The Tax Myths That Are Costing Florida Families Real Money in Estate Transfers

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Most Florida families make estate planning tax decisions based on outdated or incomplete information. The federal estate tax exemption is high enough that it doesn't apply to the vast majority of estates — but that doesn't mean there's no tax exposure. Income taxes on inherited retirement accounts, capital gains on improperly structured transfers, and multi-state tax obligations create real costs that families overlook because they're focused on the wrong number. This article separates the myths from reality.

Why This Matters

Tax season is when estate planning questions surface. Families look at their accounts, review their returns, and start thinking about what happens to all of it when they're gone. The problem is that most of what people "know" about estate taxes comes from headlines, family conversations, or outdated advice — and almost all of it focuses exclusively on the federal estate tax, which applies to fewer than 1% of estates nationwide.

The taxes that actually impact most Florida families during estate transfers are income taxes, capital gains taxes, and in some cases, state taxes owed by out-of-state beneficiaries. These are the exposures that proper planning addresses — and that most families never discuss with their attorney.

The Myths and the Reality

Myth 1: "We don't have enough to worry about estate taxes."

You're probably right about the federal estate tax. The 2026 exemption is approximately $13.61 million per individual. If your estate is below that threshold, no federal estate tax is owed. But that's not the end of the conversation. Under the SECURE Act, most non-spouse beneficiaries must fully withdraw inherited IRAs and 401(k)s within 10 years. Every dollar withdrawn is taxed as ordinary income at the beneficiary's tax rate. A child who inherits a $400,000 IRA while earning $120,000 per year could owe $100,000 or more in federal income taxes over that 10-year window.

Myth 2: "Florida has no income tax, so inheritance is tax-free."

Florida has no state income tax, which is a genuine advantage. But it doesn't eliminate tax exposure. Federal income tax still applies to inherited retirement account distributions. And if your beneficiaries live in states that do have income tax — New York, California, Illinois, New Jersey — they may owe state income tax on inherited retirement distributions, rental income from Florida property, or business income from Florida-based entities.

Myth 3: "Everything I pass on will get a stepped-up basis."

The stepped-up basis rule is real and powerful — but it doesn't apply to everything. Assets that pass through an estate at death generally receive a new cost basis equal to their fair market value at the date of death. But retirement accounts carry ordinary income tax regardless of basis. Assets transferred during the owner's lifetime through gifting receive the original cost basis — a "carryover basis" — which means the recipient inherits the full capital gains exposure.

Myth 4: "Tax planning is only for wealthy people."

Tax-efficient estate planning matters at every asset level. A family with a $500,000 estate that includes a $300,000 IRA, a $150,000 home, and $50,000 in savings isn't dealing with estate tax — but they're absolutely dealing with income tax on retirement distributions, potential capital gains on the home, and the administrative cost of probate if assets aren't structured correctly. The question isn't whether your estate is "big enough" for tax planning. The question is whether your beneficiaries will receive the maximum value from what you're leaving.

Myth 5: "My accountant and my estate attorney are handling all of this."

In most cases, your accountant and your estate attorney have never spoken to each other. They operate in separate domains — one focused on annual tax compliance, the other on legal document preparation. Tax-efficient estate design lives in the gap between these two disciplines. It requires someone to ask: Which assets should go to which beneficiaries based on their tax situation? Should retirement accounts be converted to Roth before death? Does the trust structure preserve the stepped-up basis?

Practical Guidance

Ask your attorney specifically about income tax consequences for your beneficiaries — not just estate tax. The estate tax question is easy. The income tax question is where the real planning happens.

If you have significant retirement account balances, discuss Roth conversion strategies with your financial advisor. Converting traditional IRA funds to Roth during your lifetime means paying income tax now at your rate — potentially saving your beneficiaries from paying at their rate over the 10-year distribution window.

If you're gifting assets during your lifetime, understand the carryover basis rule before you transfer. In many cases, it's more tax-efficient for your heirs to inherit assets at death (with a stepped-up basis) than to receive them as gifts (with the original basis and full capital gains exposure).

If your beneficiaries live in different states, make sure your estate plan accounts for their state tax obligations — not just Florida's favorable position.

Frequently Asked Questions

Do I owe estate tax in Florida? Florida has no state estate tax. Federal estate tax only applies to individual estates exceeding approximately $13.61 million (2026). Most Florida families owe no estate tax — but they may owe income tax on inherited retirement accounts and capital gains tax on improperly structured asset transfers.

What is the SECURE Act 10-year rule? The SECURE Act requires most non-spouse beneficiaries to withdraw the full balance of an inherited IRA or 401(k) within 10 years of the original owner's death. These withdrawals are taxed as ordinary income. For beneficiaries in their peak earning years, this can create a substantial and unexpected tax burden.

Should I convert my IRA to a Roth to help my heirs? It depends on your current tax rate versus your beneficiaries' expected rates. A Roth conversion means paying income tax now so your heirs receive tax-free distributions. If your beneficiaries are likely to be in higher tax brackets during the 10-year distribution window, a conversion can save the family money overall. This should be evaluated with both your financial advisor and estate attorney.