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What Should Be My First Step Upon Receiving an Inheritance?
Receiving an inheritance can be overwhelming and emotionally charged. The best initial step is to pause and avoid making hasty financial decisions.
- Inheritances often follow the loss of a loved one and emotions can cloud judgment.
- Take time to understand what assets you have inherited and their specific characteristics.
- Immediate financial actions (like large purchases or investing) should be delayed until a clear plan is developed to avoid mistakes.
Are All Inherited Assets Taxable?
No, most assets you inherit are not immediately taxable—but there are key caveats depending on asset type.
- Cash, brokerage accounts, and real estate are generally not taxable as income upon receipt.
- Income generated from inherited assets (such as dividends or interest from investments) is subject to normal income tax.
- If you inherit retirement accounts (like IRAs or 401(k)s), withdrawals you make are taxed as income, though the initial inheritance is not.
- Estate taxes are only an issue for very large estates. As of 2025, the federal estate tax exemption is about $13–$15 million, but state-level inheritance or estate taxes may apply (e.g., in Oregon over $1 million).
What is a “Step-Up in Basis” and Why Does It Matter?
A step-up in basis means that inherited assets like real estate or stocks receive a new cost basis equal to their fair market value at the time of the decedent’s death.
- The step-up helps minimize capital gains taxes when you sell the asset later.
- For example, if you inherit a house worth $1M and later sell it for $1.1M, you are only taxed on the $100,000 gain.
How Can Probate Be Avoided?
Probate is a legal process for settling a deceased person’s estate, but it’s often slow and costly. There are several ways to minimize or bypass probate:
- Establish a revocable trust and place non-retirement assets in it so they pass directly to named beneficiaries.
- Use Transfer-on-Death (TOD) instructions on brokerage and some bank accounts, naming beneficiaries to avoid probate for those assets.
- Regularly review and update beneficiaries for retirement and investment accounts to ensure your wishes are current.
What Are the Rules Around Inheriting Retirement Accounts?
Retirement accounts have special rules for heirs:
- If a spouse inherits, they can roll over the account into their own and delay Required Minimum Distributions (RMDs) until age 73.
- Non-spouse beneficiaries (such as children) must generally withdraw the entire inherited IRA within 10 years and may be required to take required minimum distributions each year.
- Withdrawals are taxable as ordinary income, and strategic planning can help minimize the tax burden (such as spacing out withdrawals during low-income years).
Should I Seek Professional Guidance?
Yes, given the complexity and potential tax consequences, consulting with a CPA, estate planner, or registered investment advisor is highly recommended.
- Professionals can help coordinate tax, estate, and financial planning so all aspects work together for your best benefit.
- Laws and tax implications change often; personalized advice ensures compliance and maximizes your inheritance’s value.
References:
https://www.fidelity.com/viewpoints/personal-finance/inheritance-money
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
https://www.nolo.com/legal-encyclopedia/how-avoid-probate-your-estate-29854.html
https://www.investopedia.com/what-to-know-about-inheriting-an-ira-4771097