In almost every case, grandchildren do not pay inheritance tax on what a grandparent leaves them. The federal estate tax is paid by the estate, not the heir, and the exemption is so high that fewer than 1 percent of estates owe anything. Only five states charge an inheritance tax on the recipient, and grandchildren get the most favorable treatment in each one. Where grandchildren do run into a real tax bill, it usually involves the generation-skipping transfer tax, an inherited IRA, or the sale of inherited property at a gain.
Federal Estate Tax Rarely Reaches a Grandchild
The federal government taxes wealth transferred at death under Chapter 11 of the Internal Revenue Code, but the exemption is enormous. For anyone who dies in 2026, the basic exclusion amount is $15 million. The One, Big, Beautiful Bill Act, signed on July 4, 2025, made that figure permanent, and starting in 2027 it will adjust for inflation.1Internal Revenue Service. What’s New — Estate and Gift Tax
When an estate does exceed that threshold, the executor pays the tax out of estate funds before distributing anything.2Office of the Law Revision Counsel. 26 USC Ch. 11 – Estate Tax A grandchild never writes a personal check to the IRS for estate tax. The inheritance simply arrives smaller because the estate paid first.
The Generation-Skipping Transfer Tax
One federal tax is aimed directly at transfers to grandchildren. The generation-skipping transfer (GST) tax exists to stop wealthy families from bypassing a middle generation to avoid a round of estate tax.3Office of the Law Revision Counsel. 26 USC Ch. 13 – Tax on Generation-Skipping Transfers A grandchild is a “skip person” because they sit two generations below the grandparent.
The tax tops out at 40 percent, but the effective rate depends on how much of the grandparent’s lifetime GST exemption gets applied to the transfer. For 2026 that exemption is also $15 million, matching the estate tax exclusion.1Internal Revenue Service. What’s New — Estate and Gift Tax Direct skips get exemption allocated automatically unless the grandparent affirmatively elected out during their lifetime.4Office of the Law Revision Counsel. 26 USC 2632 – Special Rules for Allocation of GST Exemption Between the size of the exemption and the automatic allocation rules, most transfers to grandchildren from ordinary estates never generate GST tax.
The GST tax covers three types of transfers: a direct skip (an outright bequest to the grandchild), a taxable termination (a trust interest ends and the assets pass to a skip person), and a taxable distribution (any other trust payment to a skip person).5Office of the Law Revision Counsel. 26 US Code 2612 – Taxable Termination; Taxable Distribution; Direct Skip
If Your Parent Died First, the GST Tax Doesn’t Apply
The most important exception for many grandchildren is the predeceased parent rule. If the grandchild’s parent (the grandparent’s child) died before the grandparent, the grandchild moves up one generation for GST purposes and is treated as the grandparent’s child rather than a skip person. No GST tax applies.6Office of the Law Revision Counsel. 26 USC 2651 – Generation Assignment The rule works automatically. The grandchild does not have to file anything to claim it, though the executor should document the parent’s date of death on the estate tax return.
State Inheritance Taxes
State inheritance tax is separate from federal estate tax, and it works differently: the person receiving the assets pays, and the rate depends on the relationship to the deceased. As of 2025, only five states impose one: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa eliminated its inheritance tax at the start of 2025.
In every state that still has one, grandchildren land in the most favorable category, typically called Class A or lineal descendants. Some states exempt direct descendants entirely; others tax them at the lowest rate available. Pennsylvania, for instance, taxes lineal descendants at 4.5 percent of the inherited share. Documentation matters. Expect to prove the family line with birth certificates showing grandparent to parent to grandchild.
Roughly a dozen states and the District of Columbia also impose a state-level estate tax, several with exemptions much lower than the federal $15 million. Those taxes are paid by the estate, not the grandchild, but they still shrink what’s left to inherit. If the grandparent lived in one of those states, the estate can owe state tax even when it owes nothing federally.
Selling Inherited Property: The Step-Up in Basis
Receiving an inheritance is not itself income, and the IRS does not tax it when it lands in your hands.7Internal Revenue Service. Gifts and Inheritances Selling inherited property for more than it was worth at the grandparent’s death, on the other hand, produces a taxable capital gain.
Federal law softens this considerably. Inherited property gets a new cost basis equal to its fair market value on the date of death, not what the grandparent originally paid.8Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If your grandmother bought a house for $80,000 in 1985 and it was worth $400,000 the day she died, your basis is $400,000. Sell it for $410,000 and you owe capital gains tax on $10,000, not on the $330,000 that built up during her lifetime.
The step-up covers stocks, real estate, and other appreciated assets. It does not cover traditional retirement accounts, which have their own rules. If you plan to sell inherited property soon, get a professional appraisal dated as close to the death as you can. That protects your basis figure if the IRS ever asks.
Inherited IRAs and 401(k)s
An inherited retirement account is where grandchildren most often get surprised. Distributions from an inherited traditional IRA or 401(k) are taxed as ordinary income at your own marginal rate, and there is no step-up in basis.
Under the SECURE Act rules that took effect in 2020, most grandchildren are non-eligible designated beneficiaries. That means you have to empty the account by the end of the tenth year after the grandparent’s death.9Internal Revenue Service. Retirement Topics – Beneficiary You can time the withdrawals however you like within that window, but pulling the whole balance in a single year can push you into a much higher tax bracket. Spreading distributions across the ten years usually keeps the tax bill lower overall.
A grandchild who is a minor, disabled, or chronically ill may qualify as an eligible designated beneficiary, which allows distributions stretched over the beneficiary’s life expectancy. For a minor, the 10-year clock starts once they reach the age of majority. Inherited Roth IRAs use the same 10-year window, but qualified distributions come out tax-free because the contributions were already taxed going in.
Tax-Free Transfers Grandparents Can Make While Alive
Some of the most tax-efficient transfers from a grandparent happen before death. For 2026, a grandparent can give up to $19,000 per grandchild per year with no gift tax return and no use of the lifetime exemption.1Internal Revenue Service. What’s New — Estate and Gift Tax Married grandparents can combine exclusions for $38,000 per grandchild. Gifts above the annual limit require the grandparent to file Form 709, but no tax is actually owed until lifetime gifts exceed the $15 million exemption.10Internal Revenue Service. Instructions for Form 709 (2025)
Two payments are exempt from gift tax rules with no dollar cap. Tuition paid directly to an educational institution on a grandchild’s behalf is not a taxable gift, and neither are medical expenses paid directly to a healthcare provider.11Office of the Law Revision Counsel. 26 US Code 2503 – Taxable Gifts The word “directly” matters. A check written to the grandchild who then pays the school or hospital loses the exemption and counts against the annual exclusion. The education exclusion covers tuition only, not room and board or books.