Many families assume their heirs will inherit assets tax-free, but recent and upcoming law changes may quietly shrink those windfalls. The combination of sunset provisions, inflation adjustments, and new reporting rules is altering how estates are taxed. Without updates, older estate plans may expose beneficiaries to unexpected bills. Even modest inheritances could trigger capital gains or income taxes under revised thresholds. Staying informed now helps prevent unpleasant surprises later.
The 2026 Estate Tax Reversion
Under the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption doubled temporarily—but it’s set to revert after 2025. Unless Congress acts, the exemption will fall from roughly $13.6 million to about $7 million per person. While that still covers most households, rising property values and investment gains could push more estates over the limit. Families who built plans around current thresholds may now face estate tax exposure. Updating trusts and gifting strategies is essential before the window closes.
Capital Gains Step-Up Rules Under Scrutiny
When heirs inherit appreciated assets, they typically receive a step-up in cost basis, reducing or eliminating capital gains taxes on future sales. Lawmakers have periodically proposed limiting or removing this benefit to raise revenue. Even small adjustments could create major liabilities for families inheriting real estate or stocks. Without the step-up, heirs may owe taxes on decades of appreciation. Monitoring legislative changes ensures your plan reflects current law, not outdated assumptions.
New IRS Reporting Requirements
The IRS now requires estates filing Form 706 to report asset values to both the government and beneficiaries. This transparency aims to prevent underreporting but can reveal higher taxable amounts than families expect. Beneficiaries unaware of these filings may trigger audits or penalties if they sell assets at inconsistent values. Coordinating with estate attorneys and accountants ensures accurate records. The days of informal inheritance handling are over.
State-Level Tax Surprises
While federal thresholds remain generous, twelve states plus D.C. impose their own estate or inheritance taxes—often with far lower exemptions. For example, Oregon’s kicks in at just $1 million. Families who move across state lines or hold property in multiple states can face overlapping taxes. An estate that’s exempt federally might still owe thousands locally. Tailoring your plan to each jurisdiction avoids costly oversights.
Trusts and Beneficiary Designations Need Updating
Many older trusts reference outdated exemption amounts or credit shelter formulas. These provisions may now overfund or underfund sub-trusts, creating inefficiencies or extra taxes. Similarly, beneficiary forms on retirement accounts and life insurance may no longer align with new estate goals. Regular reviews keep designations consistent with current law and family dynamics. A plan that worked five years ago could now backfire.
The SECURE Act’s 10-Year Rule
Inherited IRAs used to allow “stretch” distributions over a beneficiary’s lifetime, minimizing taxes. Under the SECURE Act, most non-spouse heirs must now empty accounts within 10 years. This accelerates taxable income and can push recipients into higher brackets. Trusts designed for lifetime stretches may malfunction under the new rule. Adjusting strategies—like Roth conversions—helps mitigate future tax hits.
Inflation Adjustments Aren’t Keeping Pace
While exemption amounts adjust for inflation, asset growth often outpaces those increases. Rapidly appreciating real estate and investments can push estates beyond protected limits sooner than expected. Without periodic recalculations, families may assume they’re safe when they’re not. Tax creep silently erodes untended plans. Staying proactive prevents wealth from slipping through legislative cracks.
Preparing Before the Window Closes
With major sunset provisions looming in 2026, now is the time for reviews. Gifting assets, revising trusts, and exploring life insurance can all reduce exposure. Working with estate professionals ensures compliance with evolving rules. A few adjustments today can save heirs thousands tomorrow. Waiting until after changes take effect limits your options.
Would you bet your family’s inheritance on laws that might expire in a year? Share your thoughts below.
You May Also Like…
- 7 Estate Planning Moves That Could Actually Hurt Your Family Later
- 10 Estate Planning Errors That Are Completely Legal
- 9 Ways You’re Accidentally Leaving a Tax Burden for Your Family
- Could State Medicaid Recovery Leave Your Children Without an Inheritance?
- How Hidden Arbitration Clauses in Financial Accounts Strip Away Your Legal Rights
Read the full article here
