A client came to my office a few years back — I'll call her Dorothy — three months after she'd inherited her mother's house in Stamford. She was ready to sell it, and she'd worked herself into a knot worrying about the tax bill. Her mother had bought that house in 1971 for $38,000. It was worth about $620,000 the day she died. Dorothy assumed she'd owe capital gains tax on nearly $580,000 of appreciation. She'd already mentally written a check to the IRS for six figures.
She owed almost nothing. And the reason why — a quiet little rule called the step-up in basis — is the single most important thing most families don't understand about inheriting property. We'll get to it.
Estate planning for a home isn't really about avoiding taxes, though good planning does that. It's about making sure the people you love don't sit across a desk from someone like me, three months after your funeral, untangling a mess you didn't mean to leave. Let me walk you through the pieces that actually matter — the documents, the tax rules, and the 2026 numbers you need to get right — in plain English.
A note before we start: this is general information, not legal or tax advice for your specific situation. Estate law varies considerably from state to state, and the right move in Connecticut may be the wrong one in Florida. Use this to understand what questions to ask. Then ask them of a professional who knows your state.
Your Will: The Floor, Not the Ceiling
A will is the foundation, but I want to be honest about what it does and doesn't do. It tells the court who gets what. It names a guardian if you're caring for anyone who can't care for themselves. It names an executor to carry out your wishes. What it does not do is avoid probate — the court process of validating your will and settling your estate. Probate can take months, sometimes more than a year, and it's a matter of public record. Costs vary widely by state.
For a home specifically, this matters. If your house passes through your will, it passes through probate. That's not a disaster — millions of homes do exactly that every year — but it's slower and more public than the alternatives we'll cover.
One thing most older wills miss entirely: your digital estate — email, cloud-stored photos, online banking logins, subscription services. I had a woman at one of my workshops ask, "What happens to my Amazon account when I die?" The room went quiet, and I didn't have a good answer. I do now: name a digital executor and leave a secure record of your accounts. If you're new to all of this, our estate planning 101 guide covers the basics before you build from there.
Trusts: Useful, but Not for Everyone
Trusts get oversold. Let me be direct about this — most families do not need a complicated trust, and anyone who tells you everyone does is probably selling something.
A revocable living trust is the common one. You put your house (and other assets) into the trust, you control it completely while you're alive, and when you die, the assets pass to your beneficiaries without going through probate. That's the real benefit: privacy and speed. The catch is that it costs money to set up and you have to actually retitle your assets into it, which people forget to do. An unfunded trust is just an expensive stack of paper.
An irrevocable trust is a different animal. Once you put assets in, you generally can't take them back. The upside is those assets leave your taxable estate, which can matter for very large estates or for Medicaid planning. The downside is loss of control. For most seniors I've worked with, the revocable trust is the more sensible tool — but this is precisely the kind of decision where you want a professional's eyes on your specific numbers.
Beneficiary Designations: The Paperwork That Overrides Your Will
Here's something that surprises people. Your retirement accounts and life insurance don't follow your will at all. They follow the beneficiary form you filled out — possibly decades ago.
I've seen ex-spouses inherit 401(k)s because nobody updated the form after the divorce. I've seen accounts go to a sibling who died years earlier. The will said one thing; the form said another; the form won. Have you checked your beneficiary forms lately? Most people haven't.
Life insurance proceeds generally pass to your beneficiaries income-tax-free. Inherited retirement accounts are a different story, and the rules changed significantly. Under the SECURE Act and SECURE 2.0, most non-spouse beneficiaries who inherit a traditional IRA must now empty the entire account within 10 years. The old "stretch IRA," where a child could draw it down slowly over their own lifetime, is gone for most people.
And there's a wrinkle worth knowing. Under the IRS's final regulations, if the original owner had already started taking required minimum distributions before death, the beneficiary must take annual distributions in years one through nine and empty the account by year 10. If the owner died before RMDs began, only the year-10 deadline applies. Either way, those withdrawals are taxable income to your heir. A spouse who inherits gets more favorable treatment and can usually roll the account into their own. This is genuinely complicated, and the penalty for getting RMDs wrong is a 25% excise tax on the shortfall — so it's worth a conversation with a tax professional.
Powers of Attorney: The Documents You Need Before You Think You Do
A durable power of attorney lets someone you trust manage your finances if you become unable to. Pay the mortgage, manage a rental, handle the bank — all of it. Without one, your family may have to petition a court for conservatorship, which is expensive, slow, and entirely preventable.
I'll tell you about a case that still bothers me. A daughter flew in from Seattle when her father had a stroke. No power of attorney existed. We had to petition the probate court for emergency authority — $3,400 in legal fees, six weeks of paperwork, and her father's mortgage went unpaid during the gap. All of it avoidable with a single document that costs a few hundred dollars to prepare.
Pair the financial POA with a medical power of attorney and advance healthcare directive, which names who speaks for your medical care and spells out your wishes. These don't have property or tax implications, but no estate plan is complete without them. Sign them while you're healthy. The whole point is that you can't sign them once you need them.
The Step-Up in Basis: Why Inheriting Beats Gifting
Now back to Dorothy and her mother's house, because this is the concept that makes inheriting property far better, tax-wise, than receiving it as a gift while someone is alive.
When you inherit an asset, its cost basis — the number the IRS uses to figure your capital gain — resets to the fair market value on the date of death. That's the "step-up." Dorothy's mother bought the house for $38,000. It was worth $620,000 when she died. Dorothy's basis became $620,000. When she sold it shortly after for roughly that amount, her taxable gain was close to zero. Decades of appreciation simply vanished from the tax calculation.
Now compare that to a gift. If Dorothy's mother had instead given her the house while she was alive, Dorothy would have inherited her mother's original basis of $38,000 — no step-up. Selling at $620,000 would have meant a taxable gain of nearly $582,000. Same house. Same daughter. A six-figure difference in tax, depending entirely on whether the house was gifted or inherited.
This is where well-meaning parents make their most expensive mistake. They add a child to the deed or hand over the house early to "avoid probate," not realizing they've thrown away the step-up and possibly created a gift tax filing requirement. Adding a child to a deed has caused real damage I've watched up close — one client's home became entangled in his daughter's divorce because her ex-husband suddenly had a claim to half of it. The legal fees to untangle it exceeded what probate ever would have cost.
The lesson: for an appreciated home, inheriting is usually the tax-smart path. Don't give the house away to dodge probate. There are cleaner ways to handle probate, and they don't cost your kids the step-up.
Capital Gains When You Sell the Home Yourself
What if you sell your own home while you're alive? Here the friend is Section 121 of the tax code. If you've owned and lived in the home as your primary residence for at least two of the last five years, you can exclude up to $250,000 of gain from tax if you're single, or up to $500,000 if you're married filing jointly.
That's a generous exclusion, and for many sellers it wipes out the tax entirely. But I've watched longtime homeowners blow past it. A couple who bought in the 1970s for $60,000 and sells for $900,000 has an $840,000 gain. The $500,000 exclusion leaves $340,000 still taxable. If you're in that situation — and in pricey markets, plenty of seniors are — plan for it before you sign, not after.
If you'd rather tap your home's value without selling, a homeowner 62 or older can look at a reverse mortgage. Run the numbers first with our reverse mortgage calculator to see what's realistically available. It's a tool, not a scam — but like any tool, it can be misused, so understand the terms cold before you commit.
Gifting During Your Lifetime: What the Numbers Actually Are
Lifetime gifting can make sense — to help a grandchild with a down payment, to see your money do good while you're alive to watch it. Just understand the rules.
For 2026, the annual gift tax exclusion is $19,000 per recipient. You can give $19,000 to each of as many people as you like, every year, with no tax filing at all. A married couple can give $38,000 per recipient by combining their exclusions. Give more than that to any one person, and you file a gift tax return (Form 709) — but you almost certainly won't owe tax. The excess simply draws down your lifetime exemption, which brings me to the big number.
For more on passing wealth thoughtfully, our guide on leaving an inheritance for your children walks through the practical steps.
Estate and Inheritance Taxes: The 2026 Numbers
This is the section where old guides will lead you astray, so let me be precise.
For years, the federal estate tax exemption was scheduled to drop by roughly half at the end of 2025, when the 2017 tax law was set to expire. A lot of planning was built around that looming deadline. Then the federal tax law passed in 2025 — the One Big Beautiful Bill Act — changed it. As of 2026, the federal estate and gift tax exemption is $15 million per individual, or $30 million for a married couple, and it's now set to continue, indexed to inflation. If you read an estate guide that still warns about a 2025 sunset to around $7 million, throw it out. That sunset didn't happen.
What does this mean for you? For the overwhelming majority of families, the federal estate tax is simply not a concern. An estate has to clear $15 million per person before a dollar of federal estate tax is owed. Most of us will never come close.
State taxes are a different matter, and this is where geography matters enormously. Most states have no estate or inheritance tax at all. But a number do — as of 2026, roughly a dozen states plus the District of Columbia levy an estate tax, and five states impose an inheritance tax (a tax paid by the person who receives the money, not the estate). Maryland, just to keep us humble, has both. The thresholds vary widely, and several state exemptions are far lower than the federal one. So an estate that owes nothing federally could still owe state tax. This is exactly why "what works in Connecticut may not apply in Florida" is more than a saying — it's the difference between a tax bill and no tax bill.
A letter of intent or an ethical will — a plain, non-legal note explaining your wishes and the reasoning behind them — won't change any of these numbers, but it spares your family a great deal of guesswork and second-guessing. I've seen families argue for years over what someone "would have wanted." A page in your own words prevents most of that.
When to Bring in a Professional
You can handle some of this yourself. A basic will, beneficiary updates, a power of attorney — there are legitimate ways to get those done without spending a fortune. But there's a point where do-it-yourself becomes false economy.
Bring in an estate attorney and a tax professional if your estate is large enough to brush against state tax thresholds, if you own a business or rental property, if you have a blended family, if anyone you're providing for has special needs, or if you're considering an irrevocable trust or Medicaid planning. I know money; an elder law attorney knows the law; you need both, and anyone who claims to do everything well is usually doing none of it well. If you're stepping into a parent's affairs, our guide to selling your parents' house covers that transition with the care it deserves.
Here's where I'll leave you. Estate planning isn't about predicting your death — it's about sparing the people you love a hard job at the worst possible time. Get the documents in place. Check your beneficiary forms this week. Understand the step-up before you give anything away. And review the whole plan every few years, because the laws change — the 2026 exemption numbers are proof of exactly that. You've done harder things than this. And you don't have to figure it out alone.
