What to Do With Inherited Money: Taxes, Documents, and Deadlines

If you’ve just received an inheritance, the first thing to know is that federal law does not treat the money itself as taxable income. Knowing what to do with inherited money is mostly about the surrounding steps: producing the right paperwork to get the funds released, watching for the deadlines that attach to specific asset types, and understanding the debts and claims that get paid before you do. The inheritance is yours to keep. Handling it correctly is what protects it.

Is the Inheritance Itself Taxable

Federal law excludes the value of property received by bequest or inheritance from your gross income.¹ A $200,000 cash bequest from a relative is not something you report as income. The same is true for stocks, real estate, and other property you receive from a decedent’s estate.

What is taxable is anything the property earns after it belongs to you. Interest on inherited cash, dividends on inherited stock, and rent from inherited real estate are ordinary taxable income going forward.¹

A separate federal estate tax exists, but it applies only to very large estates, and it is paid by the estate before anything is distributed. For 2026 the basic exclusion amount is $15,000,000 per individual.² If federal estate tax is owed, it comes out of the estate, not out of a bill sent to you.

A handful of states impose an inheritance tax that the heir pays directly. Only five states currently levy one, with top rates between 10 and 16 percent depending on the state and your relationship to the deceased. Spouses and children are often exempt or taxed at lower rates; more distant relatives and unrelated beneficiaries pay more. Check with the tax authority in the state where the deceased lived if you have any reason to think this applies.

Documents You Need Before the Money Can Move

Banks, brokerages, and government agencies will not release a deceased person’s assets on request. Each institution wants proof of death and proof of authority. Getting these documents in hand early is the single biggest thing you can do to speed up the process.

Certified Death Certificates

Order several certified copies from the vital records office in the state where the death occurred.³ Every financial institution, insurer, and agency will want its own. Prices vary by state, generally $10 to $25 per copy. Running out mid-process can add weeks.

Letters Testamentary or Letters of Administration

If there is a will, the executor named in it obtains Letters Testamentary from the probate court. If there is no will, the court appoints an administrator and issues Letters of Administration. Either document is what gives the executor or administrator legal authority to access accounts, pay debts, and distribute assets. Banks will not release funds without it.

Estate Tax Identification Number

If the estate earns income during administration, the executor applies for an Employer Identification Number from the IRS using Form SS-4.⁴ That number is needed to open an estate bank account and file the estate’s income tax return.

Small Estate Affidavit

Many states let heirs skip full probate for smaller estates. A Small Estate Affidavit or Affidavit of Heirship, usually notarized, can be enough to have banks and other institutions release assets when the estate’s value falls below a state-set threshold. That threshold varies widely, from around $50,000 to over $200,000. Ask the probate clerk in the county where the deceased lived what the local process requires.

Social Security Notification

Report the death to the Social Security Administration promptly, either through the funeral director or by calling 1-800-772-1213. SSA does not accept death reports online. Benefits cannot be paid for the month of death, so any payment received for that month or later has to be returned. If benefits came in by direct deposit, tell the bank not to accept further deposits.⁵

Why the Money May Take Months to Arrive

Creditors get paid before beneficiaries. Funeral expenses, administrative costs, and unpaid taxes come first, followed by other valid claims. If the estate cannot cover its debts and its inheritances, the inheritances shrink. That is the legal priority.

Creditors typically have a limited window after receiving legal notice to file claims, often several months. The exact period varies by state. Once that window closes and valid claims are settled, the executor can distribute what remains.

An executor who pays out too early can be held personally liable for legitimate debts that surface later, and courts can order beneficiaries to return money already distributed. That is why even a simple estate rarely pays out in weeks. The wait protects both sides.

Retirement Accounts Have Their Own Deadlines

Inherited IRAs and 401(k)s do not work like inherited cash. The balance in a traditional retirement account has never been taxed as income, and the IRS enforces a schedule for withdrawing it.

Non-Spouse Beneficiaries

If you are not the spouse of the account owner and the owner died after 2019, you generally must empty the inherited account by the end of the tenth year following the year of death.⁶ This applies to traditional and Roth IRAs alike. If the original owner was already taking required minimum distributions, you also have to take annual distributions in years one through nine. You cannot simply hold everything until year ten.

A narrow set of “eligible designated beneficiaries,” including minor children of the owner, disabled individuals, and beneficiaries who are not more than ten years younger than the deceased, may qualify for exceptions.⁶

Spouses Have More Flexibility

A surviving spouse can roll the inherited account into their own IRA and treat it as their own retirement account, deferring distributions until they hit their own required beginning date.⁶ Non-spouse beneficiaries cannot use this option.

Missing a Required Distribution

Skipping a required distribution triggers a 25 percent excise tax on the amount that should have come out. That drops to 10 percent if you correct the shortfall and file an amended return within the correction window, which generally runs through the end of the second tax year after the penalty was imposed.⁷ Each custodian has its own beneficiary claim forms; you have to complete those to set up the inherited account or take a distribution.

Stepped-Up Basis on Real Estate and Investments

When you inherit property like stock, mutual funds, or real estate, your tax basis is generally the fair market value on the date of death, not what the original owner paid.⁸ This “stepped-up basis” can wipe out most of the capital gain that built up during the original owner’s lifetime.

Say your parent bought a home for $150,000 and it was worth $400,000 on the date of death. Your basis is $400,000. Sell it for $420,000 and you owe capital gains tax on $20,000, not on $270,000. The same principle covers inherited stocks and mutual funds.⁹

There is one anti-abuse rule to know. If property was gifted to the deceased within one year of death and then passes back to the original giver or their spouse by inheritance, the basis is the decedent’s adjusted basis rather than the fair market value.⁹

If you sell inherited property, report the sale on Schedule D (Form 1040) and Form 8949.¹⁰ For real estate specifically, a new deed has to be drafted and recorded with the county recorder’s office. Recording fees are usually modest. Until the deed is recorded, public records still show the deceased as owner, which makes selling, refinancing, or insuring the property difficult.

Some real property never enters probate. A home held in joint tenancy with right of survivorship passes automatically to the surviving co-owner; the survivor files a document in the local land records showing the other tenant has died, and that is it. Property held in a living trust passes through the successor trustee under the trust’s terms, not through the executor.

Foreign Inheritances Have a Reporting Requirement

If the money comes from someone who was not a U.S. citizen or resident, or from a foreign estate, and the total exceeds $100,000 in a tax year, you have to file Form 3520 with the IRS. It is due with your income tax return, generally April 15, with extensions through October 15.¹¹

The inheritance itself is still not taxable income. The form exists so the IRS can track cross-border transfers. Missing it is expensive: 5 percent of the unreported amount for each month late, up to 25 percent.¹² On a $500,000 inheritance that maxes out at $125,000 for a missed form. If you are near or above the threshold, talk to a tax professional before the filing deadline.

Medicaid Estate Recovery Can Shrink What You Receive

If the deceased received Medicaid benefits for long-term care, the state may file a claim against the estate before beneficiaries receive anything. Federal law requires every state to seek repayment from the estates of people who were 55 or older when they received Medicaid-funded nursing home care, home and community-based services, and related hospital and prescription drug services.¹³

States can go further and recover for additional Medicaid services beyond the federal minimum. The recovery claim is an estate debt, so it gets paid before you do. When the estate’s main asset is a home, a Medicaid recovery claim can reduce or wipe out the inheritance entirely. Some states offer hardship exemptions or delays where a spouse, minor child, or disabled child still lives in the home, but the rules vary widely by state.

You Can Refuse the Inheritance

Accepting an inheritance is not required. If the money would create tax problems, expose you to creditors, or interfere with your financial planning, you can formally refuse through a qualified disclaimer. To count as qualified under federal law:

The refusal is in writing and signed by you or your legal representative.
The writing reaches the executor, the estate’s legal representative, or the person holding legal title within nine months of the date of death, or within nine months of your 21st birthday if that is later.¹⁴
You have not accepted the property or taken any benefit from it before disclaiming.
The disclaimed property passes to someone else without any direction from you. You cannot refuse the inheritance and pick who gets it instead.

A valid qualified disclaimer is treated as though the property had never been transferred to you.¹⁴ The assets move to the next person in line under the will or state law. The nine-month deadline is strict and cannot be extended, so decide early if you are considering it.

1
Office of the Law Revision Counsel. 26 USC 102 Gifts and Inheritances
2
Internal Revenue Service. Whats New Estate and Gift Tax
3
USAGov. How to Get a Certified Copy of a Death Certificate
4
Internal Revenue Service. Information for Executors
5
USAGov. Report the Death of a Social Security or Medicare Beneficiary
6
Internal Revenue Service. Retirement Topics – Beneficiary
7
Office of the Law Revision Counsel. 26 US Code 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
8
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
9
Internal Revenue Service. Publication 551 Basis of Assets
10
Internal Revenue Service. Gifts and Inheritances
11
Internal Revenue Service. Gifts From Foreign Person
12
Internal Revenue Service. Instructions for Form 3520
13
Office of the Law Revision Counsel. 42 US Code 1396p – Liens Adjustments and Recoveries and Transfers of Assets
14
Office of the Law Revision Counsel. 26 USC 2518 Disclaimers