Most heirs face many complex decisions â and potential tax consequences. These insights can help you avoid common mistakes and make more informed choices.
When an inheritance comes after the death of a loved one, it can feel like a mixed blessing. It can be hard to picture what you need to do with the gift when you’re feeling so sad. Jason Albano, managing director and wealth strategies advisor at Bank of America Private Bank, says that you’ll probably have a lot of questions even if your parents decide to give you your inheritance or a portion of it while they’re still alive. This is something that parents are doing more and more often.
If you expect to receive an inheritance at some point in your life, your financial advisor can provide useful guidance, he notes. âDonât wait until the decisions are urgent. Discuss in advance potential tax consequences with your advisor and personal tax professional and how the gift could help you pursue your goals,â Albano adds. You might also want to talk with your parents about their hopes for your financial future â even how they might be planning to structure their future gift to you. Read the insights below for a better sense of how to prepare for the many issues heirs can face.
A: Itâs not necessary to ask how much money your parents might leave you. âStart the conversation by asking about their values and what wealth means to them,â suggests Merrill Lynch Wealth Management Advisor Todd Silaika. That can lead to productive conversations about the role an inheritance could play in your financial future and what your parentsâ expectations might be. This sort of conversation also provides you with the opportunity to share your preferences and priorities. For instance, if thereâs a family business or even a family vacation home and you have no interest in owning either, be up-front about that. âWhen everyone understands the expectations, the outcomes tend to be better for everyone,â Silaika notes.
A: Youâll likely have some time before you receive the funds. Depending on the complexity of the estate, the probate process, if applicable, generally takes at least six months to a year. And thatâs usually for the best, says Private Wealth Advisor Cheryl Smith. Too often beneficiaries make large purchases or sweeping decisions that they later regret. Even paying off debt right away may not be in your best interests, says Albano. âDoes it make sense to pay off a mortgage at a rate below 3%? You might do better than a 3% return elsewhere,â he notes.
Instead, consider setting up a meeting with your advisor to discuss your competing goals and how you could manage your newfound wealth to help you pursue them. Albano suggests looking at four buckets â spending needs, short-term goals, long-term goals and philanthropy. âHow you allocate your inheritance to these buckets depends on your situation,â he says. If you have young children, a portion could go toward college costs in the long-term bucket. But if youâre looking at renovating your home or relocating, youâll probably want to put those funds into a short-term bucket and make sure theyâre easily available.
A: Most inheritances arenât, says Albano. You might be named the beneficiary of a retirement account â or you could inherit the family home, for instance. If youâve inherited a tax-deferred account like an IRA or a 401(k) account and youâre an eligible designated beneficiary1 or designated beneficiary, you may have as long as 10 years after the death of the original account owner to fully liquidate the account (depending on your age relative to the original account owner and certain other circumstances). The rules are complex, and distributions have tax implications. You should consult your tax professional regarding your specific situation. Youâll also be responsible for taking required minimum distributions (RMDs) as provided in the federal tax code. Assets in taxable accounts, by contrast, can be either liquidated or left in the account indefinitely. Again, youâll want to meet with a tax professional to decide your best strategy.
âThings can get more complicated when converting real assets such as a family home or business into cash, especially when multiple beneficiaries are involved,â notes Albano. If there are disputes over a will, it could take years for the issues to be resolved. In the best-case scenario, parents have worked with their advisor and estate attorney to construct a will or trust in such a way that its provisions account for the beneficiariesâ desires â for instance, which child wants to keep the family home or work in the family business.
A: For tax purposes, an inheritance generally isnât 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 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 income tax consequences. And if you inherit certain tax-deferred accounts like a traditional IRA or 401(k) account, youâll pay taxes on your withdrawals, including RMDs, as ordinary income at whatever your rate is. Also, some states have an inheritance tax.
When it comes to taxable accounts and other assets like real estate, thereâs the possibility youâll owe no income tax because the cost basis of the asset gets stepped up (or down) to the current fair market value upon its ownerâs 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 â say, a trust that pays out annually â it may put you in a higher marginal tax bracket.
A: Whenever your net worth changes, or you have a significant life event, you should take the time to review your estate plan and make appropriate changes, says Albano. You may need to consider how to protect certain newly acquired assets â for instance, a family home or business thatâs been passed down to you that you want someday to go to your children.
âAsk yourself, if something happens to you, how will your assets flow to the people you care about?â he adds. A trust might be one way to accomplish that aim. Then talk to your advisor about how you might want to use your inheritance to further your own legacy â and help make your beneficiariesâ futures more secure.
Getting a huge chunk of money dropped in your lap sounds like a dream, right? But when that cash comes from losing someone you love, it gets complicated fast. I’ve seen too many folks blow through inheritances like they’re playing with Monopoly money, and then poof – it’s gone before they even process their grief.
Whether you’re expecting a windfall or you’ve just received one, you need a game plan. Today, I’m breaking down the smartest things you can do with an inheritance to honor your loved one’s legacy while securing your own financial future.
Take a Breath Before Making Any Moves
Let’s be real – when you’re grieving, your brain isn’t exactly in top decision-making mode. The absolute smartest first move? Do nothing drastic for a while.
Put the inheritance money in a high-yield savings or money market account while you deal with your feelings. This simple step accomplishes two important things:
- Your money stays safe and even earns a little interest
- You give yourself time to think clearly before making life-altering financial decisions
Brian Lee from Tacoma, Washington learned this lesson when he inherited money after his uncle and aunt passed away. He took time to consider his options rather than rushing into decisions, which helped him use the inheritance thoughtfully.
Build Your Financial Dream Team
When a lot of money is at stake, going it alone isn’t always the best idea. You might want to put together a group of professionals who can help you with the inheritance process:
- A fee-only financial planner (who doesn’t earn commissions from selling you products)
- CPA or tax advisor
- Estate planning attorney (especially for larger inheritances)
- Insurance agent
- Investment professional
These experts can help you understand tax implications, investment options, and long-term planning strategies tailored to your specific situation.
Pay Off High-Interest Debt First
Getting rid of bad debt is one of the smartest things you can do with inheritance money. If you have credit card debt, personal loans, or payday loans with high interest rates, paying them off with some of your inheritance can save you a lot of money in interest.
Consider this priority list for debt payoff
- Credit cards and high-interest consumer debt (often 15-25% interest)
- Personal loans
- Student loans
- Mortgage (lower priority since interest rates are typically lower)
We already talked about Brian Lee. He paid off his wife’s student loans and some credit card debt with the six-figure inheritance he received. This freed up their monthly cash flow and made them feel better about their money right away.
Beef Up Your Emergency Fund
Life has a funny way of throwing expensive surprises at us when we least expect them. Using part of your inheritance to build a solid 3-6 month emergency fund creates a financial safety net that can prevent future debt.
This might not feel as exciting as buying a new car or taking a luxury vacation, but I promise you’ll sleep better knowing you’re protected against unexpected job loss, medical emergencies, or major home repairs.
Smart Investment Strategies for Inherited Money
If you’ve taken care of high-interest debt and have a solid emergency fund, investing your inheritance can help it grow over time. But where should you put it?
Retirement Accounts
Maxing out tax-advantaged retirement accounts should be a top priority. While you can’t directly deposit inherited money into an IRA (since contributions require earned income), you can use the inheritance to cover expenses while directing more of your paycheck toward retirement.
For 2025, contribution limits are:
- 401(k): $23,000 ($30,500 if you’re 50 or older)
- Roth or Traditional IRA: $7,000 ($8,000 if you’re 50 or older)
Growth Stock Mutual Funds
For long-term growth, consider investing in good growth stock mutual funds. These provide diversification across many companies, which reduces your risk compared to picking individual stocks.
Low-Turnover Index Funds
If you’ve maxed out tax-advantaged accounts, consider low-turnover index funds in a brokerage account. These funds typically have lower fees and fewer taxable events than actively managed funds.
Real Estate (But Only With Cash!)
If your inheritance is substantial enough, purchasing rental property outright (no mortgage!) can provide ongoing income. Just remember that being a landlord comes with responsibilities, and it’s not truly “passive” income.
Special Considerations for Different Types of Inheritances
Not all inheritances come as a simple check. Each type of inherited asset has different rules and considerations.
Inherited IRAs
If you inherit a retirement account, your options depend on your relationship to the deceased:
As a surviving spouse:
- Take a lump sum payment (but be prepared for the tax hit if it’s a traditional IRA)
- Open a new inherited IRA
- Transfer the funds into your own IRA (spouse-only option)
As a non-spouse beneficiary:
- Take a lump sum payment
- Open an inherited IRA, but be aware of the 10-year withdrawal rule (the account must be emptied within 10 years of the original owner’s death)
Inherited Real Estate
If you inherit property, you have three main options:
- Sell it: Thanks to the “step-up in basis” rule, you’ll only pay capital gains taxes on the appreciation since the time of death, not since the original purchase.
- Rent it out: Generate ongoing income, but be prepared for landlord responsibilities.
- Live in it: Eliminate housing costs, but remember you’ll still need to cover property taxes, insurance, and maintenance.
Tax Implications to Be Aware Of
Unless you’re inheriting millions, you probably won’t need to worry about federal estate taxes. In 2025, federal estate taxes only apply to estates worth over $13.99 million.
However, other tax considerations include:
- Step-up in basis: Inherited investments are valued at the price on the date of death, not the original purchase price.
- IRA distributions: You’ll pay income tax on distributions from inherited traditional IRAs (but not Roth IRAs).
- State inheritance taxes: Six states (Pennsylvania, Iowa, Maryland, New Jersey, Kentucky, and Nebraska) have inheritance taxes, but close relatives are often exempt.
The Great Wealth Transfer: Why This Matters Now More Than Ever
We’re in the middle of the largest wealth transfer in history. Over the next two decades, Baby Boomers are expected to pass down around $84 trillion to younger generations by 2045. About 15% of adults expect to receive an inheritance in the next decade.
But here’s something important to know: inheritances aren’t distributed equally. White households typically inherit 5-6 times more than Black or Hispanic households, and high-income families (the top 5%) receive 4-12 times more than the bottom 80%.
The Do’s and Don’ts of Inheritance Management
Do’s:
- Deposit your money initially in a secure FDIC-insured account
- Review your entire financial picture before making decisions
- Talk to financial professionals
- Consider giving some to charity (10% is a good starting point)
- Honor your loved one’s legacy with thoughtful decisions
Don’ts:
- Don’t be impulsive with your decisions
- Don’t quit your job immediately
- Don’t drastically change your lifestyle
- Don’t tell everyone about your windfall (to avoid “sudden money syndrome” and unwanted “financial advice”)
- Don’t invest in anything you don’t understand
Finding Balance: It’s OK to Enjoy Some of It
While being responsible with an inheritance is important, it’s also OK to use a portion to enjoy life or create meaningful experiences. The key is balance and intentionality.
Consider the “90/10 rule” – use 90% for responsible financial moves (debt payoff, saving, investing) and 10% for something meaningful or enjoyable. This approach honors both your financial future and the person who left you the inheritance.
A Personal Note From Someone Who’s Been There
I remember when my grandmother passed and left me some money. I was tempted to blow it all on a fancy vacation or new car, but instead decided to put most toward paying off my student loans while setting aside a small portion for a weekend trip to her favorite beach town.
Every time I look at my zero student loan balance, I think of her and know she’d be proud. And that beach trip? It gave me space to remember her and process my grief in a place she loved.
Final Thoughts: Creating a Legacy of Your Own
The smartest thing you can do with an inheritance isn’t just about the money—it’s about honoring the legacy of your loved one while creating one of your own.
By making thoughtful decisions today, you’re not only securing your financial future but potentially creating wealth that you can pass on to future generations. That’s a powerful way to honor the person who cared enough to leave something behind for you.
What have you done with an inheritance, or what do you plan to do if you receive one? I’d love to hear your thoughts in the comments below!
Remember: This article provides general guidelines about inheritance topics. Your situation may be unique, so consider consulting with financial professionals to discuss the best plan for your circumstances.
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Inherited $400,000, What Should I Do With It?
FAQ
What is the first thing you should do when you inherit money?
Deposit the money into a safe account Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance.
What should you not do with inheritance money?
7 Common Inheritance Mistakes to AvoidNot Factoring in Potential Inheritance Taxes. Failing to Make a Budget. Spending Too Much. Not Paying Off Debts. Losing Other Income Sources. Not Saving Enough. Not Getting Expert Advice.
What’s the best thing to do with inheritance money?
If one received a large inheritance it is a good idea to use it for something like a down payment on a residence or perhaps in something that makes you money (invest in a business or buy income property). That would mean refraining on using that money for smaller stuff or general expenses.
How to be smart with inheritance money?
Hire a skilled accountant to manage your wealth for your best interests. Invest the inheritance in products that are varied in risk. Budget for retirement, travel, and lifestyle. Make sure the wealth is working for you and your future. Pay off high interest debts.
What should I do with my inheritance?
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.
Should you use your inheritance wisely?
Keeping that top of mind will bring a sense of responsibility, accountability and intentionality to the situation and help you use your inheritance wisely. When you receive a financial windfall like an inheritance, don’t be shocked if all kinds of people come out of the woodwork to tell you what you should do with it.
How do I make the most of my inheritance?
Here’s our advice for making the most of your inheritance. Here’s the deal: When a loved one dies, you’re not thinking clearly enough to make major financial decisions. And in most cases, you don’t have to make any major decisions right away. There’s nothing wrong with letting your inheritance sit there for a while as you grieve.
How can I use my inheritance to save money?
One of the smartest ways to use part of an inheritance is to pay off high-interest debt. Credit card balances, personal loans, and other high-interest liabilities can erode your financial security over time. By paying off these debts, you free up more of your future income for saving, investing, or other priorities.
How do I make wise decisions with inheritance money?
As you can see, making wise decisions with inheritance money takes some time and usually involves other advisors. But in the end, by investing your time in planning and research you’ll be able to enjoy your inheritance for many years to come.
Should you invest your inheritance responsibly?
There may be the opportunity for a bit of fun once you’ve invested your inheritance responsibly—but indulge wisely. Avoid spending a lot of money on luxury products. An expensive car may be appealing, but Insurance, upkeep, and property tax are all extra fees that come with a luxury car.