Seven rental properties. That is what one widow in the conversations our advisors have shared found herself holding after her husband passed: seven rentals, tenants, taxes, repairs, and not one piece of structure connecting any of it, no entity, no plan, no instructions. She had inherited a business she never applied to run. All week, The Widow's Penalty has followed what the tax code and Social Security do to the survivor. Today the series turns to the question that, in the conversations our advisors have with clients in their seventies and eighties, eventually crowds out all the others: what will the kids actually receive, and in what condition?
What are the rules for an inherited IRA?
Start with the account most families have, because the rules here changed in 2020 and many beneficiary plans have not caught up. A surviving spouse who inherits an IRA generally has choices no one else gets: she can treat it as her own IRA, roll it into her own, or remain a beneficiary. Which choice is right depends on her age and needs, and the wrong default can cost real money, so this decision belongs on the first-year checklist, made deliberately with someone who models it. One caution worth knowing: the rules can treat a spouse as having elected to own the account based on what she does with it, so even inaction is a decision here.
The children face a different rulebook. Since the SECURE Act, most adult children who inherit an IRA must empty the account within ten years. The old strategy of stretching withdrawals across a child's lifetime is generally gone. Ten years of distributions, landing on top of what are often a child's peak earning years, can push an inheritance into tax brackets the parents never paid. There are exceptions, including for minor children, beneficiaries with disabilities or chronic illness, and beneficiaries close in age to the person who died. For everyone else, the ten-year clock is the planning reality, and it is exactly why questions like which accounts to spend first and what to convert to Roth, the levers from our Gap Years series, are also inheritance decisions. A parent who pays some tax at low rates today may be sparing a child much higher rates inside that ten-year window.
The tax break Arizona and Nevada families get that most of the country does not
Here is the bright spot of the week, and it is a genuine one for readers in our part of the country. When someone inherits an asset, its cost basis generally resets to fair market value as of the owner's death, the step-up in basis we wrote about in The Fourth Color. In most states, when the first spouse dies, only the deceased spouse's half of a jointly owned asset gets that reset. But Arizona and Nevada are community property states, and under the federal rules, when one spouse dies, the entire community asset, both halves, can receive a full step-up in basis, provided at least half its value is includible in the deceased spouse's estate. The IRS's own example: a couple's community property was bought long ago for 80,000 dollars and worth 100,000 at the first death; the survivor's basis in the whole property becomes 100,000, both halves stepped up.
Think about what that means for the widow with the seven rentals. Decades of appreciation and depreciation recapture across an entire portfolio can be reset in a single moment, if the ownership was structured as community property and the records are clean. A survivor in Scottsdale who sells a long-held rental soon after her husband's death may owe far less capital gains tax than her sister in a common-law state would in the same position. This is one of Arizona and Nevada's most valuable community-property tax benefits, and it is worth confirming with your tax professional exactly how your titles are held before anyone sells anything.
Does a will override a beneficiary designation?
Generally, no, and this single fact quietly reroutes more inheritances than almost anything else. Retirement accounts, life insurance, and annuities pass by their beneficiary designation forms, not by the will. A will written last year loses to a beneficiary form filled out in 1994. The first year after a loss is exactly when these forms need review, because the person listed on many of them is the spouse who just passed, and the contingent line, the one that now controls, may be blank, outdated, or missing a child entirely. Arizona adds a useful tool for the house itself: a beneficiary deed, which can pass real estate directly to the kids at death without probate. Like every tool in this article, it works beautifully when it is coordinated with the rest of the plan, and it can collide with a trust when it is not.
The refinance that quietly undid the trust
Which brings us to the discovery our advisors keep making when they open estate files, and if you refinanced during the low-rate years of 2020 and 2021, please read this paragraph twice. To process those refinances, some lenders required homes to be taken out of the family's living trust for the closing. The plan was always to put the house back afterward. In file after file, that last step simply never happened. The result is a beautifully drafted trust standing next to a house that is no longer in it, which can mean probate for the exact asset the trust was created to protect, discovered at the worst possible moment. The fix, while everyone is alive and well, is usually simple paperwork. The check takes one phone call to whoever holds your trust documents: is the house actually titled in the trust today?
Generous, in the right order
Finally, gifting, because the instinct to help the kids now, while you can watch them enjoy it, is one of the best instincts there is. The mechanics reward a little order. In 2026 you can generally give up to 19,000 dollars per recipient per year with no tax and no paperwork, 38,000 from a couple, and larger gifts usually cost nothing in tax either, they simply file a form and count against a lifetime exemption of 15 million dollars per person under current law. The bigger mistakes are about which asset and when: gifting highly appreciated property hands the kids your old cost basis and forfeits the step-up we just celebrated, and large gifts made within five years of needing long-term care assistance can collide with Medicaid's lookback rules. Generosity is rarely the error. Sequence is. Cash first, appreciated assets last, and the calendar in view.
Does a spouse pay taxes on an inherited IRA?
Not for inheriting it. A surviving spouse can generally treat an inherited traditional IRA as her own and defer withdrawals until her own required beginning date; withdrawals are then taxed as ordinary income when taken, just as they would have been for the original owner. The choice of how to hold the account, as her own or as a beneficiary, has real consequences and deserves professional modeling in the first year.
What is the 10-year rule for inherited IRAs?
Since the SECURE Act, most beneficiaries other than a spouse, including adult children, must generally empty an inherited IRA within ten years of the owner's death. Exceptions exist for minor children, beneficiaries with disabilities or chronic illness, and beneficiaries not more than ten years younger than the owner. The compressed timeline can raise the family's total tax bill, which is why parents' withdrawal and conversion decisions are inheritance decisions too.
What is a beneficiary deed in Arizona?
A recorded deed that names who receives your Arizona real estate automatically at your death, bypassing probate for that property. It only takes effect when you pass, you keep full ownership and control during life, and you can revoke it. It works best when coordinated with your trust and the rest of your estate plan, since overlapping instructions for the same house create the very confusion these tools exist to prevent.
Everything this week has led to one idea: the widow's penalty is real, but it is a rulebook, and rulebooks can be learned in advance. Tomorrow the series closes with the piece our advisors say families need most and have least: the first 90 days, a calm, ordered playbook for what to do, in what order, when the worst week arrives, and the story of a widow who rebuilt everything from zero. If today's episode raised a question about your own beneficiary forms, your titles, or what your kids would actually receive, that is what an inheritance planning conversation is for, and our BeneficiaryBox program was built to hold the answers in one place your family can find. Call our team at American Retirement Advisors at (602) 281-3898.
Disclaimer: The information in this article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws change frequently, and individual circumstances vary. American Retirement Advisors does not provide tax or legal services. Before making any tax-related decisions, consult a qualified CPA, tax attorney, or financial planner who can evaluate your specific situation.