' for tax purposes: the cost basis is reset to the fair market value at the date of death, eliminating capital gains taxes on appreciation during the original owner's lifetime. Inherited IRAs and retirement accounts have their own rules (typically requiring distributions within 10 years for non-spouse beneficiaries under the SECURE Act 2.0). Federal estate taxes apply only to estates above the exemption threshold — $13.61 million per person in 2024.
Example
A parent purchased Apple stock for $10,000 in 2005; it grew to $200,000 by their death in 2024. Their child inherits the stock with a stepped-up basis of $200,000 — the fair market value at death. If the child immediately sells, they owe zero capital gains tax on the $190,000 of appreciation. Without the step-up, they would owe tax on the full gain. This is why 'hold until death' is a powerful estate planning strategy for appreciated assets.