What to do after receiving an inheritance

Beneficiaries often face many complex decisions — and potential tax consequences. These insights can help you avoid common mistakes and make more informed choices.
An inheritance can seem like a mixed blessing, coming as it often does after the loss of a loved one. At such an emotional time, it can be difficult to think through what you need to do to manage the gift. But even if your parents or another loved one decide to give you your inheritance, or a portion of it, while they're still living — as many prefer to do — you'll likely have questions.
Don't wait until the decisions are urgent: Discuss in advance how the gift could help you pursue your goals.
If you expect to receive an inheritance someday, don't wait until the decisions are urgent. Consider discussing potential tax implications with a tax professional and think about how the gift could help you pursue your goals. You might also want to talk with your parents about their hopes for your financial future — even how they might be planning to structure their future gift. Read the insights below for a better sense of how to prepare for the many questions beneficiaries can face.
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How do I begin a conversation with my parents about their estate plans?

It's not necessary to ask how much money your parents might leave you. Consider starting the conversation by asking about their values and what wealth means to them. That can lead to productive conversations about the role an inheritance could play in your financial future and what your parents' expectations might be. This sort of conversation also provides you with the opportunity to share your preferences and priorities. For instance, if there's a family business or even a family vacation home, and you have no interest in owning either, be upfront about that. When everyone understands the expectations, the outcomes tend to be better for everyone.
You might also use this opportunity to discuss your own plans for your estate with your family, which will let you set expectations early and allow your loved ones to prepare for any future inheritances.

I just found out I'm receiving an inheritance. How quickly do I need to make decisions?

You'll likely have some time before you receive any property, investments or cash. The probate process, if applicable, generally takes at least six months to a year, depending on the complexity of the estate. Beneficiaries often make large purchases or sweeping decisions that they later regret. Even paying off debt right away may not be in your best interest. For example, consider whether it makes sense to pay off a mortgage with a rate below 3% if you could get a potentially higher return rate investing that money.
Instead, think about your competing goals and how you could manage your inheritance to help you pursue them. You can think about your goals in buckets: spending needs, short-term goals and long-term goals. How you allocate your inheritance to these buckets depends on your situation. If you have young children, for example, a portion could go toward college costs in the long-term bucket. But if you're looking at renovating your home or relocating, you can consider putting those funds into a short-term bucket to make sure they're easily available.

What if my inheritance isn't in cash?

Not all inheritances are in cash; you might be named the beneficiary of a retirement account — or you could inherit the family home, for instance. Here are key considerations for the different assets you might inherit.
  • Investments and retirement plans: If you've inherited an IRA or other tax-favored account like a 401(k), you'll be responsible for taking required minimum distributions (RMDs) as provided in the federal tax code. The timing will depend on whether you are considered an eligible designated beneficiary.Footnote 1 The RMD rules may allow you to distribute the account over an extended period or in some cases limit withdrawals to within 10 years after the death of the original account owner (depending on your age relative to the original account owner and certain other circumstances). The rules are complex, and distributions have federal income tax implications. You should consult your tax professional regarding your specific situation. Assets in taxable accounts, such as investment or savings accounts, by contrast, can be either liquidated or left in the account indefinitely. Again, you'll want to meet with a tax professional to decide the best strategy for you.
  • A home or business: "Things can get more complicated when converting real assets such as a family home or business into cash, especially when multiple beneficiaries are involved," notes Jason Albano, managing director and wealth strategies advisor at Bank of America. If there are disputes over a will, it could take years for the issues to be resolved. In the best-case scenario, your parent or other loved one would have worked with their advisor and estate attorney to construct a will or trust in such a way that its provisions account for the beneficiaries' desires — for instance, which child wants to keep the family home or work in the family business.

How could my inheritance affect my taxes?

For federal tax purposes, an inheritance generally isn't considered income, but there are some exceptions. Typically, the estate will pay any estate tax owed, with the beneficiaries receiving assets from the estate free of federal income taxes (see exception for retirement assets in the chart below). As a beneficiary, if you later sell or earn income from inherited assets, there may be federal income tax consequences. And if you inherit certain tax-deferred accounts like a traditional IRA or 401(k) account, you'll pay taxes on your withdrawals, including RMDs, as ordinary income at whatever your rate is.

What's my tax liability?
It all depends on the kind of assets you inherit
Type of asset How it's taxed
Cash and brokerage accounts Assets other than cash are subject to income taxes if sold for more than their value at the time of your loved one's death.
Real estate and tangible personal assets Real estate and tangible personal property are subject to income taxes if sold for more than their value at the time of your loved one's death.
Pre-tax and tax-deductible retirement accounts such as traditional IRAs and 401(k)s You pay your federal ordinary income tax rate on withdrawals; for non-spouse designated beneficiaries in many cases, the account must be emptied within five or 10 years of the original account owner's death depending on the circumstances.
When it comes to taxable accounts and other assets like real estate, there's the possibility you'll owe no federal income tax because the cost basis of the asset gets stepped up (or down) to current fair market value upon its owner's death, thereby wiping out any taxable capital gains on appreciated assets, says Albano. Keep in mind that if you inherit an asset that provides income — say, a trust that pays out annually — it may put you in a higher marginal tax bracket.

Could my inheritance require changes to my own estate plan?

Whenever your net worth changes — whether from an inheritance, a large pay increase or the sale of property — you should review and revise your estate plan. You may need to consider how to protect certain newly acquired assets — for instance, a family home or business passed down to you that you want to someday go to your children.
Ask yourself: If something happens to me, how will the assets flow to the people I care about? Setting up a trust might be one way to accomplish that aim, but a tax and legal advisor can help you determine what's needed to contribute to your beneficiaries' futures.

Next steps

Footnote 1 An eligible designated beneficiary (EDB) is a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the decedent, or a child of the account owner who has not reached the age of majority. Distribution rules differ based on the account owner's date of death; whether the beneficiary is an EDB, a designated beneficiary or neither; and whether the original account owner died before or after their required beginning date for required minimum distributions.

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