The executor or personal representative of a deceased person's estate is responsible for paying taxes from the estate’s assets before distributing any money to heirs. These taxes, which may include federal estate taxes (only on very large estates) and income taxes on money earned after death, are paid from the assets.
The executor or the trustee, as applicable, is responsible for filing the required federal and state estate tax returns and ensuring that all taxes are paid from the estate. After confirming no additional liabilities exist, the executor or trustee will distribute the remaining assets to the named beneficiaries.
The federal estate and gift tax exemption has been significantly expanded under the OBBBA. While the 2025 exemption of $13.99 million per individual remains in effect, the exemption increases to $15 million per individual in 2026, with future indexing for inflation.
Although the 1st and the 2nd Estate members did not pay taxes, they nevertheless reaped all of the benefits of a tax-paying country. This tax exemption became a major cause of the extreme inequality between these estates and the 3rd Estate.
1. Transfers and Gifts
The three year rule affects certain gifts and transfers made within three years of death. Here's a straightforward breakdown: If you transfer certain assets or give up control over them within three years of your death, those assets might be included in your estate for tax purposes.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
You can typically inherit a large amount without federal taxes because the tax applies to the deceased's estate, not the recipient, and the exemption is very high: $13.99 million in 2025 and $15 million in 2026 per person, meaning most inheritances fall below this threshold. The key is that the estate's total value must exceed these limits for any tax to be owed by the estate. Inheritances themselves (cash, property) are generally not income, but earnings on them (like interest/dividends) or pre-tax retirement funds (like IRAs) are taxable.
When a person passes away, the beneficiaries who inherit assets under a will are not required to pay tax on the value of the estate. However, while there is no direct tax on the inheritance itself, there may still be tax obligations for the estate and the beneficiaries.
The main difference is who pays the tax: an estate tax is paid by the deceased's estate before assets are distributed, levied on the total value of the estate, while an inheritance tax is paid by the beneficiaries (heirs) on the assets they receive, based on their share and relationship to the deceased. The U.S. has a federal estate tax (not inheritance), but only a few states impose an estate tax, while some states impose an inheritance tax instead.
Generally, beneficiaries do not pay income tax on money or property that they inherit, but there are exceptions for retirement accounts, life insurance proceeds, and savings bond interest.
Most debt is paid by the estate and assets of the deceased
It could be credit card debt, medical bills, and/or a mortgage on a home, among other things. When someone dies, all of their belongings enter their estate and go into the probate process.
You can typically inherit a very large amount from your parents before hitting federal estate tax thresholds, which are around $15 million per individual in 2026, meaning most heirs receive tax-free inheritances because estates rarely exceed this limit; however, some states have their own estate or inheritance taxes, and income from inherited assets (like IRAs or rental income) is usually taxable, according to this U.S. Bank article, this Fidelity article, this Domain Money article, and this Tax Foundation article.
Beneficiaries generally do not pay income tax on the principal amount of inherited cash or bank accounts, but they do pay taxes on any interest earned after the date of death, and on certain pre-tax retirement funds (like traditional IRAs). State laws vary, with some states having specific inheritance or estate taxes, while federal estate tax usually falls on the estate itself, not the beneficiary.
Capital gains tax (CGT) is paid either by the deceased estate or by the beneficiary. Never both. But which one applies depends on who sells the asset and when. This distinction matters more than people realise.
In general, executors are expected to distribute assets within several months to a year, though larger or contested estates may take longer. Probate courts often set deadlines for filings, but final distribution typically occurs only after debts, taxes and administrative expenses are settled.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
You can typically inherit a large amount without federal taxes because the tax applies to the deceased's estate, not the recipient, and the exemption is very high: $13.99 million in 2025 and $15 million in 2026 per person, meaning most inheritances fall below this threshold. The key is that the estate's total value must exceed these limits for any tax to be owed by the estate. Inheritances themselves (cash, property) are generally not income, but earnings on them (like interest/dividends) or pre-tax retirement funds (like IRAs) are taxable.