If you have just come into a significant sum, the best guidance on what to do with a large inheritance is to slow down. Federal law does not tax inherited money or property as income to you, and most estates fall well below the $15 million federal estate tax threshold that applies to decedents dying in 2026.1Internal Revenue Service. What’s New – Estate and Gift Tax The bigger risks are self-inflicted: spending before the estate settles, missing a deadline that would have saved you tens of thousands, or mishandling an inherited retirement account. Work through the decisions in order.
Wait Before You Spend
Probate takes anywhere from several months to two years, and during that window the final asset values and creditor claims are still being resolved. Most states require a waiting period for creditors to submit claims against the estate before heirs receive their full share. That notice period typically runs three to six months, and settling or contesting claims can stretch to a year.
Until those windows close, the money in your hands may not be entirely yours. Spending aggressively before the estate fully settles risks depleting funds that could still be owed to creditors or earmarked for taxes. Keep your spending at pre-inheritance levels while the legal process plays out.
Get the Paperwork You’ll Need
Order six to ten certified copies of the death certificate from the local registrar or department of health. Banks, brokerages, insurance companies, and the court each require their own copy, and fees typically run between $10 and $30 per copy. Running short means delays at every step.
The last will and testament determines who receives what and names the executor. If the estate includes real estate, business interests, or valuable personal property, arrange professional appraisals establishing the fair market value as of the date of death. Those valuations serve two purposes: they satisfy IRS requirements for any estate tax filings, and they document your cost basis for future sales. That second purpose is where most heirs leave money on the table.
The Stepped-Up Basis Is Your Biggest Tax Advantage
When you inherit property, your cost basis for tax purposes resets to the fair market value on the date of the person’s death, not what they originally paid.2Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent That reset is called a stepped-up basis, and it can eliminate decades of built-up capital gains.
Say your parent bought a home for $80,000 in 1985 and it was worth $450,000 when they died. If they had sold it themselves, they would have owed capital gains tax on $370,000 of profit. Because you inherited it, your basis is $450,000. Sell for $460,000 and you owe capital gains on only $10,000. The IRS confirms that the basis of inherited property is generally the fair market value at the date of the decedent’s death.3Internal Revenue Service. Gifts and Inheritances
This rule covers stocks, real estate, business interests, and most other inherited assets. It does not cover inherited retirement accounts, which follow their own rules. Without a documented valuation from the date of death, you have no proof of your basis if the IRS questions a future sale, which is why the appraisal step matters even when no estate tax is owed.
Inherited Retirement Accounts Follow Different Rules
Inherited IRAs and 401(k)s are the major exception to the general rule that inheritances aren’t taxed as income. Every dollar you withdraw from a traditional inherited IRA is taxed as ordinary income in the year you take it, and federal law now dictates how quickly you must empty the account.
If you’re a non-spouse beneficiary who inherited from someone who died in 2020 or later, the 10-year rule applies: you must withdraw the entire account balance by December 31 of the year containing the tenth anniversary of the account owner’s death.4Internal Revenue Service. Retirement Topics – Beneficiary If the original owner died before their required beginning date for distributions, no annual withdrawals are required during the ten-year window; you just need the account emptied by the deadline.5Internal Revenue Service. Publication 590-B (2025), Distributions From Individual Retirement Arrangements (IRAs)
A narrow group of eligible designated beneficiaries can stretch distributions over their own life expectancy instead. That group includes surviving spouses, minor children of the deceased owner, disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the deceased.4Internal Revenue Service. Retirement Topics – Beneficiary
Miss a required distribution and the excise tax is 25% of the amount you should have withdrawn, dropping to 10% if you correct the shortfall within two years.6Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Spreading withdrawals across the ten-year window rather than waiting until the final year can keep a single large distribution from pushing you into a higher tax bracket.
One transfer mistake to avoid: an inherited IRA must be coded as an inherited account, not a personal rollover. Mixing inherited IRA funds with your own IRA can trigger immediate taxation of the entire balance. The receiving institution will set up a separate inherited IRA in your name.
Federal and State Taxes
The federal estate tax is paid by the estate, not by you, and only kicks in on estates whose gross value plus adjusted taxable gifts exceeds $15 million for decedents dying in 2026.1Internal Revenue Service. What’s New – Estate and Gift Tax That threshold reflects the One Big Beautiful Bill Act, signed on July 4, 2025, which permanently increased the exemption and indexed it for inflation starting in 2027. Married couples electing portability can combine exemptions for up to $30 million.
State taxes are the more common issue. Roughly a dozen states and the District of Columbia impose their own estate taxes, sometimes with exemption thresholds as low as $1 million. Five states impose a separate inheritance tax paid by the recipient, with rates that vary by the heir’s relationship to the deceased. Close relatives typically owe nothing or face the lowest rates; unrelated beneficiaries can face rates of 15% or higher. Maryland imposes both. Whether your state or the deceased’s state imposes either tax, and which state’s rules apply, depends on where the heir lives, where the deceased lived, and where the property sits. Check before assuming.
Separate from any estate tax return, the executor must file Form 1041 if the estate earns more than $600 in gross income during the tax year, covering interest, dividends, rental income, or business revenue generated after the date of death.7Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
You Can Refuse an Inheritance, But the Clock Is Short
Not every inheritance is worth accepting. If the assets would push you into a higher tax bracket, come with unwanted obligations, or if you’d prefer they pass to the next person in line, you can formally refuse through a qualified disclaimer. The legal effect is as though the property was never transferred to you, which avoids the gift tax consequences that would apply if you accepted and then gave the assets away.
A qualified disclaimer must meet specific requirements under federal law: it must be in writing, delivered to the executor or the person holding legal title within nine months of the date of death, and you cannot have accepted any benefit from the property before disclaiming it.8Office of the Law Revision Counsel. 26 USC 2518 – Disclaimers If the person disclaiming is under 21, the nine-month clock starts on their 21st birthday. Once you’ve used or benefited from the property, disclaimer is no longer available. The nine-month deadline is firm.
Pay Down High-Cost Debt First
Before investing a dollar, take stock of what you owe. Credit cards with rates above 20% are almost always the best first use of inherited money; no investment reliably returns more than the cost of carrying that debt.
Variable-rate student loans come next. Fixed-rate federal student loans at lower rates are a closer call, and some people prefer to invest the money while continuing to pay them down.
Mortgage debt deserves separate analysis. If your rate is well below what you could earn investing the inheritance, paying it off early may not be the best mathematical move. For people who value owning their home outright, request a payoff quote from the lender; the amount includes remaining principal plus daily interest through the payoff date. After paying, confirm a satisfaction of mortgage is recorded with your county to clear the title.
Structure and Invest What Remains
Once debts are settled and estate administration is complete, the remaining inheritance needs a structure and a strategy.
Trusts
A revocable living trust lets you maintain full control during your lifetime while allowing assets to pass to your heirs outside probate. You can amend or revoke it. The tradeoff is that a revocable trust offers no creditor protection and does not reduce your taxable estate.
An irrevocable trust is more aggressive. Once you transfer assets in, you give up ownership and control. In exchange, the assets are generally shielded from your personal creditors and removed from your taxable estate. Irrevocable trusts are most useful for people whose total net worth, after adding the inheritance, approaches the federal estate tax threshold. Both types require an attorney to draft and involve retitling assets into the trust’s name. Legal fees typically range from a few thousand dollars to $10,000 or more depending on complexity.
Diversify, and Use the Basis Step-Up to Do It
Concentrating an entire inheritance in a single asset class is one of the fastest ways to erode it. A diversified portfolio spreads risk across equities, bonds, and potentially real estate. Inherited stock portfolios are worth reviewing early: the stepped-up basis lets you sell concentrated positions at little or no capital gains tax and reinvest in a more balanced allocation.
Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income and filing status, with thresholds adjusted annually for inflation.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses A 3.8% net investment income tax applies once your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly, and those thresholds are not indexed for inflation.10Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Wealth management firms typically charge between 0.50% and 1.50% of assets under management annually. On a $2 million inheritance, that’s $10,000 to $30,000 per year. Fee-only financial planners who charge a flat rate or hourly fee can be more cost-effective, especially if you need a one-time plan rather than ongoing management.
How Much You Can Safely Withdraw
If the inheritance is large enough to fund your living expenses, the question becomes how much you can withdraw each year without running out. The widely cited 4% rule suggests withdrawing 4% of the portfolio in the first year and adjusting for inflation after. That figure was designed for a 30-year retirement horizon and may need adjustment based on your age, spending needs, and market conditions. Withdrawing too aggressively in early years, especially during a market downturn, can permanently reduce the portfolio’s ability to recover. Rebalance regularly and review the tax picture with an advisor each year.
One last housekeeping step people skip: sign new beneficiary designations for every account as soon as it’s in your name. Missing that step forces your own heirs through the same probate process you just navigated.