Manage an Inheritance Like a Pro in Just Seven Steps
Got a windfall? Here's how to manage an inheritance responsibly.
How you manage an inheritance can change your life. We’ve all heard stories about individuals who passed away quietly after a life of frugality, keeping their estate plan a secret and leaving a fortune to their unsuspecting heirs. Or, alas, occasionally bequeathing their riches to a beloved pet.
In reality, inheritances are becoming more common due to the Great Wealth Transfer — boomers expecting to pass down around $84 trillion by 2045. Northwestern Mutual's 2025 Planning and Progress Study noted that 20% of adults expect an inheritance in the next decade, a decrease from 25% surveyed in the previous year. Yet, inheritances can vary by race, income, and region. White households inherit 5-6x more than Black or Hispanic households, and high-income families, or the top 5%, get 4-12x more than the bottom 80%, according to Penn Wharton.
Before you try to manage an inheritance
Before you make any decisions about your inheritance, make sure you understand what you will be getting. Many estate plans contain a smorgasbord of items, including real estate, investments, cash, retirement savings accounts and life insurance plans. It could take months to track down these assets and divide them among the estate’s heirs, and you could incur significant legal fees, particularly if the estate is large or your relative died without a will.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There are also different rules for different heirs: Spouses, for example, enjoy some tax breaks and exemptions that aren’t available to adult children or other heirs.
For example, Brian Lee of Tacoma, Wash., got a crash course in estate law after his late father’s brother and sister died almost within a year of each other, in late 2015 and 2017. Neither of his father’s siblings had children when they died, so their estates were divided among their nieces, nephews and other surviving relatives.
Lee ended up with a six-figure inheritance, but because his uncle died without a will, settling the estate took months and cost thousands of dollars in legal fees. Lee’s aunt had a will, with Lee as the executor, which made “all the difference in the world in terms of the process,” Lee says.
Also, in addition to federal taxes, beneficiaries should be aware of any state inheritance taxes. The regulations and exemptions at the state level can vary a great deal and could impact your inheritance in ways you never dreamed possible.
Here's what you need to know to handle an inheritance like a pro.
1. Know what you'll owe in taxes
Depending on the assets you inherit, you may or may not have to pay taxes. Typically, heirs won’t pay the federal estate tax unless the value of the estate exceeds the exemption amount. So, unless your parents were fabulously wealthy, you won’t have to worry about federal estate taxes. But that doesn’t mean Uncle Sam has no interest in your inheritance.
For anyone who passes away in 2025, the exemption amount is $13.99 million. For married couples, that number jumps to $27.98 million, because each spouse can take advantage of the exemption. These generous exemptions sunset after 2025, so be sure to plan for 2026 taxes if you expect an inheritance soon.
2. Taxable investments
If you inherited stocks, mutual funds, or other investments in a taxable account, you’ll be able to take advantage of a generous tax break known as a step-up in basis. The cost basis for taxable assets, such as stocks and mutual funds, is “stepped up” to the investment’s value on the day of the original owner’s death.
For example, if your father paid $75 for shares of stock that were worth $575 on the day he died, your basis would be $575. You won’t owe any taxes if you sell the stocks immediately, but if you hold on to the shares, you’ll owe taxes (or be eligible to claim a loss) on the difference between $575 and the sale price.
It’s a good idea to notify the investment account custodian of the date of death to ensure that you get the step-up, says Annette Clearwaters, co-founder of Clarity Investments.
Because of this favorable tax treatment, a taxable-account inheritance could be a good source of cash for a short-term goal, such as paying off high-interest debt or making a down payment on a house, says Jayson Owens, a certified financial planner. If you’d rather keep the money invested, review your inherited investments to see whether they are appropriate for your portfolio. For example, you could sell individual stocks and invest the money in a diversified mutual fund without triggering a big tax bill.
3. Retirement accounts
If you inherit a tax-deferred retirement plan, such as a traditional IRA, you’ll have to pay taxes on that money. Spouses can roll the money into their IRAs and postpone distributions — and taxes — until they’re 73. The rules and timelines differ depending on your relationship to the deceased. For example, if you inherited a retirement plan from a parent or sibling, you must follow different guidelines.
The rules for inherited retirement plans are complicated and change often, so review the tax requirements carefully with a tax advisor or financial expert.
If you inherit a traditional IRA
If the deceased was not your spouse, then the ten-year rule applies. This means you must distribute funds within ten years after the original account holder's death. However, there are some exceptions in the case of minor children or disabled heirs. Check these exceptions in case you might qualify.
Heirs also pay different tax amounts depending on whether the original account owner died before or after they had to take annual distributions, known as required minimum distributions (RMDs).
Beginning in 2020, the IRS announced rules that penalize heirs for failing to take proper distributions from inherited IRAs. The roll-out of these rules caused such confusion over inherited IRA rules that the IRS clarified the process in the SECURE 2.0 Act. This Act lowered penalties for failing to take IRA distributions from 50% to 25%. It also made changes to some of the age requirements. Given the complexity of these changes, it's best to consult a tax professional before you designate how you will take RMDs.
If you inherit a Roth IRA
If you are fortunate enough to inherit a Roth IRA, you’ll still be required to deplete the account in 10 years, but the withdrawals will be tax-free.
Get some help
If you inherit a traditional IRA or 401(k), you may want to consult with a financial planner or tax professional to determine the best time within the 10-year window to take taxable withdrawals. For example, postponing withdrawals until after you stop working may make sense if you're close to retirement, since your overall taxable income will probably decline.
4. Real estate
When you inherit a relative’s home (or other real estate), the value of the property will also be stepped up to its value on the date of the owner’s death. This can result in a large lump sum if the home is in a part of the country that has seen real estate prices skyrocket.
For instance, if you inherit a property that was purchased for $150,000 initially, but is now worth $300,000 at the time you inherit it, the basis is stepped up to $300,000. You not only benefit from the immediate break, but this step up can also significantly reduce any capital gains taxes if you sell the property later.
Selling a home, however, is considerably more complex than unloading stocks. You’ll need to maintain the home, along with paying the mortgage, taxes, insurance, and utilities, until it’s sold.
5. Life insurance
Inheritance from a life insurance policy isn’t generally taxable as income. The money may be included in your estate for purposes of determining whether you must pay federal or state estate taxes. However, when a death benefit is paid out as a lump sum rather than in installments, the interest earned on the death benefit is taxable.
Also, if you transfer your insurance policy over to someone, a gift tax may be applied and withdrawing money from the cash value of a life insurance policy could also spark income taxes.
6. Spending your windfall
Even a small inheritance can represent more money than you’ve ever received at one time. Go ahead and treat yourself to a modest splurge — a special vacation, for example — but avoid making costly changes in your lifestyle.
Brian Lee used his inheritance to pay off his wife’s student loans and a small credit card debt; the rest went into retirement savings. Lee says he wanted to honor the legacy of his uncle, a dedicated investor who worked for IBM in the custodial department for 30 years. Lee’s uncle spent most of his life in the same small house in Austin, Texas, and drove a 1967 Ford truck, but he was a wealthy man, with an estate valued at more than $3 million when he died. “There’s no way I would blow money someone spent a lifetime saving,” Lee says.
However, many people overestimate how long their newfound wealth will last. For this reason, consider stashing your inheritance in a money market account or CD account for six months to a year. You'll earn interest on your cash, and your money will be safe while you assemble a team of professionals, which typically includes a fee-only planner, a tax professional and an attorney.
Your team can help you look for ways to fortify your finances. Paying off credit cards and student loans will relieve you of high-interest debt and free up cash for other purposes. If you haven’t saved enough to cover several months’ worth of expenses, use your windfall to beef up your emergency fund.
Once you’ve got that covered, consider using your inheritance to increase retirement savings. Finally, if you don’t have an estate plan of your own, use some of the money to create one, including powers of attorney, health care directives, a will, and, if necessary, a living trust. Your heirs will thank you.
7. Inheriting dos and don'ts
While you might not inherit anything close to the billions dangled in front of the Roy family children on the show Succession, it is still important to plan how you will handle (and spend) your inheritance.
Inheriting dos
- Deposit your money initially in a secure account. The first thing to do with your inheritance is to deposit the funds in a NCUA or FDIC-insured bank account. This will give you a little time to consider your next moves. But remember, the maximum coverage for each FDIC-insured account is $250,000.
- Review your finances. The time you take to consider the big picture of your current finances (debt vs assets) now will help ensure your financial situation in the future is in good order.
- Talk to a professional. You may be financially savvy, but everyone can benefit from a second set of eyes on your finances.
Inheriting don'ts
- Don't be impulsive. If you are fortunate enough to receive an inheritance, celebrate for a day, then hit the pause button. Think before you act and take a moment to consider if you need that new $60,000 vehicle or if the funds would be better off in an interest-bearing account.
- Don't quit your job. Many people say that if they inherit a large sum of money or other assets, they will quit their day job. Not smart — at least not right away. Quitting too early will only force you to blow through your inheritance, which you may regret later.
- Don't drastically change your life. If you inherit a large sum of money, you may be inclined to make drastic changes to your life, like buying a million-dollar yacht or a seaside villa in Spain. Unless you have a magic ball, there is no guarantee how long you will be able to live a life of luxury if you don’t put some limits on your spending.
Related Content
-
4 Great Tools to DIY Your Own Financial PlanSmart Savings Several tools picked out by Kiplinger that DIYers can use to make their own financial plan.
-
The 7-Month Deadline That Sets Your Lifetime Medicare PremiumsUnderstanding Medicare enrollment is crucial, as missing deadlines can lead to permanent late enrollment penalties and gaps in coverage.
-
Retirees Living in Portugal: You Need a Post-NHR Tax StrategyWhen your 10-year Non-Habitual Resident tax break ends, you could see your tax rate soar. Take steps to plan for this change well before the NHR window closes.
-
4 Great Tools to DIY Your Own Financial Plan
Smart Savings Several tools picked out by Kiplinger that DIYers can use to make their own financial plan.
-
The 7-Month Deadline That Determines Your Lifetime Medicare Premiums
Understanding Medicare enrollment is crucial, as missing deadlines can lead to permanent late enrollment penalties and gaps in coverage.
-
If You're a U.S. Retiree Living in Portugal, Your Tax Plan Needs a Post-NHR Strategy ASAP
When your 10-year Non-Habitual Resident tax break ends, you could see your tax rate soar. Take steps to plan for this change well before the NHR window closes.
-
Could Target-Date Funds With Built-In Income Guarantees Be the Next Evolution in Retirement Planning?With target-date funds falling short on income certainty, retirement plans should integrate guaranteed income solutions. Here is what participants can do.
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
Should You Renew Your CD?With rate cuts impacting earnings, we examine if now is a wise time to renew CDs.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
The Delayed November Jobs Report Is Out. Here's What It Means for the Fed and Rate CutsThe November jobs report came in higher than expected, although it still shows plenty of signs of weakness in the labor market.
