I setup a IIS application from within an existing application.
Will the parents web.config be inherited or is that something I have to set explicitly?
What you do is change the parent .NET 4 app's web.config to indicate its settings shouldn't flow down to the children
...your system.web stuff goes here
For more details refer here http://www.hanselman.com/blog/ChangingASPNETWebconfigInheritanceWhenMixingVersionsOfChildApplications.aspx