Inheritance Tax When Both Parents Die

Why Tax Changes When the Second Parent Dies

When the first parent dies, many assets pass to the surviving spouse without immediate estate or inheritance tax, and eligible Canadian assets can roll over to defer capital gains. In the US, the unlimited marital deduction generally defers federal estate tax on assets passing to a spouse. In the UK, assets passing between spouses are generally exempt from inheritance tax.

When the second parent dies, those spousal deferrals no longer apply to assets passing to children. Whether tax is due depends on the assets, their value, and the rules in the relevant country and state.

United States: Federal Estate Tax and State Inheritance Taxes

The federal estate tax basic exclusion amount is $15 million per individual for deaths in 2026; tax can apply to a taxable estate above that amount. If both spouses die in 2026 and portability is properly elected — allowing a surviving spouse to claim the deceased spouse's unused exclusion — a married couple's combined exclusion can reach roughly $30 million. Most American families won't owe federal estate tax.

Iowa repealed its inheritance tax for deaths on or after January 1, 2025. The five states that currently impose inheritance taxes are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Several more impose state estate taxes with thresholds far lower than the federal exemption. Maryland is the only state that imposes both. The state where the deceased lived, the state where any real property is located, and the beneficiary's relationship to the deceased all affect whether state-level taxes apply.

The stepped-up basis. Many inherited capital assets, such as a home or taxable investments, generally receive a new tax basis equal to fair market value at the owner's death. The adjustment applies to the property interest included in the estate; retirement accounts and other income-in-respect-of-a-decedent assets follow separate tax rules. If a house with a $100,000 basis is worth $600,000 when the second parent dies, an heir who receives the whole house generally takes a $600,000 basis. If they sell it for $610,000, they generally pay capital gains tax on $10,000 — not $510,000. This is one of the most valuable tax provisions in US law, and eligible assets generally receive a basis adjustment at death.

United Kingdom: Inheritance Tax

UK inheritance tax (IHT) is 40% on estate values exceeding the £325,000 nil-rate band. Married couples can transfer the unused portion of the nil-rate band to the surviving spouse, and the residence nil-rate band (£175,000 per person for homes passed to direct descendants) can bring the effective threshold for a married couple up to £1 million.

When both parents die simultaneously or in circumstances where the order of death is uncertain, the Commorientes Rule applies — the elder parent is deemed to have died first. But for IHT purposes, Section 4(2) of the Inheritance Tax Act 1984 overrides this rule: simultaneous deaths are treated as occurring at the same instant, preventing assets from passing through both estates and being taxed twice in rapid succession.

Quick succession relief also applies if the second parent dies within five years of the first. Tax already paid on the first death is partially credited against the second estate's IHT bill, on a sliding scale: 100% credit within the first year, down to 20% in year five.

Canada: No Inheritance Tax, But Capital Gains at Death

Canada doesn't impose an inheritance or estate tax. Instead, the Income Tax Act treats death as a "deemed disposition" — capital property is generally considered sold at fair market value immediately before death. This can trigger capital gains tax on appreciation in investments, secondary real estate, businesses, and other assets. A qualifying principal residence may be exempt under the principal residence rules.

For the second parent's death, this means every deferred gain from the first parent's spousal rollover is now realized. If the first parent's investment portfolio rolled to the surviving spouse at its original cost base, and the portfolio has doubled by the time the second parent dies, the full gain is taxable on the second death's final tax return.

RRSPs and RRIFs are fully included in the deceased's income in the year of death unless they roll to a qualifying beneficiary (surviving spouse, financially dependent child, or financially dependent infirm child). After both parents have died, the full RRSP/RRIF value is included in the second parent's final tax return, which can push the estate into the highest marginal tax bracket.

Retirement Accounts: The SECURE Act Rules

In the US, the SECURE Act changed the rules for inherited retirement accounts. Most non-spouse adult children who inherit an IRA from someone who died after 2019 must distribute the full balance by the end of the tenth year after the owner's death. If the owner had reached the required beginning date for distributions, annual required minimum distributions generally also apply in years one through nine; if not, the entire balance can generally be deferred until year ten. Special rules apply to eligible designated beneficiaries.

When the first parent dies and names the surviving spouse as IRA beneficiary, the spouse can roll the IRA into their own account and continue deferring taxes. When the second parent dies, the children inherit under the 10-year rule. For large retirement accounts, this can create a significant tax planning challenge — distributing $500,000 or more over 10 years in a way that minimizes the total tax burden.

Roth IRAs generally follow the same 10-year distribution deadline for adult children, but inherited Roth distributions are tax-free only when the applicable five-tax-year holding requirement is met; otherwise, earnings may be taxable.

What the Executor Needs to Do

File final personal tax returns for each parent (Form 1040 in the US, SA return in the UK, T1 in Canada), due by the normal filing deadline of the year after death.

File estate tax returns if required. In the US, Form 706 is generally due nine months after the date of death, and an extension of up to six months is available to file. Estate tax is generally still due within nine months unless the IRS grants an extension to pay. In the UK, IHT is due six months after the end of the month of death.

Request a tax clearance certificate before making final distributions. This confirms that the estate has no outstanding tax liability. Distributing assets before receiving clearance exposes the executor to personal liability for any subsequently assessed taxes.

Get professional help. Tax planning for a dual-parent estate — especially one with assets in multiple jurisdictions, retirement accounts, appreciated real property, and business interests — is not a DIY project. The cost of a tax attorney or CPA is a legitimate estate expense that can save beneficiaries far more than it costs.

For a complete timeline of tax filing deadlines, estate settlement milestones, and financial administration steps, the When Both Parents Die guide covers the full first-year process with jurisdiction-aware guidance for the US, UK, Canada, and Australia.