In most cases, children do not pay federal income tax on inherited savings accounts, but they may owe state-level inheritance taxes depending on location (e.g., PA, NJ, KY, etc.). The IRS does not tax inherited cash, though any interest earned on that money after the transfer is taxable to the beneficiary.
Inheritances are not considered income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
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. Money inherited from a 401(k), 403(b), or IRA is taxable if that money was tax deductible when it was contributed.
To transfer property to children while minimizing taxes, consider estate planning tools like trusts or gifting strategies. Consult a qualified estate attorney to explore options such as lifetime gifts within tax exemption limits or establishing a trust to manage assets.
There are several ways to transfer property to a child tax-free, including leaving it in a will, gifting it using lifetime and annual exclusions, selling it, or placing it in an irrevocable trust.
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.
California does not levy estate or inheritance taxes. That means that if the person with the estate (known as the testator) dies in California and leaves money to beneficiaries, the state won't collect estate or inheritance taxes on it. Those funds are not considered income by California.
No, you are not required to have a beneficiary on a bank account, but it is highly recommended because it allows the funds to bypass probate, providing a quicker, cheaper, and more direct transfer to your chosen person (or charity) after your death, avoiding lengthy court processes and potential family disputes. If you don't name one, the money usually goes to your estate and through probate, following your will or state law, which can delay access for heirs.
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.
Typically, the estate will pay any estate tax owed, with the beneficiaries receiving assets from the estate free of income taxes (see exception for retirement assets in the chart below). As a beneficiary, if you later sell or earn income from inherited assets, there may be income tax consequences.
Ways to reduce Inheritance Tax
Income tax
In most cases, an inheritance isn't subject to income taxes. The assets passed on in an investment or bank account aren't considered taxable income, nor is life insurance.
When someone dies, tax will normally be paid from their estate before any money is distributed to their heirs. Usually when you inherit something, there's no tax to pay immediately but you might have to pay tax later.
Yes, you can gift your son $100,000, but since it's over the 2025 annual exclusion of $19,000, you'll need to file a gift tax return (Form 709), though you likely won't owe taxes unless you've already used up your large lifetime exemption (over $13.99 million in 2025). Your son pays no tax on the gift, but you, as the giver, must report the amount exceeding the annual limit, which counts against your lifetime exemption.
As of 2024, this exclusion is set at $18,000 per individual. This means that you can give up to $18,000 in cash or property to your son, daughter, or granddaughter individually without concern for tax implications. If you and your spouse make a joint gift, the exclusion doubles to $36,000.
If the beneficiary inherits a bank account, they do not pay tax on what is in the account but will be taxed on interest earned, such as on a savings account.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
Ideas for what to do with your inheritance
By far the biggest mistake people make when it comes to IHT Planning is simply not taking action. The issue with IHT and Estate Planning is that it is almost always something that 'can wait' until tomorrow (until it can't of course).
For smaller gifts, an individual taxpayer can benefit from the annual gift tax exclusion, which allows you to gift up to $19,000 per recipient in 2026 ($38,000 for married couples filing jointly) without having to pay taxes. There is no limit to the number of individuals you can gift this amount to in a year.
The most common methods for transferring wealth to another person are via gifts, trusts, and wills. A fourth option, Family Limited Partnership, allows family members to buy shares in a family holding company and transfer assets that way, often income tax-free.