Inheriting an Estate: Understanding the Tax Consequences for Beneficiaries
Inheriting money or property can be a blessing—but it can also come with tax responsibilities. While some inheritances are tax-free, others may come with significant obligations depending on the size and type of the estate.
This article breaks down the key tax issues beneficiaries might face when they inherit assets.
State Income Taxes
Tennessee does not currently have a state income tax. This means that if you live in Tennessee and inherit money or property, you will not owe state income tax on your inheritance.
However, if you live in a different state, you may be subject to your state’s tax laws. Some states do tax certain types of inheritance, so it’s important to check your local rules.
Inheritance Taxes
Inheritance taxes are paid by the person receiving the inheritance—not by the estate. Whether you owe this tax depends on where the person who passed away lived or owned property.
If the deceased lived in a state with no inheritance tax, you don’t owe any inheritance tax—even if you live in a state that does have one.
Tennessee repealed its inheritance tax in 2016. As of 2025, the following states still have inheritance taxes:
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania
If your loved one lived or owned property in one of these states, you may need to pay an inheritance tax.
Federal Estate and Gift Taxes
The federal estate tax is paid by the estate itself—not the beneficiary.
This tax is only applied if the estate's total value is above a certain threshold. In 2025, the federal estate tax exemption is $13.99 million per person. If the estate is worth more than this, the excess amount may be taxed at up to 40%.
Important note: This large exemption is scheduled to drop on December 31, 2025, down to $5 million per person, adjusted for inflation—unless Congress changes the law.
Gift Tax Exclusion
The federal gift tax exclusion allows individuals to give away up to $19,000 per person, per year in 2025 without triggering gift taxes or using up their lifetime exemption.
This is a useful tool for families who want to reduce the size of their taxable estate over time.
Federal Income Taxes
Most inherited assets—like cash, real estate, or stocks—are not considered income and are not taxed when you receive them.
However, any income generated from those assets is taxable. For example:
Dividends from inherited stocks
Rental income from inherited property
If you inherit a retirement account, you’ll likely need to follow required minimum distribution (RMD) rules. These rules determine how quickly you must withdraw the money—and these withdrawals are taxable income.
In most cases, beneficiaries must withdraw the entire retirement account within 10 years.
Capital Gains Taxes
Capital gains taxes may apply when you sell an inherited asset—like a home or stock—and make a profit.
Fortunately, inherited assets usually receive a step-up in basis, which means the value of the asset is adjusted to its market value at the time of the decedent’s death.
Example:
Let’s say your parents bought a house for $100,000 years ago, and it’s now worth $700,000. If they sold it while alive, they might owe capital gains tax on the $600,000 profit.
But if they pass it down through inheritance, you receive a stepped-up basis of $700,000. If you sell the home for that same amount, you owe no capital gains tax.
If you sell it later for $950,000, you’d pay capital gains tax on the $250,000 increase since you inherited it.
Generation-Skipping Transfer (GST) Taxes
The GST tax applies when property is transferred to someone who is more than 37.5 years younger than the person giving the gift—often a grandchild or great-grandchild.
This tax prevents wealthy families from avoiding estate taxes by skipping generations.
In 2025, the GST exemption is $13.99 million per person. Like the estate tax, this exemption is set to drop to $5 million (plus inflation) on January 1, 2026, unless new laws are passed.
If the GST tax applies, it’s charged at a flat rate of 40% on the amount that exceeds the exemption.
Inheritances can bring joy, but they can also bring tax complexity. Understanding how taxes may affect you—before you receive an inheritance—can help you plan wisely.
To protect your wealth and ensure a smooth transfer of assets, it’s crucial to work with an experienced estate planner.