Author: AskMyFinance Editorial Team

A Family Limited Partnership (FLP) is a legal entity formed by family members to hold and manage assets together — typically investment portfolios, real estate, or business interests. Beyond family governance and asset management, FLPs are used as an estate planning tool because they can reduce the taxable value of assets transferred to heirs through valuation discounts. They are a legitimate but scrutinized strategy that requires careful setup and ongoing compliance.

How a Family Limited Partnership Works

An FLP has two classes of partners:

• General partner (GP): Controls the management of the partnership — investment decisions, distributions, and operations. Parents or a holding company they control typically hold the general partner interest, often a small percentage (1–2%) of the total FLP.
• Limited partners (LP): Own most of the economic interest in the FLP but have no management authority. Parents transfer limited partnership interests to children or trusts for children over time, using the annual gift tax exclusion and/or lifetime exemption.

The key tax benefit: limited partnership interests are worth less than the equivalent pro-rata value of the underlying assets because LPs have no control and no ability to force liquidation. This discount — called the lack of control (minority interest) discount combined with a lack of marketability discount — can reduce the taxable value of transferred interests by 15%–40%, allowing more assets to be transferred within a given gift or estate tax budget.

Valuation Discounts: The Core Estate Planning Mechanism

Imagine an FLP holds $10 million in investment assets. A 10% limited partner interest would have a pro-rata value of $1 million. But because the 10% LP has no control over distributions or management and cannot easily sell their interest to an outside buyer, an independent appraiser may value it at $650,000–$800,000 — a 20%–35% discount to pro-rata value. When you gift or transfer that 10% interest to a child, the taxable gift is $650,000–$800,000, not $1 million. Over time and across multiple transfers, these discounts can substantially reduce the taxable estate.

FLP vs. Family LLC

A Family Limited Liability Company (FLLC) is a close cousin of the FLP and serves similar estate planning purposes. The key differences:

• FLPs require a general partner with unlimited liability (often mitigated by placing the GP interest in a corporation or LLC). FLLCs have no such issue — all members have limited liability.
• Both allow valuation discounts for minority/non-controlling interests.
• FLLCs are increasingly preferred over FLPs because of the simpler liability structure.

IRS Scrutiny: The Line Between Planning and Abuse

The IRS closely examines FLPs because valuation discounts reduce estate and gift taxes. Courts have repeatedly upheld FLPs that are properly structured and operated. They have also collapsed FLPs — including the assets back in the estate — when:

• The FLP had no legitimate business purpose beyond tax avoidance
• The parents transferred personal assets (rather than business assets) and continued to use them personally
• The FLP was not respected as a real legal entity (no separate accounts, no annual meetings, no formal distributions)
• Assets were transferred to the FLP on the deathbed or shortly before death

To withstand IRS scrutiny, an FLP must have a legitimate non-tax reason to exist — managing family investment assets, maintaining family control over a business, protecting assets from creditors — and must be operated as a real partnership with proper formalities.

Legitimate Non-Tax Benefits of an FLP

• Centralized management: One decision-maker manages the portfolio for the whole family, avoiding fragmentation when assets pass to multiple heirs.
• Asset protection: Creditors of limited partners generally cannot seize FLP assets — they can only obtain a “charging order” against the LP’s economic interest, making the FLP a less attractive target.
• Gradual wealth transfer: Parents can transfer limited partnership interests systematically over years using the annual exclusion, with valuation discounts making each year’s gifts larger in real economic terms.

Costs and Complexity

Setting up an FLP typically costs $3,000–$10,000 in legal and accounting fees, plus ongoing annual costs for partnership tax returns (Form 1065), independent appraisals of transferred interests, and record-keeping. The tax return preparation and appraisal requirements make FLPs more expensive to maintain than simpler strategies. For smaller estates, the cost may outweigh the benefit.

Who Benefits Most from an FLP?

FLPs make the most sense for:

• High-net-worth families with estates above the gift and estate tax exemption ($13.99 million per individual in 2026)
• Family businesses where maintaining management control during the transition to heirs is important
• Families with significant real estate or investment portfolios who want centralized management and asset protection

Bottom Line

A properly structured FLP can significantly reduce the taxable value of wealth transferred to the next generation through legitimate valuation discounts, while also providing non-tax benefits like centralized management and creditor protection. The IRS scrutiny means proper setup — with independent appraisals, real business purpose, and ongoing compliance — is essential. Consult an estate planning attorney experienced with FLPs before proceeding.

The SECURE Act 2.0, signed into law in December 2022, is the most sweeping overhaul of retirement savings rules in years. It builds on the original SECURE Act of 2019 and introduces dozens of changes affecting required minimum distributions, catch-up contributions, employer plans, and more. Many provisions are phasing in through 2024, 2025, and 2026. Here is what you need to know — and what changed from the original rules.

RMD Age Increased to 73 (and Eventually 75)

The original SECURE Act raised the required minimum distribution (RMD) age from 70½ to 72. SECURE 2.0 raised it again:

• If you were born between 1951 and 1959: your RMD age is 73
• If you were born in 1960 or later: your RMD age will be 75 (beginning in 2033)

This gives pre-retirees more years of tax-deferred growth before mandatory distributions begin. If you turned 72 in 2023 and had already started RMDs, you continue taking them — this change does not allow you to stop once you have started.

Reduced Penalty for Missing RMDs

The penalty for failing to take a required minimum distribution was cut from 50% to 25% of the undistributed amount. If you self-correct within two years, the penalty drops to 10%. This is still a significant penalty, but it is meaningfully less draconian than before.

Roth 401(k) RMDs Eliminated

Before SECURE 2.0, Roth 401(k) accounts were subject to RMDs during the account owner’s lifetime — unlike Roth IRAs, which had no lifetime RMDs. Starting in 2024, Roth 401(k) accounts are no longer subject to lifetime RMDs, bringing them in line with Roth IRAs. If you have a Roth 401(k) and were taking RMDs, you no longer have to. If you were waiting to convert to a Roth IRA to avoid RMDs, that is no longer necessary.

Catch-Up Contributions: Higher Limits for Ages 60–63

Starting in 2025, workers aged 60, 61, 62, and 63 can make enhanced catch-up contributions to workplace retirement plans. For 2026:

• Standard catch-up contribution (age 50+): $7,500 to a 401(k)
• Super catch-up (ages 60–63): $11,250 — 150% of the standard catch-up amount

This super catch-up applies to 401(k), 403(b), and governmental 457(b) plans. IRA catch-up limits are different — the IRA catch-up for those 50 and older is $1,000 (indexed for inflation starting in 2024, though the increase is tied to CPI adjustments).

Catch-Up Contributions Must Be Roth for High Earners

Employees earning more than $145,000 in the prior year (indexed for inflation) must make catch-up contributions on a Roth basis starting in 2026. This means high-income catch-up contributors will no longer get an immediate tax deduction for catch-up amounts — contributions will be after-tax with tax-free growth. The IRS delayed full implementation of this rule, so confirm your plan’s rules for the current year.

Emergency Savings Accounts Linked to 401(k) Plans

SECURE 2.0 created a new type of emergency savings account that employers can add to their 401(k) plans starting in 2024. Non-highly-compensated employees can contribute up to $2,500 per year to a Roth-style emergency account. Withdrawals for any reason are penalty-free. This bridges the gap between emergency funds and retirement savings.

Student Loan Repayments Can Trigger Employer Match

Starting in 2024, employers may treat student loan payments made by an employee as if they were 401(k) contributions for purposes of the employer match. If your employer offers this benefit, making a $500 student loan payment could trigger a matching contribution to your 401(k) — even if you contributed nothing to the plan itself. This helps workers who cannot afford to contribute to retirement while paying off loans.

529 Plans Can Roll Over to Roth IRAs

Starting in 2024, unused 529 plan funds can be rolled into a Roth IRA for the 529 account beneficiary, subject to rules:

• The 529 account must have been open at least 15 years
• The rollover is limited to the annual Roth IRA contribution limit ($7,000 in 2026, plus $1,000 catch-up if eligible)
• The lifetime rollover limit is $35,000 per beneficiary
• Contributions to the 529 made in the past five years cannot be rolled over

This gives 529 account holders a new exit valve for leftover funds that avoids the 10% penalty and taxes on non-qualified withdrawals.

Auto-Enrollment in New 401(k) Plans

New 401(k) and 403(b) plans established after December 29, 2022 must automatically enroll eligible employees at a minimum 3% contribution rate, scaling up 1% per year to at least 10% (maximum 15%). Employees can opt out. This applies to new plans only — existing plans are grandfathered. The goal is to boost retirement savings participation rates through behavioral defaults.

Qualified Longevity Annuity Contracts (QLACs) Enhanced

SECURE 2.0 increased the amount you can invest in a QLAC (a deferred annuity inside an IRA that starts paying at age 80 or 85) to $200,000, up from the previous $145,000 limit. This allows more of a retirement account to be used for longevity insurance.

Bottom Line

SECURE 2.0 is largely favorable for savers: higher RMD ages, enhanced catch-up limits, new Roth 401(k) parity, 529 rollover flexibility, and emergency savings options. Review your retirement plan strategy now — particularly if you are in your 60s and eligible for the super catch-up, or if you have an old 529 with excess funds looking for a destination.

The annual gift tax exclusion lets you give money or assets to any number of people each year without paying gift tax or eating into your lifetime estate and gift tax exemption. For 2026, the annual exclusion is $19,000 per recipient — up from $18,000 in 2025. A married couple can give $38,000 to any individual in 2026 through gift-splitting. Understanding how this exclusion works is essential for anyone doing estate planning or providing financial support to family members.

How the Annual Exclusion Works

You can give up to $19,000 to as many people as you want in 2026 without filing a gift tax return or triggering any gift tax. The limit applies per recipient, not in total. If you have three children and five grandchildren, you can give $19,000 to each of the eight people — $152,000 total — in 2026 with no gift tax consequences and no forms to file.

The exclusion is per donor and per recipient. If you and your spouse both give to the same child, you can each give $19,000, for a combined $38,000 to that child in 2026. This is called gift-splitting and does require filing Form 709 to elect the split, even though no tax is owed.

What Happens When You Exceed the Annual Exclusion?

If you give more than $19,000 to a single person in 2026, the excess counts against your lifetime gift and estate tax exemption ($13.99 million per individual in 2026). No gift tax is owed until you exhaust your entire lifetime exemption. Once you exceed the lifetime exemption, gifts above that threshold are taxed at up to 40%. Most people never come close to the lifetime exemption — the annual exclusion is what matters for routine family giving.

Any gift exceeding the annual exclusion in a year requires filing IRS Form 709 (U.S. Gift Tax Return) to report the excess and track how much of your lifetime exemption you have used, even if no tax is due.

Gift Tax Annual Exclusion History

• 2022–2023: $16,000
• 2024: $18,000
• 2025: $18,000
• 2026: $19,000

The exclusion is indexed for inflation and adjusts in $1,000 increments.

Direct Tuition and Medical Payments: Unlimited Exclusions

Two types of gifts are completely excluded from gift tax with no dollar limit — and do not count against the annual exclusion:

• Direct tuition payments: Payments made directly to an educational institution for tuition (not room and board, not fees, not books) are fully excluded. You must pay the school directly, not the student.
• Direct medical payments: Payments made directly to a medical provider for someone else’s medical care are fully excluded. You must pay the provider directly, not reimburse the patient.

A grandparent who pays $40,000 directly to a college for a grandchild’s tuition can also give that grandchild an additional $19,000 under the annual exclusion in the same year — no gift tax and no lifetime exemption use.

529 Plan Superfunding: Five-Year Gift-Tax Averaging

A 529 college savings plan allows “superfunding” — you can contribute up to five years’ worth of annual exclusions in a single year without gift tax consequences. In 2026, that means up to $95,000 per beneficiary ($190,000 if gift-splitting with a spouse). The catch: you cannot make additional annual exclusion gifts to that beneficiary during the five-year period. This front-loads college savings and allows more years of tax-free growth.

Annual Exclusion Gifts and Estate Reduction

Systematic annual exclusion gifting is one of the simplest and most effective estate planning strategies. A couple with four children who gifts the maximum every year removes $152,000 ($38,000 x 4) from their estate annually. Over 10 years, that is $1.52 million transferred without touching the lifetime exemption — and without any estate or gift tax. Add grandchildren and the numbers grow quickly.

Gifts to Spouses

Gifts between U.S. citizen spouses are fully exempt from gift tax under the unlimited marital deduction — there is no limit on gifts between citizen spouses. For gifts to non-citizen spouses, the exclusion is $185,000 in 2026 (a separate, higher exclusion than the standard $19,000). Gifts to non-citizen spouses above $185,000 count against the lifetime exemption.

What Counts as a Gift?

Any transfer of property for less than fair market value is a gift. This includes:

• Cash gifts
• Securities or real estate transferred at below market value
• Forgiven loans (the forgiven amount is a gift)
• Paying someone else’s expenses without expecting repayment
• Below-market loans where the IRS imputes forgone interest as a gift

Bottom Line

The $19,000 annual exclusion is the most accessible gift tax planning tool available. Use it every year to transfer wealth systematically — directly to family members, through 529 plans, or via direct tuition and medical payments with no dollar cap. For estates that may exceed the exemption, consistent annual gifting compounded over years can remove substantial assets from the taxable estate at zero cost.

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that allows one spouse to use their lifetime gift tax exemption to move assets out of the taxable estate — while the other spouse can still indirectly benefit from those assets during their lifetime. It is one of the most popular estate planning strategies for high-net-worth married couples who want to lock in the current elevated gift tax exemptions before they potentially sunset.

Why SLATs Are Popular Right Now

The federal lifetime gift and estate tax exemption is $13.99 million per individual in 2026 ($27.98 million for a married couple). However, under current law, this elevated exemption is scheduled to sunset after December 31, 2025, reverting to roughly half that amount. Legislative activity around the sunsetting provision has created urgency: high-net-worth couples are using SLATs now to lock in gifts at the higher exemption level before it potentially expires.

How a SLAT Works

1. Spouse A (the grantor) creates an irrevocable trust naming Spouse B as the primary beneficiary, with children and grandchildren as secondary beneficiaries.
2. Spouse A funds the trust with assets — cash, securities, real estate — using part or all of their lifetime gift tax exemption. Because this is a completed gift to an irrevocable trust, those assets leave Spouse A’s taxable estate.
3. Spouse B (and often children) can receive distributions from the trust for health, education, maintenance, and support. Since Spouse A and Spouse B are married and share finances, Spouse A indirectly benefits from the assets even though they are technically no longer in Spouse A’s estate.
4. At Spouse B’s death, the remaining trust assets pass to children or other beneficiaries outside both spouses’ taxable estates.

The Key Benefit: Access Without Estate Inclusion

The elegance of a SLAT is that Spouse A can give away assets using a large exemption amount — removing them from the taxable estate permanently — while still having indirect access to those assets through Spouse B. If structured properly, the IRS does not include those assets in Spouse A’s estate at death.

The Reciprocal Trust Doctrine: A Critical Warning

If Spouse A creates a SLAT for Spouse B and Spouse B simultaneously creates an equivalent SLAT for Spouse A, the IRS may invoke the reciprocal trust doctrine — essentially unwinding both trusts and including the assets back in both spouses’ estates. To avoid this, the two SLATs must be meaningfully different in structure, funding amounts, timing, or beneficiary provisions. Most attorneys recommend a gap of 6–12 months between establishing each spouse’s SLAT and ensuring the trusts differ in material ways.

The Divorce or Death Risk

The SLAT’s Achilles heel is the indirect access structure. If Spouse A and Spouse B divorce, Spouse A loses indirect access to the trust assets entirely — the assets remain in the trust for Spouse B’s benefit, outside Spouse A’s control. If Spouse B dies first, Spouse A loses indirect access and must live off other assets.

Some SLATs include provisions allowing Spouse A to name a new beneficiary if Spouse B predeceases, but these provisions must be carefully structured to avoid IRS issues.

SLAT vs. GRAT

• SLAT: Permanent removal of assets from the estate using the lifetime exemption. Indirect access via the beneficiary spouse. Best when you have a large exemption to use and want to provide for a spouse.
• GRAT: A grantor trust that passes the “excess” appreciation to heirs over the IRS hurdle rate. Less dependence on the exemption amount but more sensitive to the interest rate environment and no income access for the grantor’s spouse.

Tax Treatment of SLAT Income

A SLAT is typically structured as a grantor trust, meaning Spouse A (the grantor) pays income tax on all income and gains generated inside the trust. This is actually a feature, not a bug — Spouse A’s tax payments further reduce their taxable estate without being treated as additional gifts, allowing the trust assets to grow tax-free for the beneficiaries.

Who Should Consider a SLAT?

A SLAT is appropriate for married couples with estates above or close to the estate tax exemption threshold who:

• Want to utilize the current high exemption before it potentially sunsets
• Need the funded spouse to retain indirect access to the assets
• Have a stable marriage and can accept the spousal dependency risk
• Have sufficient assets outside the SLAT to fund living expenses if access to the trust is cut off

Bottom Line

A SLAT is a powerful tool for married couples to lock in today’s elevated gift tax exemption and remove assets from the taxable estate while preserving some indirect access. The divorce risk and reciprocal trust doctrine require careful structuring by an estate planning attorney. If the exemption reduction goes through as scheduled, the window for maximizing a SLAT strategy may be narrow — consult an advisor if your estate could be affected.

An Irrevocable Life Insurance Trust (ILIT) is a type of trust that owns a life insurance policy outside your taxable estate. When you die, the life insurance proceeds pay into the trust and are distributed to your beneficiaries — potentially free of both income tax and estate tax. For high-net-worth individuals facing estate tax exposure, the ILIT is one of the most effective tools for passing wealth to the next generation.

The Problem an ILIT Solves

If you own a life insurance policy on your own life, the death benefit is included in your taxable estate at death. For a $5 million estate that includes a $2 million life insurance policy, the full $7 million could be subject to estate tax — significantly reducing what passes to your heirs. An ILIT moves the policy outside your estate, removing that $2 million from the estate tax calculation while preserving the full $2 million death benefit for your beneficiaries.

How an ILIT Works

1. Create the trust: An attorney drafts an irrevocable trust with your chosen beneficiaries (typically your spouse and/or children). You name an independent trustee — often an adult child, sibling, or corporate trustee. You cannot be the trustee of your own ILIT.
2. Transfer or purchase the policy: The ILIT either purchases a new life insurance policy on your life, or you transfer an existing policy into the trust. If you transfer an existing policy, you must survive at least three years after the transfer or the IRS will still include the death benefit in your estate (the three-year lookback rule).
3. Fund the trust to pay premiums: The trust itself pays the insurance premiums. You make annual gifts to the trust — typically within the annual gift tax exclusion ($18,000 per beneficiary in 2025; $19,000 in 2026) — to fund premium payments. Your beneficiaries receive a Crummey notice giving them the right to withdraw those gifts for a limited time, which qualifies the gift for the annual exclusion.
4. At your death: The insurance proceeds are paid to the ILIT. The trustee distributes funds to beneficiaries per the trust terms, outside of probate and outside of the taxable estate.

The Crummey Notice: Why It Matters

For your annual gifts to the ILIT to qualify for the annual gift tax exclusion, they must be present-interest gifts — meaning the recipient must have the right to access the funds now, not just in the future. The Crummey notice satisfies this requirement by notifying beneficiaries that a gift was made and that they have a 30-day window to withdraw it. In practice, beneficiaries almost never exercise this withdrawal right, allowing the trust to use the gift for premiums. But the notice process must be followed precisely to preserve the gift tax exclusion.

ILIT vs. Outright Life Insurance Ownership

• You own the policy: Simple setup, full control. Death benefit is included in your taxable estate. Works fine if your estate is under the federal exemption ($13.99 million per individual in 2026 under current law).
• Policy owned by ILIT: More complex to set up and administer. No direct control over the policy. Death benefit is outside your estate, potentially saving millions in estate tax for large estates.

Can You Use an ILIT for Survivorship (Second-to-Die) Insurance?

Yes. Survivorship life insurance — which pays out at the death of the second spouse — is a common ILIT strategy. The premium is lower than insuring one life, and the death benefit arrives precisely when the estate tax bill is due (at the second spouse’s death, after the marital deduction expires). The ILIT holds the policy so the proceeds are outside both spouses’ estates.

Who Needs an ILIT?

An ILIT makes the most sense for:

• Estates that exceed or are likely to exceed the federal estate tax exemption
• Business owners whose estate value includes illiquid business interests that heirs cannot easily sell to pay estate taxes
• Individuals with large life insurance policies who want to ensure heirs receive the full benefit without estate tax erosion

For estates well below the exemption threshold, the complexity and cost of an ILIT is usually not justified.

Costs and Considerations

Drafting an ILIT typically costs $1,500–$5,000 in attorney fees. Ongoing annual administration includes trustee fees, Crummey notice preparation, and accounting. The trust is irrevocable — once created and funded, you cannot take the policy back or change the beneficiaries without specific trust provisions allowing limited modifications.

Bottom Line

An ILIT is a well-established estate planning strategy for removing life insurance from a taxable estate while preserving the full death benefit for heirs. For estates above the estate tax exemption, the potential tax savings far exceed the cost of setup and administration. Work with an estate planning attorney and review your estate plan every few years as tax law and your circumstances change.

Related: Term Life vs. Whole Life Insurance: Which Should You Choose in 2026?

The step-up in basis is one of the most valuable and underappreciated provisions in the U.S. tax code for estate planning. When you inherit an asset — a home, stocks, a business interest — the tax basis of that asset is “stepped up” to its fair market value at the date of the original owner’s death. This eliminates the capital gains tax on all the appreciation that occurred during the deceased owner’s lifetime. The result can be a tax savings of tens or even hundreds of thousands of dollars for heirs.

How Basis Works Without a Step-Up

To understand the step-up, you need to understand cost basis. When you buy an asset, your cost basis is what you paid for it. When you sell it, you owe capital gains tax on the difference between the sale price and your basis. If you bought stock for $10,000 and it grew to $100,000, your gain is $90,000 — and that is what you owe capital gains tax on when you sell.

If that stock were gifted to you during the donor’s lifetime, you would inherit the donor’s original $10,000 basis, and still owe tax on $90,000 of gains when you sold.

How the Step-Up Works

If instead that stock is inherited at death — rather than gifted during life — your basis is stepped up to the fair market value at the date of death. If the owner died when the stock was worth $100,000, your new basis is $100,000. If you sell immediately, you owe zero capital gains tax. If the stock grows to $110,000 before you sell, you owe tax only on the $10,000 gain that occurred after you inherited it.

The same rule applies to real estate, business interests, and most other capital assets held in a taxable account.

Which Assets Get a Step-Up in Basis?

Most assets included in the deceased person’s taxable estate receive a step-up:

• Stocks, bonds, and mutual funds held in taxable brokerage accounts
• Real estate (primary home, rental properties, land)
• Business interests and partnership stakes
• Collectibles, art, and other capital assets

Assets that do NOT receive a step-up include:

• Retirement accounts (IRA, 401(k), 403(b)): Distributions from inherited retirement accounts are taxed as ordinary income, not at capital gains rates. There is no step-up in basis.
• Annuities: The gain in a non-qualified annuity is taxed as ordinary income to the beneficiary.
• U.S. savings bonds (in most cases)

Step-Up for Community Property vs. Common Law States

In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), both halves of community property owned by a married couple receive a step-up in basis when one spouse dies — not just the half owned by the deceased. This is a double step-up that is not available in common law states, where only the deceased spouse’s share is stepped up.

For a couple who bought a rental property together for $200,000 that is now worth $1 million in California:

• In a community property state: the surviving spouse’s entire basis steps up to $1 million.
• In a common law state: only the deceased spouse’s 50% steps up. The surviving spouse has a blended basis of $600,000 (50% stepped-up at $500,000 + original 50% at $100,000).

Estate Planning Strategies Around the Step-Up

Hold Appreciated Assets Until Death

If you have significantly appreciated assets and your estate is not large enough to trigger federal estate tax (under $13.99 million per individual in 2026 under current law), the optimal strategy for highly appreciated assets may simply be to hold them until death rather than sell or gift them. Your heirs inherit with a stepped-up basis and avoid all the embedded capital gains.

Do Not Gift Highly Appreciated Assets During Life

Gifting an appreciated asset during your lifetime transfers your original basis to the recipient. If you have $500,000 of embedded gains in a stock position, gifting it means your children inherit your low basis and owe capital gains tax when they sell. Holding it and passing it at death eliminates that liability entirely.

Consider Unrealized Loss Assets Differently

The step-up can also be a “step-down” — if an asset has declined in value since purchase, the heir inherits the lower basis. For assets with unrealized losses, it may make more sense to sell during life to capture the tax loss rather than passing the asset at death.

The Step-Up and the Estate Tax

The step-up in basis is separate from the estate tax. Estate tax (federal, and in some states) applies to the total value of a large estate. The step-up in basis is a separate benefit that affects the capital gains taxes heirs pay when they eventually sell inherited assets. You can receive the full benefit of the step-up in basis whether or not an estate tax return is required.

Bottom Line

The step-up in basis is a powerful estate planning tool that effectively forgives a lifetime of capital gains for your heirs. For families with appreciated real estate or investment portfolios, understanding this rule should directly inform gifting decisions and asset transfer strategies. When in doubt, do not gift appreciated assets during life — hold them and let the step-up eliminate the embedded tax liability at death.

Inheriting an IRA used to mean a lifetime of tax-deferred growth. The SECURE Act of 2019 ended that strategy for most non-spouse beneficiaries by introducing the 10-year rule, which requires the entire inherited IRA to be emptied within 10 years of the original owner’s death. SECURE Act 2.0 (2022) added further nuances. Understanding these rules prevents costly mistakes and unnecessary taxes.

The Old Rules vs. The New 10-Year Rule

Before the SECURE Act (2019), most beneficiaries could “stretch” distributions over their own life expectancy — sometimes 40 to 50 years. This allowed decades of tax-deferred compounding. The SECURE Act eliminated the stretch IRA for most beneficiaries, replacing it with the 10-year rule: the inherited IRA must be fully distributed by December 31 of the tenth year following the original account owner’s death.

There is no required minimum distribution each year during the 10-year window — you can take nothing for nine years and empty the account in year 10 — but the IRS added confusion around this when the original owner died after their Required Beginning Date (RBD).

Who the 10-Year Rule Applies To

The 10-year rule applies to most non-spouse beneficiaries, including adult children, grandchildren, siblings, and non-designated beneficiaries (trusts or estates). It does not apply to certain “eligible designated beneficiaries” who still qualify for the life expectancy (stretch) method:

• Surviving spouses
• Minor children of the deceased (until they reach the age of majority — then the 10-year clock starts)
• Disabled or chronically ill individuals (as defined by the IRS)
• Beneficiaries not more than 10 years younger than the deceased

The RMD Twist: Did the Owner Die After Their Required Beginning Date?

The Required Beginning Date (RBD) is April 1 of the year following the year the account owner turns 73 (for most people under current law after SECURE 2.0). Whether the original owner died before or after the RBD matters:

• Owner died before RBD: Beneficiaries subject to the 10-year rule have no annual RMDs during the 10 years. They just need to empty the account by the end of year 10.
• Owner died on or after RBD: Beneficiaries must take annual RMDs based on the beneficiary’s own life expectancy during years 1–9, with the full remaining balance due by the end of year 10. The IRS proposed regulations in 2022 confirmed this interpretation, and the rules began applying starting in 2025 after years of transition relief.

The 10-Year Tax Strategy: Timing Withdrawals Wisely

Because there is no required annual distribution (in cases where the owner died before RBD), beneficiaries have flexibility to time withdrawals to minimize taxes:

• If you expect high income in some years and lower income in others, take larger distributions in your lower-income years to avoid being pushed into a higher tax bracket.
• If you will retire or experience reduced income in year 5 of the 10-year window, front-loading distributions in those years can reduce the total tax bill.
• Roth IRA distributions are tax-free, so the 10-year rule is far less impactful for inherited Roth IRAs. You are not required to distribute annually, and the full 10-year window simply means you cannot keep the Roth IRA forever.

Inherited IRA Rules for Surviving Spouses

A surviving spouse has unique options not available to other beneficiaries:

• Spousal rollover: Treat the inherited IRA as your own by rolling it into your existing IRA or a new IRA in your name. This resets the RMD age to your own RMD start date and allows continued contributions if you have earned income.
• Remain as inherited IRA beneficiary: If the deceased spouse was younger and you are under 59½, keeping it as an inherited IRA allows distributions without the 10% early withdrawal penalty, which would apply to a spousal rollover IRA before age 59½.

Inherited Roth IRA Rules

Inherited Roth IRAs follow the same 10-year rule for non-spouse beneficiaries. The critical difference: qualified distributions from an inherited Roth IRA are tax-free if the original account was at least 5 years old. The 10-year rule means you cannot keep a Roth IRA forever after inheriting it, but taxes are far less painful than with a traditional IRA. Annual distributions during the 10-year period are not required (if the owner died before RBD).

Common Mistakes to Avoid

• Missing the year 10 deadline. The penalty for failing to fully distribute is 25% of the amount that should have been withdrawn.
• Combining an inherited IRA with your own IRA. You cannot roll an inherited IRA (from a non-spouse) into your own IRA — they must remain separate accounts.
• Taking a 10-year lump sum without a tax plan. A single large withdrawal in year 10 could push you into the highest federal tax bracket. Spread distributions intentionally.
• Naming a trust as beneficiary without understanding the conduit vs. accumulation trust rules. These affect whether the 10-year rule applies and how distributions flow.

Bottom Line

The 10-year rule eliminated the stretch IRA strategy for most people. If you inherit a traditional IRA, you must now plan for the tax impact of emptying the account within a decade. Build a distribution plan early — ideally with a tax advisor — to spread the tax hit across the 10-year window and minimize the total amount lost to federal and state taxes.

A Solo 401(k) — also called an individual 401(k) or one-participant 401(k) — is a retirement savings plan designed specifically for self-employed people and business owners with no full-time employees other than a spouse. It offers the highest contribution limits of any self-employed retirement account, plus the flexibility to choose a traditional or Roth structure. If you run your own business and want to maximize retirement savings, a Solo 401(k) is likely your most powerful option.

Who Qualifies for a Solo 401(k)?

You qualify if you have self-employment income from any source — freelancing, consulting, a side business, or a sole proprietorship — and you have no full-time W-2 employees other than your spouse. If you employ even one non-spouse full-time worker, you cannot use a Solo 401(k) and must consider a SEP IRA or SIMPLE IRA instead. Part-time employees (fewer than 1,000 hours per year) generally do not disqualify you.

Solo 401(k) Contribution Limits for 2026

The Solo 401(k) is unique because you contribute as both an employee and as the employer, allowing significantly higher contributions than other self-employed plans:

• Employee contribution (elective deferral): Up to $23,500 in 2026, or 100% of compensation, whichever is less. If you are age 50 or older, the catch-up contribution limit adds $7,500, for a total of $31,000.
• Employer contribution (profit sharing): Up to 25% of net self-employment income (after deducting the self-employment tax deduction). For a sole proprietor, this is 20% of net Schedule C income.
• Combined limit: $70,000 for 2026 ($77,500 if 50 or older), or 100% of compensation, whichever is less.

Compare this to the SEP IRA, which is capped at 25% of compensation (maximum $70,000 in 2026) but has no employee deferral component. A high-income self-employed person can often contribute significantly more with a Solo 401(k) than a SEP IRA.

Traditional vs. Roth Solo 401(k)

Most Solo 401(k) plans offer both traditional and Roth options for the employee deferral portion:

• Traditional Solo 401(k): Contributions are pre-tax, reducing your taxable income in the year you contribute. Withdrawals in retirement are taxed as ordinary income.
• Roth Solo 401(k): Contributions are after-tax — no deduction now — but qualified withdrawals in retirement are completely tax-free, including all growth. Unlike the Roth IRA, there are no income limits for contributing to a Roth Solo 401(k).

The employer/profit-sharing portion must always go into the traditional (pre-tax) bucket, even if you choose Roth for employee deferrals. Not all Solo 401(k) custodians offer the Roth option — confirm before opening an account.

Solo 401(k) vs. SEP IRA vs. SIMPLE IRA

• Solo 401(k): Highest contribution limits, Roth option available, can take loans against the account, more paperwork. Best for high-income self-employed with no employees.
• SEP IRA: Simpler to set up and administer, no annual filing requirement until assets exceed $250,000, but no catch-up contributions and no Roth option. Good for lower-income self-employed or those who want simplicity.
• SIMPLE IRA: Designed for small businesses with employees; lower contribution limits than Solo 401(k); mandatory employer match. Less suited for solo operators.

How to Open a Solo 401(k)

You must establish a Solo 401(k) plan by December 31 of the tax year you want to make contributions (or by the business’s tax filing deadline if you’re a corporation). However, employee deferrals must be deposited by year-end. Employer/profit-sharing contributions can be made up to the tax filing deadline including extensions.

1. Choose a custodian: Fidelity, Vanguard, Charles Schwab, and E*TRADE all offer free Solo 401(k) plans with low-cost index fund investments.
2. Complete the plan adoption agreement provided by the custodian.
3. Obtain a plan Employer Identification Number (EIN) if you do not already have one for your business.
4. Make contributions and keep records of the amounts and dates.

Loan Provision

A Solo 401(k) can include a loan provision that allows you to borrow up to $50,000 or 50% of the account balance, whichever is less. This is a feature not available with IRAs. Loans must be repaid within five years (generally) with interest. The interest goes back into your own account. Loans are not tax events unless you default.

IRS Filing Requirements

Once your Solo 401(k) plan assets exceed $250,000 at the end of any plan year, you must file Form 5500-EZ with the IRS annually. Below that threshold, no annual filing is required. This is simpler than the reporting required for multi-participant 401(k) plans.

Bottom Line

For a self-employed person with no employees, the Solo 401(k) delivers the highest possible contribution limits of any retirement vehicle — up to $70,000 per year in 2026 — combined with the option to shelter income in a Roth structure. Set one up before year-end to maximize current-year contributions.