Estate Tax After Second Parent Dies: IRA Rules, Capital Gains, and What to File

Why the Second Parent's Death Changes the Tax Picture

When the first parent dies, assets typically pass to the surviving spouse under the unlimited marital deduction — no federal estate tax, no immediate capital gains event, and inherited retirement accounts can be rolled into the surviving spouse's own IRA. The tax bill gets deferred, not eliminated.

When the second parent dies, the marital deduction no longer applies to transfers from that parent. Federal estate tax may apply if the taxable estate exceeds the available exclusion, while inherited retirement accounts follow separate income-tax distribution rules. Many inherited capital assets receive a basis adjustment at death, subject to exceptions. These are separate tax questions that may arise after the second death.

Federal Estate Tax: The Exemption and Portability

The federal estate tax basic exclusion for 2026 is $15 million per individual. A married couple can potentially shelter up to $30 million through portability — the surviving spouse can use any unused portion of the deceased spouse's exclusion, but portability generally requires the first estate to file IRS Form 706.

If your parents' estate planner filed Form 706 when the first parent died, the surviving parent's estate may have access to both exclusions. If not, the estate may still qualify for simplified late-election relief by filing Form 706 within five years of the first parent's death and meeting the IRS requirements; otherwise, only the second parent's individual exclusion applies.

For estates below the federal exclusion: no federal estate tax is generally owed. State-level estate taxes may apply at lower thresholds — Oregon starts at $1 million and Massachusetts at $2 million. Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose inheritance taxes for some beneficiaries; exemptions and rates depend on the state and the beneficiary's relationship to the decedent. Iowa's inheritance tax does not apply to deaths on or after January 1, 2025.

Check both the state where your parents lived and any state where they owned real property. Property in another state can create separate probate or tax requirements where it is located.

Inherited IRA and Retirement Account Rules

The SECURE Act of 2019 (and SECURE 2.0 in 2022) fundamentally changed how inherited retirement accounts work for non-spouse beneficiaries. When the second parent dies:

The 10-year rule applies to most non-spouse beneficiaries. Adult children generally must fully distribute an inherited IRA or 401(k) within 10 years of the account holder's death. A lifetime distribution schedule remains available to certain eligible designated beneficiaries.

Required minimum distributions (RMDs) may apply within the 10-year window. If the parent died on or after their required beginning date, beneficiaries generally must take annual distributions during years 1–9 and empty the account by the end of year 10. If the parent died before that date, annual RMDs generally are not required during the 10-year period, but the account must still be emptied by the end of year 10. The account's rules and the beneficiary's category can affect the schedule.

Tax planning matters. If both parents' retirement accounts pass to you simultaneously, you could receive two inherited IRAs with overlapping 10-year clocks. Distributing strategically — taking larger amounts in years when your other income is lower, spacing withdrawals across the full decade — can save meaningful amounts in federal and state income tax.

Roth IRAs follow the same 10-year rule but with different tax treatment. Inherited Roth distributions are generally tax-free when the five-year holding-period requirement is met; if it is not met, earnings may be taxable. The 10-year clock still applies, but there is no tax reason to rush qualified withdrawals.

Stepped-Up Basis and Capital Gains

Many inherited capital assets generally receive a new cost basis tied to fair market value at the date of death, but exceptions apply. This is significant for assets held for decades — if the family home bought in 1985 for $120,000 is worth $650,000 at death and that value is used as its basis, selling it near that value would generally leave little or no capital gain.

For assets that passed to the surviving parent at the first death (via marital deduction or joint ownership), the basis treatment depends on the state:

Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin): both halves of community property receive a full stepped-up basis at the first spouse's death. The surviving spouse's half also steps up, not just the deceased's half.

Common law states (the remaining 40 states): generally, only the deceased spouse's share of jointly held property receives a stepped-up basis at the first death. The result depends on how the property was owned and applicable state law; the surviving spouse's share may retain its prior basis until the second death.

The practical implication: in a common law state, the basis adjustment at the second death may apply only to the decedent's includible interest, while the other share may retain an earlier basis. The result depends on how the home was owned and applicable tax rules. Talk to a tax professional before selling — the difference can be tens of thousands of dollars.

What Needs to Be Filed

After the second parent's death, the executor faces several filing obligations:

• Final individual income tax return (Form 1040) for the second parent, covering January 1 through the date of death
• Estate income tax return (Form 1041) if the estate has gross income of $600 or more for the tax year, or another filing requirement applies
• Federal estate tax return (Form 706) if required based on the estate's value, or to elect portability where applicable
• State estate or inheritance tax returns as applicable
• Inherited retirement account beneficiary designation forms with each custodian

Deadlines vary. The final 1040 is generally due by April 15 of the year following death. Form 706 is due nine months after death; a six-month extension to file is available, but it does not extend the time to pay any estate tax due. State deadlines differ.

If you are managing both parents' estates simultaneously — overlapping probate timelines, multiple retirement accounts, real property in different states — the When Both Parents Die toolkit includes an estate timeline tracker and administrative checklists that sequence these obligations against the first-year calendar, accounting for the cognitive impairment that makes every deadline harder to track.

Get a CPA or tax attorney involved early. The cost of professional guidance on inherited retirement account distributions and estate tax elections is typically a fraction of the tax savings they identify.