Why estate taxes aren’t the only inheritance-related costs to consider
Posted on March 10, 2026
Estate planning often fixates on the federal estate tax exemption, set at $15 million per person in 2026. However, focusing only on the federal estate tax can obscure persistent risks: hidden costs that erode inherited wealth. Many families below the exemption still face significant, avoidable friction. Probate fees, capital gains taxes, and administrative costs can quietly reduce inheritances—often preventable with proper planning.
Federal estate taxes: the exception, not the rule
The federal estate tax is currently levied at a top rate of 40%, but it only applies to assets exceeding the lifetime exemption amount. In 2026, the exemption is at a historically high level, meaning most estates will not owe this tax—yet this does not mean beneficiaries avoid costs. Many common, and often unexpected, expenses occur in estates below the threshold, catching families who assume “no estate tax” means zero costs.
State estate and inheritance taxes: a patchwork problem
Some states impose estate or inheritance taxes at lower exemption levels than the federal government.
For example:
- Massachusetts and Oregon have estate tax exemptions of just $1-2 million.
- New York and Washington State tax estates at rates of 16-35%
- Pennsylvania and Nebraska levy inheritance taxes on heirs, including adult children, in some cases
These state-level rules can significantly reduce the net value beneficiaries receive, and for families with real estate, business holdings, or other assets across multiple jurisdictions, state tax exposure can be layered and complex. This is an area where Topel Forman’s multi-state tax compliance expertise is especially relevant, particularly for clients with ties to both Illinois and Colorado, where state-specific rules can interact in ways that catch families off guard.
Some states also have filial responsibility laws, which can (under certain conditions) hold adult children financially responsible for a parent’s unpaid long-term care expenses. While historically rarely enforced and typically limited to cases involving Medicaid or nursing home debts, a handful of recent cases have raised concerns. For now, this is more the exception than the rule, but one worth monitoring if your family is navigating elder care planning.
Probate: delays, fees, and public disclosure
Even in the absence of an estate tax, the probate process can introduce delays and costs that frustrate heirs and add legal complexity. Probate is the court-supervised process of validating a will, paying off debts, and distributing assets. While fees vary by state, they can include:
- Court filing fees
- Attorney fees (often based on a statutory percentage of the estate)
- Executor commissions
- Appraisal and accounting fees
In states like California and Florida, these fees can reach tens of thousands, especially with real estate or private businesses involved. Probate makes estates public, exposing asset details, beneficiaries, and family matters to scrutiny or litigation.
Capital gains and the step-up in basis
Another overlooked issue is capital gains tax on appreciated assets when they are sold. It’s relatively common for heirs to inherit a house. And while they may not face federal estate taxes on the house, they’ll likely owe some capital gains taxes when the house is sold. Heirs usually receive a step-up in basis to the asset’s value at death. If a home bought for $100,000 is worth $500,000 at death, the heir’s new basis is $500,000. If sold immediately at that price, no capital gains tax applies; if sold for more, gains are taxed. Further appreciation after death is taxable, regardless of the step-up in basis. It’s important to note that not all inherited assets receive a step-up in basis. Tax-deferred retirement accounts, like traditional IRAs, RAs, and 401(k)s, don’t qualify, because they’re subject to income tax when withdrawn.
Capital gains planning should be integrated with estate planning rather than treated as an afterthought.
Administrative friction: the hidden cost of poor planning
Families often prioritize taxes, but administrative burdens can be equally painful.
Without clear documentation, titling, or communication, heirs can face:
- Delays in accessing bank or investment accounts
- Legal disputes among siblings or blended family members
- Confusion around business succession or real estate ownership
These issues are especially common in estates with non-liquid or complex assets, such as art, collectibles, closely-held businesses, or investment real estate. For the multi-generational families and business owners that Topel Forman regularly serves, valuation uncertainty, poorly defined roles, and emotional tensions can lead to real financial losses, even when the estate tax isn’t part of the picture.
Planning beyond the exemption
A well-designed estate plan addresses more than just tax exposure. Key takeaways include: even if your estate is below the federal exemption, you can reduce delays and costs for heirs, lessen state-specific risks, manage capital gains, and coordinate asset transfer more smoothly with careful attention to documentation and communication.
- Avoid or minimize probate through the use of revocable trusts,
- Mitigate state-level estate or inheritance taxes,
- Address capital gains exposure for heirs,
- Clarify how assets will be valued, managed, and distributed,
- Align ownership, titling, and instructions to reduce administrative confusion.
Remember: these are not just tax solutions, but crucial steps to improve your heirs’ experience. Taking proactive action on operational challenges can have a greater impact than minimizing a tax line item. Prioritize comprehensive planning to preserve more of your estate for beneficiaries.
In light of all these potential pitfalls, it’s clear that avoiding tax matters—but avoiding chaos is even better.
Federal estate tax may grab headlines, but for most, it is not the greatest threat to a successful wealth transfer. The real risks often lie in a complex, time-consuming estate process that creates confusion, erodes value, or causes conflicts among beneficiaries. Good estate planning goes beyond tax thresholds. An effective plan aims for clarity, continuity, and control—ensuring your legacy moves forward efficiently and without unnecessary conflict or cost.
Topel Forman’s estate and gift tax planning addresses the full picture from tax exposure and probate avoidance to capital gains and administrative details affecting transfers. If you want to avoid unnecessary costs or ensure a smooth transfer, our team can review your situation, identify tax opportunities, and help protect your wealth across generations.
