A Loved One Died and Left You an Inheritance. Now What?
Receiving an inheritance can be both a blessing and a challenge. If you’re fortunate enough to inherit money or assets from a loved one, you may wonder how to manage your windfall. With a growing wealth transfer underway, it’s crucial to understand the steps to take when receiving an inheritance. According to Cerulli Associates, a financial consulting firm, this great wealth transfer could total $100 trillion by 2048.
Fortunately, most inherited assets are not taxed directly. However, managing the inheritance efficiently can be tricky. Below are the key steps to take when you receive a windfall, along with tips for managing common types of inherited assets.
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1. Cash, Stocks, and Other Taxable Accounts
Cash is the simplest form of inheritance. You can spend or invest the money as you like, and it isn’t considered taxable income. However, if interest is earned on the cash before it is distributed, that interest may be taxable.
When inheriting stocks or bonds, you receive a “step-up in basis,” meaning the asset’s value is reset to the price on the day of the owner’s death. For example, if you inherit Amazon stock bought for $2 a share and it’s now worth $175 a share, you won’t owe capital gains taxes when selling. If you hold onto the stock and sell later, you’ll pay taxes only on any future gains.
Take time before making investment decisions. “You’ll want to use that money in a way that aligns with your financial goals,” advises Marguerita Cheng, a certified financial planner (CFP). Consulting a financial planner may help guide your decisions.
2. Retirement Accounts
Tax rules for inherited IRAs and 401(k)s can be complex. New IRS requirements dictate that most non-spouse beneficiaries must empty a traditional IRA within 10 years of the account holder’s death. Exceptions include surviving spouses, chronically ill individuals, and those with disabilities, who can stretch distributions over their lifetime.
For non-spouse beneficiaries, setting up an inherited IRA in your name is necessary. If you inherit a Roth IRA, the same 10-year limit applies, but Roth IRA distributions are not taxed. It’s essential to work with a tax professional to understand these rules and avoid penalties.
3. Real Estate
If you inherit a family home, you might benefit from a “step-up in basis” when you sell. For instance, if your grandfather bought a house for $100,000 and it’s worth $500,000 today, you can sell it for $500,000 without paying capital gains taxes.
Special tax rules apply to surviving spouses. You can sell the home within two years of your spouse’s death and exclude up to $500,000 in capital gains. After two years, you can exclude only your half, which is $250,000.
If the property is co-owned, reach an agreement with other family members regarding its sale or use. Don’t forget to maintain the house and manage expenses like insurance and taxes.
4. Life Insurance and Annuities
Life insurance payouts are generally not taxable. However, if you receive the payout in installments, you may owe taxes on any interest earned. In states with inheritance taxes, these policies are typically excluded from the estate.
For annuities, the tax rules depend on several factors, including how the annuity was funded. It’s advisable to consult with a financial adviser before making any decisions.
5. Personal Items
Inherited personal items—such as furniture, jewelry, or clothing—may have emotional value but not always financial value. Work with your family to decide which items to keep, sell, or donate. If some items might have value, consider hiring an appraiser. This ensures you understand their market value before making any decisions.
For most items sold for less than what the deceased person paid, you won’t owe taxes. With the federal inheritance tax exemption at $13.99 million in 2025, it’s unlikely you’ll owe taxes unless the items are particularly valuable.
