What Happens When You Inherit Money: Taxes, Probate, and Timing

When you inherit money, the cash usually is not treated as taxable income by the federal government, but it will not land in your account right away: the estate has to move through probate, the executor has to pay debts, and a few categories of inherited assets (retirement accounts especially) carry tax rules that can catch you off guard. The federal estate tax only applies to estates above $15 million in 2026, so fewer than 1% of estates owe it.¹ The real friction points for most heirs are timing, inherited IRAs, state inheritance taxes in a handful of states, and the risk that a modest inheritance can knock you off Supplemental Security Income or Medicaid.

Expect Months, Not Days

The money does not move directly from the deceased person to you. It moves through the estate, and the estate has obligations to settle first. If there was a will, a probate court validates it and appoints an executor. If there was no will, the court appoints an administrator under state intestacy rules. When the deceased set up a living trust, the successor trustee handles things privately, outside court.

Before beneficiaries get anything, the executor pays the estate’s debts: credit cards, medical bills, mortgages, court filing fees, and any other valid claims. Creditors get a statutory window to file claims, and that window (which varies by state from a few months up to a year) is one of the main reasons the process is slow.

A straightforward estate typically takes 9 to 24 months from start to finish. Contested wills, complex assets, or fights among heirs push it longer. Some states let heirs skip full probate for small estates by filing an affidavit; the dollar threshold ranges widely, from as low as $5,000 to as high as $300,000 depending on the state and the type of property.

Is Inherited Money Taxable Income?

For federal income tax purposes, no. The Internal Revenue Code specifically excludes property acquired by inheritance from gross income.² If a relative leaves you $50,000 in a bank account, you do not report it on your tax return. Life insurance proceeds paid because the insured person died are also excluded from gross income under a separate section of the code.³

Two things do get taxed. First, any income the inherited assets generate after you receive them (interest, dividends, rent) is taxable to you going forward, the same as income from any other asset you own. Second, inherited traditional retirement accounts follow their own rules, covered below.

Federal Estate Tax

The federal estate tax is paid by the estate itself, not by you.⁴ It applies only when the total value of the deceased person’s assets exceeds the basic exclusion, which for people dying in 2026 is $15 million per individual and $30 million for a married couple.¹ That threshold was set by the One Big Beautiful Bill Act signed in July 2025, is indexed to inflation, and has no sunset.

When an estate does exceed the threshold, the executor files Form 706 and pays the tax from estate funds before anything is distributed. The top rate is 40%, and it applies only to the amount above the exclusion. If you are inheriting from someone whose total assets fall below $15 million, federal estate tax is not something you need to worry about.

State Inheritance Taxes

Five states tax the person receiving the inheritance rather than the estate: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates run from 0% to 16% and depend almost entirely on your relationship to the person who died. Surviving spouses are exempt in all five. Children and other close relatives pay lower rates than distant relatives or unrelated beneficiaries.

A separate group of states imposes its own estate tax (paid by the estate) at thresholds far below the federal $15 million. Maryland is the only state that levies both. If you live in or inherit from someone in one of these states, check the specific rules for your relationship and the amount.

Inherited Retirement Accounts

This is the biggest tax trap. Traditional IRAs and similar pre-tax accounts were funded with untaxed dollars, so the IRS collects income tax when the money comes out. Every dollar you withdraw from an inherited traditional IRA counts as taxable income in the year you take it.⁵

Most non-spouse beneficiaries have to empty the entire inherited account by December 31 of the tenth year after the original owner’s death.⁶ During that ten-year window, annual required minimum distributions may also apply, depending on whether the original owner had already started taking their own. These rules, finalized under the SECURE Act framework, apply to accounts inherited from owners who died in 2020 or later. Missing an annual distribution can trigger steep penalties.

Surviving Spouses

A surviving spouse can roll the inherited IRA into their own account.⁵ Once rolled over, the account is treated as though it always belonged to them. No ten-year deadline, and required minimum distributions follow the surviving spouse’s own age. For a younger spouse who does not need the money right away, this is almost always the better move.

Eligible Designated Beneficiaries

A narrow group of non-spouse beneficiaries can also skip the ten-year rule and stretch distributions over their own life expectancy: minor children of the account owner (though the ten-year clock starts once they reach the age of majority), beneficiaries who are disabled or chronically ill, and beneficiaries who are not more than ten years younger than the deceased owner.⁶

Inherited Roth IRAs

Inherited Roth IRAs follow the same ten-year depletion timeline, but the tax treatment is much friendlier. Withdrawals of contributions are tax-free, and withdrawals of earnings are tax-free as long as the account has been open for at least five years.⁶ If the account is younger than five years, earnings may be taxable. A surviving spouse can treat an inherited Roth as their own, the same way as a traditional IRA.

Step-Up in Basis on Property and Stocks

One of the biggest tax benefits of inheritance is the step-up in basis. When you inherit appreciated property like stocks, mutual funds, or real estate, your tax basis resets to the fair market value on the date the owner died.⁷ The gains that built up during the deceased person’s lifetime are wiped out for capital gains tax purposes.

Say your parent bought a house for $150,000 in 1995 and it is worth $500,000 when they die. If they had sold it themselves, they would have owed capital gains tax on $350,000 of appreciation. Because you inherited it instead, your basis is $500,000, and if you sell for $510,000 you only owe tax on $10,000 of gain. This is one of the strongest reasons not to have a dying parent sell appreciated assets before death if the goal is to pass them to heirs.

Documents You Will Need

Banks, brokerage firms, and insurance companies will not release funds without proper paperwork. The core document is a certified copy of the death certificate, obtained from your local registrar or vital records office. Certified copies carry an official seal or security features; a regular photocopy will not work. Order several, because every institution holding assets will want its own.

If the estate went through probate, the court issues either letters testamentary (when there is a will) or letters of administration (when there is not). This document gives the executor or administrator legal authority to access the deceased’s accounts and distribute funds. Financial institutions almost universally require a copy.

You will also need to provide your Social Security number or taxpayer identification number for tax reporting purposes, even though the inheritance itself is not taxable.⁸ Each institution has its own claim forms. Getting the paperwork right the first time prevents delays that stretch weeks into months.

If You Get SSI or Medicaid, Read This First

A modest inheritance can do the most damage to people relying on needs-based benefits. The Supplemental Security Income resource limit is $2,000 for an individual and $3,000 for a couple, and those limits have not changed since 1989.⁹ Even a few thousand dollars can push you over and trigger a suspension of benefits. Medicaid follows similar asset rules in most states.

You have to report the change to the Social Security Administration within ten days after the end of the month in which it happens.¹⁰ Failing to report can bring penalties of $25 to $100 per occurrence plus an overpayment demand for benefits received while over the limit.¹¹ Serious cases can be treated as fraud.

Special Needs Trusts

If you are disabled and rely on SSI or Medicaid, a first-party special needs trust can hold an inheritance without disqualifying you. Federal law allows this type of trust for individuals under age 65 who meet the Social Security Administration’s definition of disabled.¹² The trust has to be established by you, a parent, grandparent, legal guardian, or a court.

Assets inside the trust do not count toward SSI or Medicaid resource limits, so the money can pay for things those programs do not cover, like personal care items, entertainment, or home modifications. The catch is a Medicaid payback requirement: when the beneficiary dies, remaining trust funds must first reimburse the state for Medicaid expenses paid during the beneficiary’s life. Set the trust up before or immediately after receiving the inheritance. Once the money hits your bank account and puts you over the resource limit, benefits can be suspended even if you move the funds into a trust later.

You Can Refuse the Inheritance

You are not required to accept an inheritance. If taking the money would create tax problems, threaten your government benefits, or you simply do not want it, you can file a qualified disclaimer. This is a formal, written refusal, and it has to be delivered within nine months of the date of death.¹³ Beneficiaries under 21 have until nine months after their twenty-first birthday.

For the disclaimer to be valid, you cannot have accepted any benefit from the property first. Depositing a check, collecting interest or rent, or using the property all count as acceptance. The disclaimed property passes to whoever would have been next in line under the will or state law, as if you had never been a beneficiary. Because it is a valid disclaimer and not a gift, you do not face gift tax consequences.

Inheriting From Someone Abroad

If you inherit more than $100,000 from a foreign person or foreign estate, you have to report it to the IRS on Form 3520, even though the inheritance itself is not taxable income.¹⁴ The form is due with your income tax return, including extensions. It is an information return, but the penalties for skipping it are severe: the greater of $10,000 or 35% of the reportable amount, with an additional $10,000 for every 30 days of continued noncompliance after the IRS sends a notice.¹⁵

Gifts or bequests from multiple foreign sources have to be aggregated when checking whether you cross the $100,000 threshold. People inherit from foreign relatives without realizing this obligation exists, and the penalties can dwarf any tax that would have been owed on the underlying funds. An accountant experienced with international tax reporting is worth the cost here.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances
3
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
4
Office of the Law Revision Counsel. 26 USC Ch 11 – Estate Tax
5
Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
6
Internal Revenue Service. Retirement Topics – Beneficiary
7
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
8
Internal Revenue Service. US Taxpayer Identification Number Requirement
9
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
10
Social Security Administration. Report Changes to Your Situation While on SSI
11
Social Security Administration. What Do I Need to Report to Social Security if I Get Supplemental Security Income (SSI)?
12
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
13
eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer
14
Internal Revenue Service. Instructions for Form 3520 – Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
15
Internal Revenue Service. Failure to File the Form 3520/3520-A Penalties