What Amount of Inheritance Is Tax Free? 2026 Thresholds for California and Washington Families

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

There is no federal inheritance tax, and neither California nor Washington taxes heirs on what they inherit, so in most cases the full amount your children receive is free of inheritance tax. The tax that can apply is an estate tax, charged to the estate before anything is distributed: federally only above $15,000,000 per person for 2026, and in Washington above $3,076,000 or $3,000,000 in 2026 depending on the date of death. California has no estate tax at all.

For a two-earner family in the Bay Area or Seattle, the real questions are narrower. Will Washington’s estate tax reach you? And which inherited accounts will your kids eventually owe income tax on?

Inheritance tax vs. estate tax: who actually pays

An inheritance tax is charged to the person who receives the money. An estate tax is charged to the estate of the person who died, before heirs receive anything. Washington’s Department of Revenue puts it plainly: “Washington does not have an inheritance tax. Washington does have an estate tax” (WA DOR estate tax FAQ). California has neither (California State Controller). A few other states do tax heirs, but that only matters to your children if they inherit from someone who lived in one of those states.

An inheritance is also generally not income to the person who receives it. Your kids do not report the money itself on a tax return. They owe tax later on income the inherited assets produce, on gains after the date of death, and on withdrawals from inherited pre-tax retirement accounts.

The thresholds that matter for 2026

The federal figure comes from the One Big Beautiful Bill Act, which set the basic exclusion at $15,000,000 for 2026, indexed for inflation from 2027 (IRS, What’s new, estate and gift tax). Older articles warning that the exemption would fall to about $7 million in 2026 are out of date. With a portability election, a married couple can shelter up to $30,000,000 federally.

Washington is the outlier. Its exclusion is about a fifth of the federal one, and the DOR is explicit that “Washington law does not have, nor does it incorporate, the federal provisions of portability for estate tax.” Each spouse’s exclusion is used at that spouse’s death or lost. The Washington return and payment are due nine months after the date of death (WA DOR estate tax).

Worked example: the same $7 million family in Bellevue and in Palo Alto

Assumptions: married parents, two children aged 6 and 9, household income about $1.2 million. Net worth $7,000,000 after debts and final expenses: a $2,500,000 home, $2,500,000 in a brokerage account holding vested RSU shares, and $2,000,000 in 401(k)s. To keep the math on one rate table, assume both deaths fall between January 1 and June 30, 2026 (Washington exclusion $3,076,000, rates from DOR Table W). Everything passes to the surviving spouse first, then to the children.

How the Bellevue numbers work. With simple wills, the first death is sheltered by the marital deduction, but the first spouse’s Washington exclusion is wasted. At the second death the estate is $7,000,000, less the $3,076,000 exclusion, leaving $3,924,000 taxable. Table W charges 10% on the first $1,000,000, 15% on the next $1,000,000, 17% on the next $1,000,000 and 19% on the remaining $924,000, which is $595,560. If the first spouse’s will instead leaves $3,076,000 to a trust for the survivor and the kids (often called a credit shelter or bypass trust), that amount is excluded at the first death and stays outside the survivor’s estate. The second estate is then $3,924,000, of which $848,000 is taxable at 10%. Same family, same assets: the difference is about $510,000, and it comes from how the wills are drafted.

The example ignores investment growth between the two deaths, which makes the gap larger in practice. For a young family, the trust structure matters even more because the survivor may live for decades.

What your kids may owe income tax on later

Taxable accounts and the home: the basis step-up

Inherited property generally takes a basis equal to its fair market value on the date of death (IRS FAQ, gifts and inheritances). If RSU shares that vested at $800,000 are worth $2,500,000 at death, your children can sell them the next week with little or no taxable gain. California taxes capital gains as ordinary income with no lower rate, so avoiding that gain is worth a lot to a California heir.

California and Washington are both community property states. When one spouse dies, “the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property” (IRS Pub 555). The surviving spouse gets a full step-up on community assets, not just half. That is a reason to be careful before selling a highly appreciated position late in life or retitling community assets as separate property.

401(k)s and traditional IRAs: taxed when withdrawn

Pre-tax retirement money is the one inheritance that is taxed as income. For most non-spouse beneficiaries, the entire account must be withdrawn within ten years (IRS RMD FAQs). The account owner’s own minor child is an exception until reaching the age of majority, then the ten-year clock starts (IRS Pub 590-B). A $2,000,000 401(k) left to a child who is a high earner in her own right could be withdrawn at her top rate. Inherited Roth accounts are generally tax-free to the heir, which is one reason high earners use the mega backdoor Roth when their plan allows it.

The decision your family actually has to make

• If you live in Washington and your combined net worth, including home equity, retirement accounts and life insurance you own, is above about $3,000,000, ask your estate attorney whether your wills or trust use both spouses’ Washington exclusions. Life insurance you own on your own life is generally counted in your federal gross estate (IRC §2042), so a large term policy can push a young family over the line.
• If you live in California, the only estate tax is federal, and for 2026 it applies only above $15,000,000 per person (up to $30,000,000 for a married couple that elects portability). Your planning is mostly about guardianship, trusts for minor children and beneficiary designations, not tax.
• In both states, check every beneficiary designation. Retirement accounts and life insurance pass by beneficiary form, not by your will. Naming a minor child directly usually means a court-supervised guardianship of the money. Naming a trust is often cleaner (how to name a trust as beneficiary).
• If you have moved between states, confirm where you are domiciled. Moving from Washington to California, or the reverse, changes the estate tax answer.

Common mistakes

• Assuming Washington works like the federal system. Without portability, “leave everything to my spouse” can waste the first spouse’s entire Washington exclusion ($3,000,000 or more in 2026).
• Leaving an account to a young child outright. In California, a custodial transfer under a will or trust can be delayed to no later than age 25, but only if the document says so (Cal. Probate Code §3920.5). See also what happens to a UTMA at 21.
• Gifting appreciated stock to children during life to “avoid inheritance tax.” A lifetime gift carries over your low basis. Holding the stock until death may give your heirs a step-up instead.
• Relying on figures from before 2025. Both the federal exemption and Washington’s rules have changed recently.

What to write down for your kids

A trust tells a trustee when to pay. It does not tell your children why you built it, what you hoped the money would be for, or how you decided between spending, saving and giving. As Kevin Luu puts it: “Your kids will inherit your money. Will they inherit your judgment?” Alongside the estate documents, keep a short letter or Decision Memo that explains the choices behind them: who the trustee is and why, what age you picked for distributions and why, and what you would want a 25-year-old to consider before touching the money.

Frequently asked questions

Do I have to pay tax if I inherit $1 million?

Not on the inheritance itself. There is no federal inheritance tax, and California and Washington do not tax heirs. You may owe income tax later on gains after the date of death, on dividends and interest, and on withdrawals if part of the $1 million is a traditional IRA or 401(k). The estate may owe Washington estate tax before distribution if it is above the Washington exclusion.

Is there a 7-year rule for inheritance tax in the US?

No. The seven-year rule belongs to the UK system. In the US, gifts above the $19,000 annual exclusion (2026) per recipient are reported on Form 709 and reduce the giver’s lifetime $15,000,000 exclusion, whenever they were made. They do not become tax-free after a set number of years.

Does my child pay tax on life insurance they inherit?

Life insurance proceeds paid because of the insured’s death are generally not taxable income to the beneficiary. The issue is the estate side: if you own the policy, the death benefit is generally counted in your estate, which can matter in Washington. Some families hold large policies in an irrevocable trust for this reason.

Next step

Add up what you own, including home equity, retirement accounts and the face value of any life insurance you own, and compare it with the thresholds above. If you live in Washington and the total is above $3,000,000, take the number to your estate attorney and ask how your documents use both exclusions. Our estate planning and tax management teams at Age Five Family Office™ work alongside your attorney on exactly this, and the family governance work covers the letter to your kids. Related reading: how to calculate inheritance tax step by step and questions to ask an attorney about inheritance.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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