Many people worry about taxes when they inherit assets. As an estate planning attorney, I get asked this question all the time. I’m Christopher Small, owner of CMS Law Firm in Washington State, where we specialize in estate planning and probate. Let’s break down what you need to know about inheritance and taxes.

Most Inheritances Are Tax-Free

In general, beneficiaries do not pay income tax on the assets they inherit. This includes:

• Life insurance proceeds – the payout is received tax-free.

• Real estate – heirs benefit from a “step-up in basis,” meaning they typically won’t owe capital gains tax if they sell the property immediately.

• Bank accounts, stocks, and other investments – these are generally transferred without taxes owed at the time of inheritance.

There are a few exceptions, such as certain states with inheritance taxes (Iowa, for example), but these are rare.

When Taxes May Apply

The main exception is retirement accounts, like 401(k)s and traditional IRAs:

• Withdrawals from inherited retirement accounts are subject to income tax.

• The tax applies whether the account is withdrawn by the beneficiary or at the time of death.

This is the primary scenario where a beneficiary might owe taxes on an inheritance.

Key Takeaways

• Most inheritances are received tax-free.

• Life insurance and real estate transfers are generally exempt from income tax.

• Taxes may apply for inherited retirement accounts.

• Always check your state’s rules — some states may have inheritance taxes.

Need Help With Estate Planning?

Understanding inheritance and taxes is just one part of a complete estate plan. If you’re in Washington State and want guidance on protecting your assets, minimizing taxes, or ensuring your estate plan works as intended, visit cmslawfirm.com to schedule a consultation.