What to Do With a Million Dollar Inheritance?

A million-dollar inheritance sits in an awkward middle: too large to treat as ordinary savings, too small to survive careless decisions. Deciding what to do with a million-dollar inheritance comes down to a sequence — secure the cash under deposit-insurance limits, understand which taxes actually apply, protect any government benefits you receive, hire a fee-only fiduciary team, clear high-interest debt, then invest and put your own estate plan in place. Rushing into purchases or investments before working through that list is the most common and most expensive mistake new heirs make.

Park the Money Safely First

Before making any investment decisions, move the inheritance somewhere safe and liquid. High-yield savings accounts and money market accounts pay more than standard checking while keeping the cash accessible. The goal in the first weeks is protection, not growth.

The immediate risk is deposit-insurance limits. FDIC insurance covers $250,000 per depositor, per insured bank, for each account ownership category.¹ A million dollars sitting in one account leaves $750,000 unprotected if that bank fails. Credit unions carry the same $250,000 limit through the National Credit Union Administration.²

Two practical ways to get full coverage:

Split the money across four separate FDIC-insured institutions that don’t share a parent company, keeping no more than $250,000 at each.¹
Use a brokerage sweep account that spreads cash across a network of partner banks. Each bank in the network insures up to $250,000, so a five-bank network can cover the full million from a single account.³

You can also stack coverage at one bank using different ownership categories. An individual account and a joint account at the same institution are insured separately, each up to $250,000, and a revocable trust account adds another separately insured category.¹

What You Actually Owe in Taxes

Most heirs will not owe federal estate tax on a million dollars, but several other tax rules can still reach the inheritance depending on what you received and where the deceased lived.

Federal Estate Tax

Federal estate tax is paid by the estate, not by you as the heir, and it applies only above a very high threshold.⁴ For 2026, the basic exclusion amount is $15 million.⁵ A million-dollar inheritance falls well below the line.

State Estate and Inheritance Taxes

About a dozen states and the District of Columbia impose their own estate taxes, and some have exemption thresholds far lower than the federal one — as low as $1 million in one state and $2 million in others. Those taxes are generally the estate’s problem, but they reduce what’s left to distribute.

A separate handful of states impose an inheritance tax, which you pay directly as the recipient. Rates depend on your relationship to the deceased. Spouses are usually exempt, children and close relatives face lower rates, and unrelated beneficiaries face the steepest rates, reaching up to 16% in some states. If the deceased lived in one of these states, get local tax advice before you touch the money.

Step-Up in Basis on Appreciated Assets

If the inheritance included stocks, real estate, or other assets that gained value during the original owner’s lifetime, the cost basis resets to the fair market value on the date of death.⁶ Sell soon after inheriting and you owe little or no capital gains tax on the pre-death appreciation.

Say a parent bought a home for $200,000 and it was worth $900,000 on the date they died. Your basis is $900,000. Sell for $900,000 and you have no taxable gain. Hold longer and you only pay capital gains on appreciation above the stepped-up value.

Inherited Retirement Accounts

An inherited traditional IRA or 401(k) creates income tax obligations that cash and real estate do not. Withdrawals are taxed as ordinary income at your rate.

If you are not the spouse of the person who died, you generally must empty the account within ten years of the owner’s death.⁷ One nuance matters: if the original owner had already reached the age when required minimum distributions begin, you may also need annual withdrawals during that ten-year window, not just a lump sum by the deadline. Missing a required withdrawal triggers a 25% penalty on the shortfall, dropping to 10% if you correct it within two years.⁸

Spreading withdrawals across the full ten years, instead of taking a lump sum, can keep you in a lower tax bracket and save tens of thousands. A CPA can model the best schedule against your other income.

Surviving spouses have more flexibility. A sole-beneficiary spouse can roll the account into their own IRA, delay distributions until the deceased would have reached age 72, or take distributions based on their own life expectancy.⁷ Minor children of the account owner, disabled or chronically ill individuals, and beneficiaries no more than ten years younger than the original owner also qualify for extended timelines.

Foreign Inheritance Reporting

If the inheritance came from someone who was not a U.S. citizen or resident, or from a foreign estate, and the total exceeds $100,000, file IRS Form 3520 by your tax filing deadline.⁹ This is a report, not an added tax, but the penalty for missing it is the greater of $10,000 or 35% of the reportable amount, plus another $10,000 for every 30 days of continued noncompliance after an IRS warning notice.¹⁰

Estate Income Tax Return

If the estate itself earned $600 or more in gross income during the year — from interest, dividends, rent, or similar — the executor files Form 1041.¹¹ You don’t file that return, but any income the estate passes through to you shows up on a Schedule K-1 for your personal return.

If You Receive Means-Tested Benefits, Stop and Read This

If you get Supplemental Security Income, Medicaid long-term care, or other means-tested benefits, a million-dollar inheritance can knock you off the program the day it hits your account. SSI caps countable resources at $2,000 for an individual and $3,000 for a couple.¹² Giving the money away or selling assets below fair market value to get back under the limit triggers an ineligibility penalty of up to 36 months. Medicaid long-term care typically imposes a $2,000 individual limit and a five-year look-back on transfers.

A special needs trust (also called a supplemental needs trust) is one option. Trusts established under specific provisions of the Social Security Act are not counted as resources for SSI purposes.¹³ The trust can pay for medical equipment, education, and personal care without disqualifying you. Setting one up requires an attorney experienced with public benefits law, and timing matters: you generally need the trust in place before you take possession of the inheritance.

Hire the Right Professionals

A million dollars is enough to justify professional help and small enough that bad advice can eat a real share of it. Three roles handle different parts of the picture.

Fee-Only Fiduciary Financial Advisor

An investment adviser registered under federal law owes you a fiduciary duty, a legal obligation to act in your best interest.¹⁴ Look specifically for a fee-only advisor, meaning one paid only by you and not by commissions from selling products. Fee-only advisors commonly charge around 1% of assets per year for a portfolio in this range, and flat-fee arrangements exist too.

Before hiring anyone, run their name and firm through the SEC’s Investment Adviser Public Disclosure database, which shows registration status, work history, and any disciplinary actions.¹⁵

Certified Public Accountant

A CPA handles the tax side: calculating stepped-up basis on inherited property, modeling withdrawal schedules for an inherited IRA, filing any foreign-inheritance forms, and coordinating with the executor on Schedule K-1 income. Fees vary by region and complexity. Get an estimate before engaging.

Estate Attorney

An estate attorney reviews the inheritance documents, confirms that legal title to inherited property is properly transferred into your name, and drafts your own estate plan. Rates vary by location and experience. For a straightforward million-dollar inheritance, total legal fees usually amount to a small fraction of the money involved. Ask for a clear fee structure — hourly, flat, or a combination — in the engagement letter.

Clear High-Interest Debt and Set a Reserve

Before investing, look at what you owe. Credit card balances commonly carry rates above 20%, and paying one off is the equivalent of a guaranteed, tax-free return equal to that rate. No investment reliably beats that.

Low-interest secured debt like a mortgage is a judgment call. If the mortgage rate sits well below what you could reasonably earn investing, the math favors keeping the loan. If being debt-free matters more to you than optimizing returns, paying it off is defensible; it just carries an opportunity cost. To pay a mortgage off, request a payoff statement from the lender showing exact balance, accrued interest, and fees, then follow their remittance instructions.

After debt, set aside six to twelve months of living expenses in a liquid account as an emergency fund. On $5,000 a month of expenses, that’s $30,000 to $60,000, held separately from your long-term investment portfolio so you never have to sell in a downturn to cover a surprise.

Buy Umbrella Liability Coverage

A million-dollar net worth makes you a bigger target in lawsuits. A personal umbrella liability policy sits on top of your auto and homeowners coverage, typically starting at $1 million in coverage for a few hundred dollars a year. Most insurers require underlying limits in the range of $250,000 to $500,000 on auto and $300,000 or more on homeowners liability before they’ll sell you an umbrella. Without one, a serious car accident or an injury on your property can produce a judgment that reaches the inheritance.

Keep the Inheritance Separate from Marital Property

An inheritance received by one spouse is generally treated as separate property, even during a marriage. That protection disappears if you mix inherited funds with marital assets, a process called commingling. Depositing the money into a joint account, using it to pay joint expenses, or retitling inherited property in both names can convert some or all of it into marital property subject to division in a divorce.

To preserve the separate character, keep inherited money in accounts titled only in your name. If any portion goes toward a joint purpose, like a down payment on a marital home, document the transaction so the separate origin can be traced. State rules vary considerably; an estate or family law attorney can walk you through yours.

Build Your Own Estate Plan

Receiving a large inheritance is the clearest signal that you need your own estate plan. Without one, state default rules pick your heirs and a court picks who manages your affairs.

Wills and Revocable Living Trusts

A will specifies who receives your assets. A revocable living trust adds the ability to bypass probate, the court process of validating a will and distributing property. Probate is public, can take months or longer, and typically costs several percent of estate value in legal and administrative fees.

To fund a revocable living trust, you retitle your assets — bank accounts, real estate, investment accounts — into the trust’s name. You stay in full control as trustee during your lifetime and can change or revoke the trust at any time. The trust names a successor trustee to step in if you’re incapacitated or die, which avoids a court-appointed guardian. Professional trustees commonly charge 1% to 2% of trust assets per year, so many people name a trusted family member and reserve a professional as a backup.

Powers of Attorney and Healthcare Directives

A durable power of attorney names someone to handle your finances if you can’t — paying bills, managing investments, filing taxes. A healthcare directive names someone to make medical decisions on your behalf and records your care preferences. Without these, your family may have to petition a court for authority to act. Together with a will or trust, they form the core of a complete plan.

Deadlines and Filings to Track

Inherited IRA withdrawals: a non-spouse beneficiary must empty the account by the end of the tenth year after the owner’s death, with annual distributions possibly required in between if the original owner had reached the required beginning date.⁷
Estate income tax return: if the estate earned $600 or more in income, the executor files Form 1041 and passes your share of income to you on a K-1.¹¹
Foreign inheritance reporting: Form 3520 is due by your tax filing deadline if you received more than $100,000 from a foreign estate or nonresident alien.⁹
State inheritance tax: if the deceased lived in a state that imposes one, there may be a separate state filing and payment deadline.
Beneficiary designations: update the beneficiaries on your own retirement accounts, life insurance, and any new accounts to match your current wishes. These designations override your will.

1
Federal Deposit Insurance Corporation. Understanding Deposit Insurance
2
eCFR. 12 CFR Part 745 – Share Insurance and Appendix
3
Federal Deposit Insurance Corporation. Pass-Through Deposit Insurance Coverage
4
eCFR. 26 CFR Part 20 – Estate Tax; Estates of Decedents Dying After August 16, 1954
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
7
Internal Revenue Service. Retirement Topics – Beneficiary
8
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
9
Internal Revenue Service. Instructions for Form 3520
10
Internal Revenue Service. Failure to File Form 3520/3520-A Penalties
11
Internal Revenue Service. Instructions for Form 1041
12
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
13
Social Security Administration. SSI Spotlight on Trusts
14
Federal Register. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
15
Investor.gov. Investment Adviser Public Disclosure (IAPD)