Before we look at the estate tax, we should provide a bit of general information about taxation. You might assume that an inheritance would be subject to regular income taxes, but this is not the case. The income does not have to be reported on your annual returns.
There is also a step up in basis that applies to appreciated assets that are bequeathed. For capital gains purposes, the value of the assets would be equal to their value at the time that the inheritor assumed ownership of them. The heir would not be responsible for the gains that took place during the life of the decedent.
Moving on to the estate tax per se, there is a federal estate tax in the United States, and that’s the bad news. The good news is that your heirs are unlikely to be exposed to this tax unless you are extremely wealthy.
It is only applicable on asset transfers that exceed the amount of the exclusion. At the time of this writing, the exclusion amount is over $11 million, and there are ongoing adjustments to account for inflation. The maximum rate of the federal estate tax is a robust 40%, so it is something to be taken seriously if you are a high net worth individual.