If you inherit a million dollars, the money itself generally isn’t taxed as income on your federal return, and the estate falls well below the 2026 federal estate tax exemption of $15 million.1Internal Revenue Service. Gifts and Inheritances2Internal Revenue Service. Whats New – Estate and Gift Tax What you do have to do is work through probate, settle the deceased person’s debts, handle retirement accounts under strict distribution rules, file the correct tax returns for the estate, and get the assets retitled in your name. Most of the risk at this size is procedural, not federal tax.
Will You Owe Federal Tax on the Inheritance
Inherited money and property are excluded from your gross income for federal purposes, so a million-dollar inheritance doesn’t create a tax bill the way a million-dollar salary would.1Internal Revenue Service. Gifts and Inheritances
Federal estate tax is separate and is paid by the estate before you receive anything. For 2026, the basic exclusion amount is $15 million.2Internal Revenue Service. Whats New – Estate and Gift Tax A one-million-dollar estate falls well below that line. Congress has adjusted this exemption several times in the past decade, and future legislation could lower it.
State Taxes Are the Real Risk at This Size
Roughly a dozen states and the District of Columbia impose their own estate taxes with exemption thresholds far below the federal level. Oregon’s threshold is $1 million and Massachusetts’s is $2 million, so a million-dollar estate could face state estate tax depending on where the deceased person lived.
Five states also levy inheritance taxes, which are based on who receives the assets rather than the size of the estate. Spouses are almost always exempt, children often pay lower rates, and more distant relatives or unrelated beneficiaries can face rates reaching 15 or 16 percent. Maryland is the only state that imposes both an estate tax and an inheritance tax. If the deceased person lived in any of these states, build potential state tax liability into your planning early.
First Steps After the Death
Order certified copies of the death certificate before anything else. Banks, brokerage firms, insurance companies, the Social Security Administration, and the probate court will each want their own original. Ten to twelve copies through the county registrar or department of health is a reasonable starting point for a million-dollar estate.
Find the original will. It controls how the estate is divided and names the executor. If there is no will, state intestacy laws decide who inherits and in what shares. Either way, the executor’s next stop is the local probate court to obtain Letters Testamentary (with a will) or Letters of Administration (without one). Those court-issued documents give the executor legal authority to access accounts, pay debts, and manage estate property.3Legal Information Institute (LII) / Cornell Law School. Letters Testamentary
Once the executor has authority, notify the Social Security Administration to stop benefit payments, contact banks and brokerages to identify and secure accounts, and reach out to any insurers about active policies.
What Passes Outside Probate
Not every dollar of a million-dollar inheritance goes through probate. Several common asset types transfer directly to named beneficiaries by operation of law, regardless of what the will says. Those transfers are faster, private, and in most cases not subject to creditor claims filed during probate.
- Retirement accounts (IRAs, 401(k)s, and similar) with a named beneficiary pass directly to that person. The beneficiary contacts the plan administrator with a death certificate, and the account transfers without court involvement.
- Life insurance proceeds go to the named beneficiary, not the estate, unless the estate itself is listed as beneficiary.
- Payable-on-death and transfer-on-death bank and brokerage accounts transfer automatically to the named individual.
- Jointly held property with right of survivorship passes to the surviving owner by operation of law.
- Assets in a revocable living trust distribute according to the trust’s terms, handled by the successor trustee without court supervision.
For a million-dollar estate, the bulk of the value often sits in retirement accounts and life insurance. When those have proper beneficiary designations, the probate estate may contain only a fraction of the total. That matters because it changes how much is exposed to probate fees and creditor claims.
How Probate Works and What It Costs
Probate is the court-supervised process that validates the will, authorizes the executor, and oversees distribution. For a million-dollar estate going through formal probate, the process typically takes six months to two years depending on the complexity of the assets, whether the will is contested, and how quickly creditor claims are resolved.
Everything filed in probate becomes part of the court record, which is generally accessible to the public. The will, the asset inventory, and the names of beneficiaries can be viewed by anyone who requests the file. Trusts and beneficiary designations that bypass probate keep those details private.
Costs add up. Court filing fees vary widely and are typically a few hundred dollars. Attorney fees are harder to predict. Some states set statutory fee schedules based on the gross value of the estate, and in those states the attorney’s fee on a million-dollar estate could be $20,000 or more. Where courts use a “reasonable compensation” standard instead of a fixed formula, attorneys usually charge hourly rates or negotiate flat fees. If the executor is not also the beneficiary, they are entitled to a commission, generally 1 to 5 percent of the estate’s value depending on the state. These costs come out of the estate before distribution.
Paying the Deceased Person’s Debts
The executor cannot distribute the inheritance until valid debts are settled. Part of probate involves publishing a legal notice to creditors, usually in a local newspaper, giving them a deadline to file claims. That window varies by state but generally runs a few months.
Claims are paid in a priority order set by state law. Funeral expenses and the costs of administering the estate almost always come first. Government tax debts follow, then secured obligations like mortgages, with unsecured debts like credit cards at the bottom. If the estate cannot cover all valid claims, lower-priority debts go unpaid.
You are not personally responsible for the deceased person’s debts. The estate’s assets are the only pool available to creditors. If debts consume the estate, you receive nothing, but creditors cannot pursue your own bank account or wages to make up the difference.4Federal Trade Commission. Debts and Deceased Relatives
Medicaid Estate Recovery
One creditor that surprises many families is the state Medicaid program. Federal law requires every state to seek reimbursement from the estate of anyone 55 or older who received Medicaid-funded nursing home care, home health services, or related hospital and prescription drug coverage.5Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets If a parent spent years in a nursing facility on Medicaid, the state can file a claim for the full cost of that care, which can easily reach hundreds of thousands of dollars.
Recovery cannot happen while a surviving spouse is alive, or if the deceased is survived by a child under 21 or a blind or disabled child of any age.6Medicaid.gov. Estate Recovery States must also grant hardship waivers in certain circumstances. Outside those protections, the Medicaid claim can significantly reduce what heirs receive.
Inherited Retirement Accounts and the 10-Year Rule
If part of the million dollars comes from an inherited IRA or 401(k), special distribution rules apply that are easy to get wrong and expensive to violate. The rules depend on your relationship to the deceased and when they died.
A surviving spouse has the most flexibility. They can roll the inherited account into their own IRA and treat it as theirs, delaying required minimum distributions until their own retirement timeline kicks in. They can also keep it as an inherited IRA and take distributions based on their own life expectancy.
Most other beneficiaries face the 10-year rule, which requires emptying the entire inherited account by December 31 of the year containing the 10th anniversary of the account owner’s death.7Internal Revenue Service. Retirement Topics – Beneficiary There is no flexibility on this deadline; missing it triggers a steep IRS penalty on the amount that should have been withdrawn. A narrow group of “eligible designated beneficiaries,” including minor children, disabled individuals, and people not more than 10 years younger than the deceased, can stretch distributions over their own life expectancy.
Whether you must take annual withdrawals during the 10-year window depends on the timing. If the account owner died before their required beginning date for distributions, you can generally wait and withdraw everything in year 10. If they died after that date, annual distributions may be required in each of the first nine years, with the remainder due in year 10.8Internal Revenue Service. Publication 590-B – Distributions From Individual Retirement Arrangements
Inherited Roth IRAs follow the same 10-year timeline, but qualified Roth distributions are tax-free.7Internal Revenue Service. Retirement Topics – Beneficiary You still must empty the account within 10 years, but the withdrawals won’t add to your taxable income, so there’s a reason to let the Roth grow as long as possible before pulling money out in year 10.
Check the Step-Up in Basis Before You Sell
When you inherit stocks, real estate, or other appreciated assets, their tax basis resets to fair market value on the date the person died.9Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent That wipes out any capital gains that built up during the deceased person’s lifetime.
Suppose you inherit a stock portfolio the deceased bought for $200,000 that’s worth $600,000 at death. Your basis is $600,000. If you sell the next month for $610,000, capital gains tax applies to $10,000, not $410,000. The reset applies to most inherited assets, including real estate and securities.10eCFR. 26 CFR 1.1014-1 – Basis of Property Acquired From a Decedent Confirm the adjusted basis with a tax professional before you sell anything.
Tax Returns the Estate Must File
Even when no estate tax is owed, the executor still has several returns to prepare. Missing deadlines triggers penalties that come out of the estate and reduce what beneficiaries receive.
The Deceased Person’s Final Income Tax Return
A final Form 1040 covers income from January 1 through the date of death, following the normal April 15 filing deadline of the following year. A surviving spouse can file a joint return for that final year, which often produces a better result.
The Estate’s Income Tax Return
Any income the estate’s assets generate after the date of death, such as interest, dividends, rent, or capital gains, goes on Form 1041, the estate’s income tax return.11Internal Revenue Service. Filing Estate and Gift Tax Returns The estate is a separate taxpayer with its own tax identification number. The executor can choose a fiscal year for the estate rather than the calendar year, which can defer the first filing deadline.12Internal Revenue Service. File an Estate Tax Income Tax Return For a calendar year estate, Form 1041 is due April 15 of the following year. For a fiscal year estate, it’s due by the 15th day of the fourth month after the fiscal year ends.
The Federal Estate Tax Return
Form 706 is due nine months after the date of death, with a six-month extension available if requested before the deadline.11Internal Revenue Service. Filing Estate and Gift Tax Returns For a million-dollar estate in 2026, this return is almost certainly unnecessary because the estate falls below the $15 million exemption.2Internal Revenue Service. Whats New – Estate and Gift Tax
Foreign Account Reporting
If any inherited accounts sit at foreign financial institutions, two separate reporting obligations may apply. An FBAR (FinCEN Form 114) is required when foreign accounts exceed $10,000 in aggregate value at any point during the year.13FinCEN. BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts Form 8938 kicks in at $50,000 for unmarried taxpayers in the U.S., with higher thresholds for married filers and those living abroad.14Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets Penalties for missing these filings are severe, so flag any foreign accounts immediately.
Getting the Assets Into Your Name
Once debts are paid and the court approves distribution, the executor petitions the probate court for a formal order of distribution. That order is the key document to present to every financial institution holding estate assets.
For cash and securities, you’ll open a new brokerage account, or for retirement assets an inherited IRA. The executor provides the distribution order, the death certificate, and the estate’s closing documents to the institution, which transfers the assets into accounts bearing your name and Social Security number.
Inherited real estate requires a new deed recorded with the county’s land records office. The deed removes the deceased person’s name and adds yours, establishing a clean chain of ownership. Until it’s recorded, you can’t sell or refinance the property. If the property sits in a different state from where the estate is being probated, a separate legal proceeding in that state (called ancillary probate) may be required.
Brokerage firms and banks each have their own transfer forms and processing timelines. Follow up until every account has been retitled and no funds are still linked to the estate’s tax identification number.
When Refusing the Inheritance Makes Sense
Sometimes the smart move is to refuse. A qualified disclaimer lets you decline some or all of the assets, and they pass as if you had died before the person who left them to you. The assets then go to the next beneficiary in line under the will or state law.15Office of the Law Revision Counsel. 26 USC 2518 – Disclaimers
People disclaim to redirect assets to the next generation for tax planning, to avoid adding to their own estate if it’s near a tax threshold, or to keep assets out of reach of their own creditors. A parent might disclaim so the inheritance passes directly to their children, skipping a generation of potential estate tax.
The requirements are strict. The disclaimer must be in writing, delivered to the executor or the person holding the property, and filed within nine months of the date of death. You cannot have already accepted the inheritance or used any of its benefits.16eCFR. 26 CFR 25.2518-2 – Requirements for a Qualified Disclaimer Depositing an inherited check, collecting rent on inherited property, or using a dividend all count as acceptance and end your ability to disclaim. The nine-month clock runs from the date of death regardless of when you learn about the inheritance.
Who You’ll Want on Your Side
A million-dollar estate is large enough that professional help pays for itself in avoided mistakes.
An estate or probate attorney handles court filings, navigates creditor claims, and keeps the executor within the bounds of the law. The fee is real, but the alternative is an executor personally exposed to liability for procedural errors. If the will is contested or family dynamics are complicated, an attorney isn’t optional.
A CPA manages the tax side: the deceased person’s final return, the estate’s income tax filings, and state tax obligations. They’ll calculate the step-up in basis for inherited assets and make sure nothing is filed late. Estate income tax brackets compress quickly, so proper distribution timing and deductions can save thousands.
A fiduciary financial advisor can help during the transition and beyond. The “fiduciary” part matters, because it means they’re legally required to act in your interest rather than sell you products. If a significant share of the inheritance sits in securities or real estate, someone managing the portfolio while the estate settles prevents costly drift, and a long-term plan built around the money is the difference between an inheritance that lasts and one that doesn’t.