Settling Your Parent’s Estate:
Distributing Assets and Final Taxes
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
In a previous blog, we covered the Immediate Action Items to Take When Settling Your Parents’ Estate. Today, we’re going to dive deeper into the next steps of the estate settlement process and how your Shakespeare advisor helps guide you. This is meant to give you a high-level overview – each estate settlement will vary depending on the estate planning attorney’s recommendations and the assets held by the deceased.
For the purposes of this blog, we’re going to assume the parents had a revocable trust plan in place and are below the estate tax threshold ($15,000,000/person in 2026). At this point, Shakespeare and other trusted partners are aware of the passing, all estate documents (wills, powers of attorney, trust, etc.) are located, and the death certificates have been obtained. So, what should you do next?
Schedule Meetings with Your Shakespeare Advisor and Estate Attorney
Often, the two can be combined into one meeting. Your Shakespeare advisor can help coordinate a time that works for all parties. In that meeting, there will be an overview of the estate settlement process and a review of the terms of the trust/will to determine how assets will be distributed. Then each account/property will be looked at to determine the beneficiary.
It’s important to confirm which assets are titled in the name of the trust. A revocable trust is designed to simplify asset distribution, but primarily for assets that are properly titled in the trust or have the trust listed as a beneficiary. How an account/property is titled largely determines how it will pass to heirs.
One of the primary benefits of a revocable trust is that it avoids probate. If all major assets were properly funded into the trust, probate may be largely avoided. However, any assets left outside the trust may still require a probate proceeding, even when no estate tax is owed.
It’s also important to note that a beneficiary designation supersedes what is written in the will/trust. For example, if three beneficiaries are listed in the will/trust, but only one of them is listed as the beneficiary of an account, that account will specifically pass to that one beneficiary. This is why it is crucial to update your account beneficiaries to mirror the wishes of your estate documents.
Address Final Income Taxes and Expenses
Final taxes are often one of the most overlooked aspects of estate settlement. If your parents had an accountant, make them aware of the passing. You don’t necessarily have to utilize them for the final tax returns, but it can be a nice option. Shakespeare can help gather some of the necessary tax documents for the final returns.
Key tax filings may include:
Final individual income tax return (Form 1040): Covers income earned from January 1 through the date of death.
Estate or trust income tax return (Form 1041): Required if the estate earns income after death (interest, dividends, rental income, etc.).
It’s also important to note that tax deadlines still apply. Extensions may be available, but penalties can accrue if filings are missed.
Before assets are distributed, the estate must settle outstanding obligations such as funeral costs, medical bills, outstanding loans and credit card balances, as well as legal/accounting fees. Failure to pay these items prior to distributing assets can expose executors to personal liability.
Step-Up in Basis
One of the most valuable tax benefits for heirs is the ‘step-up’ in cost basis rule. Assets held in a revocable trust are still included in the deceased’s taxable estate for income tax purposes and generally receive a step-up at death. In many cases, assets such as brokerage accounts, real estate and business interests receive a new cost basis equal to their fair market value as of the date of death.
This can significantly reduce (or eliminate) capital gains taxes if the asset is sold shortly after inheritance. For example, if your parents bought their house for $100,000 30 years ago and it is valued at $500,000 when they pass, you (the beneficiary) can sell the house for $500,000 without incurring any tax consequences.
It’s important to note that retirement accounts (IRAs, 401(k)s) do NOT receive a step-up in basis. These accounts have their own set of distribution rules.
Inherited Retirement Accounts
Retirement accounts often represent a significant portion of an estate. The distribution rules have changed over the past five years, so it’s important to work with an advisor who can walk you through the correct distribution requirements. For a majority of non-spouse beneficiaries, the 10-year rule applies, requiring the account to be fully distributed within 10 years of the original owner’s death. There is typically a required minimum distribution that must be taken annually during each of the 10 years. While the timing of withdrawals may be flexible, the tax impact is not. Distributions from inherited pre-tax accounts are generally taxed as ordinary income.
Your Shakespeare advisor will review your overall situation to determine when it makes the most sense to take distributions from the inherited IRA accounts. For example, if you inherit a $1,000,000 pre-tax IRA and are two years away from retirement, it may make sense to take just the minimum required amount each year until retirement, then accelerate distributions once you’re retired and in a lower tax bracket.
Final Thoughts
Distributing assets and handling final taxes after a parent’s death can be a very stressful period of time. A coordinated approach involving your Shakespeare advisor, CPA and estate attorney can help ensure assets are distributed efficiently, taxes are minimized, and family members feel supported during an already difficult transition.