7 Smart Ways to Ensure Your Inheritance Doesn’t Become a Burden

Receiving an inheritance can feel like winning the lottery – except it comes with the emotional weight of losing someone you love. While many people dream of a financial windfall, inheritances often bring unexpected challenges that can turn this blessing into a burden if not handled properly.

I’ve seen too many clients struggle with the complexities of managing inherited wealth. The mix of grief, responsibility, and sometimes family tension creates a perfect storm that can overwhelm even the most financially savvy individuals

In this guide, we’ll explore practical strategies to help you navigate the potential pitfalls of inheritance and transform what could be a burden into a genuine blessing for your financial future

Understanding Why Inheritances Can Feel Burdensome

Before diving into solutions let’s understand why inheritances sometimes feel more like a burden than a blessing

• Emotional complexity: Grieving while making major financial decisions is extremely difficult
• Tax implications: Unexpected tax bills can significantly reduce your inheritance
• Family conflicts: Disagreements over assets can strain relationships
• Management responsibility: Suddenly having to manage significant assets can be overwhelming
• Financial uncertainty: Lack of clarity about how to use the money wisely

Someone I worked with once told me, “I never thought I’d be stressed about getting money, but my inheritance has caused me more stress than anything else in my life.” “.

The Tax Reality of Inheritances

One of the biggest potential burdens of inheritance is taxation. While the federal government doesn’t impose an inheritance tax directly on beneficiaries, there are several tax considerations that could impact your windfall:

Estate Tax Considerations

The federal estate tax applies to the estate itself before distribution to beneficiaries. In 2024, estates valued under $13.61 million are exempt from federal estate tax. However, some states have their own estate taxes with lower thresholds.

Inheritance Tax by State

As of 2025, six states impose inheritance taxes:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

If you live in one of these states, you may have to pay more taxes on your inheritance, depending on how close you were to the person who died and how much it was worth.

Capital Gains Tax on Inherited Assets

When you sell inherited assets like stocks or property, you may owe capital gains tax on the profits. Fortunately, inherited assets receive a “stepped-up basis,” meaning you’re only taxed on gains that occur after you inherit the asset, not from the original purchase price.

7 Effective Strategies to Prevent Inheritance Burden

1. Consider the Alternate Valuation Date

When dealing with an estate, the executor typically values assets based on their fair market value at the date of death. However, there’s another option:

Viola Robinson Faust, CPA, says, “The executor could pick the other valuation date, which is six months after the death.” “This is only possible if it lowers both the gross value of the estate and the estate tax liability, giving the beneficiaries a bigger inheritance.” “.

This plan can be especially helpful if your loved one’s assets lose value after they die.

2. Put Everything into a Trust

Trusts aren’t just for the ultra-wealthy – they’re powerful tools for anyone receiving an inheritance.

“A trust allows you to pass assets to beneficiaries after your death without having to go through probate,” notes a TurboTax expert. “Trusts are similar to wills, but trusts generally avoid state probate requirements and the associated expenses.”

Two common types of trusts include:

• Revocable trusts: Allow the grantor to take assets out if necessary
• Irrevocable trusts: Usually tie up assets until the grantor dies

An irrevocable trust transfers asset ownership from the original owner to the trust beneficiaries. Because those assets don’t legally belong to the person who set up the trust, they aren’t subject to estate or inheritance taxes when that person passes away.

Additionally, trusts offer privacy benefits during estate settlement that public probate proceedings don’t provide.

3. Minimize Retirement Account Distributions

If you inherit retirement accounts, be strategic about withdrawals to avoid unnecessary tax burdens:

“Inherited retirement assets are not taxable until they’re distributed,” states the TurboTax article. “However, if the beneficiary is not the spouse, certain rules may apply to when the distributions must occur.”

For spouses inheriting IRAs:

• You can typically take over the IRA as your own
• Required minimum distributions would begin at age 73

For non-spouse beneficiaries:

• You can transfer funds to an inherited IRA in your name
• Choose a distribution method based on your life expectancy
• Take the money out all at once by the end of the year after the account holder died
• If the decedent was under 73, you may take out all money within 10 years

4. Implement a Strategic Gifting Plan

Gifting portions of your inheritance can reduce your tax burden while helping loved ones:

“It may seem counter-intuitive, but sometimes it makes sense to give a portion of your inheritance to others,” the TurboTax expert advises. “In addition to helping those in need, you could potentially avoid taxable gains on appreciated property and receive a tax deduction by donating to a charitable organization.”

You can give up to $18,000 (as of 2024) to each person annually without reducing your lifetime estate tax exemption or filing a gift tax return.

5. Keep Inherited Assets Separate

One common mistake I see is when people mix inherited money with marital assets, which can create complications if relationships change later.

“Inherited funds are considered separate property when they’re held in a separate account in your name only,” explains financial planning expert Bella Mertz. “To ensure that your inheritance remains separate, it can’t be commingled with your marital assets.”

This separation provides important protection and clarity, especially in the event of divorce or other life changes.

6. Seek Professional Guidance

The complexities of inheritance often require expert help. Consider working with:

• Estate planning attorney: To help develop comprehensive estate plans
• Financial advisor: For investment guidance and tax-saving strategies
• Tax professional: To navigate federal and state tax implications

“While not always necessary, seeking guidance from a qualified financial professional can be beneficial, especially if you have a large inheritance or complex financial situation,” advises Mertz.

7. Address the Emotional Aspects

Don’t underestimate the emotional impact of receiving an inheritance. Many clients tell me the psychological burden can be just as challenging as the financial aspects.

Take time to:

• Process your grief before making major financial decisions
• Consider talking to a trusted friend or counselor
• Focus on honoring the legacy of your loved one through thoughtful use of the inheritance

As one financial advisor notes, “The first step financial advisors typically suggest, especially if you’ve come into a large sum of money: Keep quiet.” This helps avoid unwanted attention and pressure from friends, family, or scammers.

Frequently Asked Questions About Inheritance Management

How can I avoid paying estate taxes on my inheritance?

The best strategies include:

• Ensuring inherited assets fall below federal/state exemption thresholds
• Transferring assets into trusts
• Utilizing annual gift tax exclusions
• Making charitable donations

What types of assets typically trigger capital gains tax when inherited?

Capital gains tax applies when you sell inherited assets like:

• Stocks and bonds
• Real estate properties
• Art or collectibles
• Business interests

Remember, you benefit from a stepped-up basis, meaning you only pay taxes on gains since your inheritance, not from the original purchase price.

Should I hire a financial professional to manage my inheritance?

While not always necessary, professional guidance can be invaluable, especially for:

• Large inheritances
• Complex asset portfolios
• Significant tax implications
• Long-term wealth preservation goals

Final Thoughts: Turning Inheritance into Opportunity

An inheritance doesn’t have to be a burden. With proper planning and the right approach, it can become a powerful tool for financial security and even creating a lasting legacy of your own.

Remember these key takeaways:

• Understand the tax implications before making decisions
• Consider trusts and other protective structures
• Be strategic with retirement account distributions
• Don’t rush major financial moves while grieving
• Seek professional guidance when needed

By implementing these strategies, you can honor your loved one’s wishes while ensuring their gift provides lasting benefit rather than unexpected burden.

Have you received an inheritance? What challenges did you face? Share your experiences in the comments below!