MANAGING AN INHERITANCE
Guidance for individuals and families navigating inherited IRAs, investments, property, and other inherited assets.
More Than a Financial Moment
Receiving an inheritance is rarely just a financial event. It often arrives during a period of loss, reflection, and change. While many people know these responsibilities will eventually come, it can still feel different when the decisions become real.
The good news is that most inheritance decisions do not need to be made immediately. Taking time to understand the assets involved — and the tax and planning considerations that come with them — can help ensure that the choices ahead are handled thoughtfully and at the right pace.
IT'S REASONABLE AND OFTEN WISE TO PAUSE
After receiving an inheritance, many people feel pressure to act quickly. Suggestions often come from well-meaning friends, family members, or financial institutions, and there can be an internal pressure to “handle things responsibly” right away.
In reality, many inheritance-related decisions benefit from a measured pace. Some administrative steps may need to occur so assets can be transferred properly, but the larger strategic decisions — how assets should be invested, whether property should be sold or retained, and how distributions should be timed — rarely need to be made immediately.
A thoughtful pause is not neglect. It is often part of responsible stewardship. Allowing time to understand what has been inherited and how it fits into your broader financial life can help prevent avoidable mistakes.
UNDERSTANDING WHAT YOU'VE INHERITED
Before making meaningful financial decisions, it is important to understand exactly what has been inherited. Many estates include several types of assets, each with its own rules, tax treatment, and planning considerations.
Inherited IRAs and Retirement Accounts
Retirement accounts are among the most commonly inherited financial assets. These may include traditional IRAs, Roth IRAs, 401(k) plans, or other employer-sponsored retirement plans.
While these accounts may appear similar on a statement, they can function quite differently after inheritance. Traditional retirement accounts are generally funded with pre-tax dollars, which means withdrawals by beneficiaries are typically taxable as ordinary income. Rules governing how and when those withdrawals must occur depend on the beneficiary's relationship to the original owner and several other factors — including whether the original account owner had already begun taking required distributions before their death.
Because the rules in this area are both specific and consequential, the timing of decisions around inherited retirement accounts is one of the more important early considerations for many beneficiaries, particularly as it relates to tax planning.
Inherited Brokerage Accounts
Taxable investment accounts often contain stocks, bonds, mutual funds, exchange-traded funds, or cash balances. Unlike inherited retirement accounts, these investments are generally not taxed simply because they were inherited.
In many cases, inherited investments receive what is known as a step-up in cost basis. This means the tax cost of the investment is reset to its value at the time of the original owner’s death. Any capital gains that accumulated during the previous owner’s lifetime are typically eliminated for tax purposes.
As a result, if the beneficiary sells an inherited investment shortly after receiving it, there may be little or no taxable gain. This adjustment often provides more flexibility than people initially expect when deciding how to manage inherited investments.
Trust Accounts and Trust Distributions
Some assets pass to beneficiaries through trusts rather than directly. Trusts can hold investment accounts, real estate, business interests, or other property.
In these situations, the trust document often governs how and when assets are distributed. The tax treatment of trust income can also differ depending on whether income remains within the trust or is distributed to beneficiaries.
Because trust structures vary widely, reviewing the terms of the trust is an important first step before making financial decisions.
Real Estate and Other Property
Not all inheritances involve financial accounts. Some individuals inherit homes, rental properties, land, or business interests.
These assets can raise additional questions about ownership, valuation, maintenance costs, and whether it makes sense to retain or sell the property. Like brokerage accounts, inherited property may also receive a stepped-up cost basis for tax purposes, which can affect capital gains if the asset is eventually sold.
Cash and Bank Accounts
Some beneficiaries inherit funds through savings accounts, certificates of deposit, or other bank accounts. These may transfer through beneficiary designations or through the estate itself.
Although cash assets may appear simpler than investment accounts, they still raise important questions about how the funds should be allocated, invested, or preserved within a broader financial plan.
TAX CONSIDERATIONS THAT OFTEN ACCOMPANY INHERITED ASSETS
Taxes are one of the areas where inherited assets can become more complex than many people expect. Most beneficiaries are relieved to learn that receiving an inheritance itself is generally not treated as taxable income.
However, inherited assets can create taxes later depending on how they are structured and when withdrawals or sales occur.
Taxes on Retirement Accounts
Withdrawals from inherited traditional retirement accounts are typically taxed as ordinary income. The rules governing how quickly those withdrawals must occur, and whether annual distributions are required along the way, depend on the beneficiary's relationship to the original account owner and whether the original owner had already begun taking distributions before their death.
Because the timing of withdrawals affects both tax exposure and potential penalties, this is one of the areas where working with a fiduciary advisor and a tax professional early in the process can make a meaningful difference. See the FAQ below for more detail on how these rules work.
Capital Gains on Inherited Investments
Inherited brokerage accounts are often more tax-efficient than people expect because of the step-up in cost basis described earlier. Capital gains taxes generally apply only to appreciation that occurs after the inheritance.
This means beneficiaries may have flexibility to personalize and restructure the portfolios without triggering gains based on decades-old purchase prices.
Trust-Related Taxes
Trusts may distribute income to beneficiaries or retain income within the trust itself. The tax treatment depends on the trust structure and distribution rules.
For this reason, trust-related inheritances often require coordination among financial advisors, tax professionals, and estate attorneys.
Estate Taxes vs Income Taxes
Estate taxes and income taxes are often confused. Federal estate taxes are assessed on the estate itself rather than directly on beneficiaries in most cases.
However, inherited assets can still generate income taxes later depending on how they are distributed or sold.
In many cases, inheritance planning intersects with broader financial questions such as retirement planning, portfolio construction, tax-efficient investing, and estate planning for future generations.
WHAT HAPPENS WHEN YOU INHERIT AN IRA OR INVESTMENT ACCOUNT?
Many beneficiaries are unsure how inherited accounts actually transfer to them.
In most situations, accounts do not simply change names automatically. Instead, the transfer process typically begins once the financial institution is notified of the account owner’s death and receives required documentation.
Depending on the type of asset, the process may be initiated by the executor of the estate, the trustee of a trust, or the named beneficiary working directly with the financial institution.
Inherited Retirement Accounts
For retirement accounts, beneficiaries typically contact the custodian or plan administrator, submit a claim form and death certificate, and establish an inherited IRA account in their own name as beneficiary. The assets are then transferred into that account rather than becoming the beneficiary’s personal IRA.
Inherited Brokerage Accounts
For brokerage accounts with transfer-on-death designations, the beneficiary works with the brokerage firm to complete transfer paperwork and establish a receiving account.
If the account passes through the estate instead, the executor coordinates the transfer before the beneficiary takes ownership.
Bank Accounts
Bank accounts with payable-on-death designations are often transferred once the beneficiary provides the required documentation to the bank. Accounts without beneficiary designations may pass through the estate instead.
Real Estate and Business Interests
Property transfers are often coordinated through the executor, trustee, or estate attorney and may require updated deeds, ownership documents, or valuation work.
While the administrative steps can feel unfamiliar, most follow a well-established process once the appropriate professionals are involved.
ALIGNING INHERITED ASSETS WITH YOUR FINANCIAL LIFE
An inheritance often represents a meaningful change to a person’s financial landscape.
Investments inherited from someone else may reflect a different time horizon, risk tolerance, or financial objective. Reviewing those assets in the context of your own financial life can help determine whether adjustments are appropriate.
For some individuals, inherited assets may become part of a long-term investment strategy. For others, they may provide flexibility to support retirement planning, reduce financial risk, or address other long-term goals.
In some cases, inheritance planning may naturally intersect with other areas of financial strategy, such as retirement planning during the years leading up to retirement or investment strategies designed to help manage portfolio risk over time.
COMMON MISTAKES AFTER RECEIVING AN INHERITANCE
Most inheritance-related mistakes are not the result of carelessness. They often occur when decisions are made too quickly or without a full understanding of how different assets are treated.
Some individuals make investment changes before understanding the tax character of the accounts involved. Others assume all inherited accounts function the same way when in reality retirement accounts, brokerage accounts, trusts, and property can all follow different rules.
Another common challenge is treating inherited assets as separate from the rest of one’s financial life. In reality, inheritances often affect investment strategy, tax planning, retirement preparation, and long-term financial goals.
Approaching inheritance decisions with patience and context can help avoid many of these pitfalls.
WHY MANY FAMILIES SEEK GUIDANCE FOR AN INHERITANCE
Even individuals who are comfortable managing their finances often find that inheritance introduces questions and processes they have not encountered before.
Tax rules, account transfer procedures, and investment decisions can intersect in ways that are unfamiliar. In addition, the emotional context surrounding an inheritance can make it difficult to approach financial decisions objectively.
Professional guidance can help bring clarity to the process by explaining how inherited accounts work, identifying potential tax considerations, and helping beneficiaries integrate inherited assets into their broader financial lives.
A HELPFUL CONVERSATION
If you have recently inherited financial assets and would find it helpful to talk through your situation, we offer an experienced perspective. Our advisors have navigated inheritances both personally and professionally, and we understand that these responsibilities often arrive during a time when emotions and financial decisions overlap.
Often the most helpful first step is simply understanding what you have inherited, what rules may apply, and which decisions can wait.
A thoughtful conversation can provide reassurance and help bring clarity to the path ahead.
FAQ:
INHERITANCE AND INHERITED ACCOUNTS
Do I need to make decisions immediately after receiving an inheritance?
Not necessarily right away. Many financial decisions benefit from taking time to understand your options. That said, some accounts do require timely action. Inherited IRAs, for example, may require you to begin taking annual distributions within the first year, depending on whether the original account owner had already begun taking required minimum distributions (RMDs) before their death. Missing those required distributions carries a penalty of up to 25% of the amount that should have been withdrawn, so the timing here matters in a concrete way.
Separately, certain administrative steps, such as transferring accounts into your name as beneficiary, should generally be completed sooner rather than later, as delays can cause complications with financial institutions and the estate. These are just two examples of why working with a fiduciary advisor who understands the specific rules governing different types of inherited assets is so important. The rules are complex, the exceptions are real, and the cost of a misstep can be significant.
Are inherited IRAs taxable?
Withdrawals from inherited traditional IRAs are generally taxed as ordinary income. Whether you owe tax simply for inheriting a retirement account is a separate question — the answer is generally no. Taxes arise when distributions are taken, not at the moment of inheritance itself.
How distributions must be taken depends significantly on your relationship to the original account owner.
Surviving spouses have the most flexibility. A spouse who inherits an IRA can generally choose to roll the account into their own IRA and treat it as their own — deferring distributions according to their own age and timeline, and naming their own beneficiaries. Alternatively, a spouse may keep the account as an inherited IRA, which can be useful in certain situations, such as when the surviving spouse is younger than 59½ and may need to access funds without the early withdrawal penalty that would apply to their own IRA.
For most non-spouse beneficiaries who inherited after 2019, current IRS rules generally require the full balance of an inherited IRA to be withdrawn within ten years of the original owner's death. Whether annual distributions are also required during that ten-year period depends on a key factor: whether the original account owner had already begun taking required minimum distributions (RMDs) before they passed away. If they had, the beneficiary is generally required to take annual distributions throughout the ten-year period. If the original owner had not yet reached the age at which distributions were required, the beneficiary has more flexibility in timing withdrawals — though the account must still be fully distributed by the end of the tenth year. Missing a required annual distribution can result in a penalty of up to 25% of the amount that should have been withdrawn.
These rules are nuanced, and the consequences of a misstep can be significant. For guidance specific to your situation, see the IRS FAQ page, or speak with a qualified tax professional or fiduciary advisor.
Do inherited investments have to stay invested the same way?
No. Once assets are transferred to the beneficiary, investments can typically be adjusted. However, understanding tax implications before making changes is important.
Will I owe taxes on the inheritance I receive?
In most cases, receiving an inheritance is not itself a taxable event at the federal level. The federal government does not impose an income tax on beneficiaries simply for inheriting money, investments, or property. That said, taxes can arise later depending on the type of asset and what you do with it.
Withdrawals from inherited retirement accounts are typically taxed as ordinary income as they are taken. Selling inherited investments or property may generate capital gains, though the step-up in cost basis that often applies to inherited assets can significantly reduce or eliminate gains on appreciation that occurred before the inheritance. The important distinction is between receiving an inheritance and the tax consequences that arise from using, selling, or withdrawing from the assets you have inherited.
State-level taxes are a separate consideration and are discussed in the two FAQs below.
What is the difference between an estate tax and an inheritance tax?
These two concepts are frequently confused, and the distinction matters practically.
An estate tax is assessed on the total value of a deceased person's estate before any assets are distributed to heirs. It is the estate itself — not the individual beneficiaries — that owes this tax, and it is typically paid from estate funds before distributions occur. At the federal level, the estate tax applies only to estates above a significant exemption threshold, which means the vast majority of estates are not subject to it. Twelve states and the District of Columbia also impose their own estate taxes, often with much lower exemption thresholds than the federal level — meaning a state estate tax may apply even when the federal tax does not.
An inheritance tax is different. Rather than being levied on the estate, it is assessed on the individual beneficiary based on the value of what they receive. Five states currently impose an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates and exemptions vary by state and, in most cases, by the beneficiary's relationship to the deceased — closer relatives are often exempt or taxed at lower rates, while more distant relatives or unrelated beneficiaries may face higher rates. Surviving spouses are exempt from inheritance tax in all states that impose one.
Maryland is the only state that currently imposes both an estate tax and an inheritance tax, which means certain estates there may be subject to taxation at two separate levels before and after distribution.
Does it matter if the estate and the beneficiary are in different states?
Yes, and this is one of the more commonly overlooked complications in inheritance planning.
Estate taxes are generally governed by the state where the deceased was domiciled at the time of death — or, in the case of real estate and certain other property, the state where the property is physically located. This means that even if you as a beneficiary live in a state with no estate tax, the estate itself may still owe tax to the state where your loved one lived or where property was held.
Inheritance taxes follow a different rule. They are generally owed to the state where the deceased was domiciled or where taxable property was located — regardless of where the beneficiary lives. So if you live in a state that does not impose an inheritance tax, but you inherit from someone who lived in another state that does, you may still owe that state's inheritance tax on what you receive.
As an example: a beneficiary living in South Carolina, which has no estate or inheritance tax, who inherits from a parent who lived in Pennsylvania may still owe Pennsylvania inheritance tax on assets received from that estate. The beneficiary's home state is not the determining factor.
Because the rules vary significantly by state, and because estates and beneficiaries are often in different states, this is an area where early coordination between a fiduciary advisor and an estate attorney can help identify and plan around potential obligations before they become surprises.
What if I inherited property or a business interest?
Inherited property and business interests often involve additional considerations such as valuation, ownership transfer, and potential tax implications. These assets can still be incorporated into a thoughtful long-term financial plan.