Kiplinger’s Personal Finance
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 2026 Planning & Progress Study shows that expectations around inheritances remain consistent with recent years, with about 20 percent of adults expecting to receive one in the coming decade. Yet, inheritances can vary significantly by race, income and region.
On average, white households inherit roughly three times more than Black or Hispanic households, and high-income families, or the top 5 percent, still get several times more than the bottom 80 percent, according to recent findings by the Federal Reserve and related data.
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.
There are also different rules for different heirs: spouses, for instance, enjoy some tax breaks and exemptions that aren’t available to adult children or other heirs.
For example, Brian Lee of Tacoma, Washington, 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 late 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 2026, the exemption amount is $15 million. This generous exemption is now permanent, so be sure to consider the 2026 tax rules 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 10-year rule applies. This means you must distribute funds within 10 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 rollout of these rules caused such confusion over inherited IRA rules that the IRS clarified the process in the SECURE 2.0 Act. (SECURE refers to Setting Every Community Up for Retirement Enhancement.) The act lowered penalties for failing to take IRA distributions from 50 percent to 25 percent. 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 $400,000 at the time you inherit it, the basis is stepped up to $400,000. 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 trigger income taxes.
