Take these steps when you receive a windfall
Perhaps you are among the growing number of Americans fortunate enough to receive an inheritance. As older generations pass away and leave money to their families, a great wealth transfer is underway. Those bequests could total $100 trillion by 2048, according to Cerulli Associates, a financial consulting firm.
If you’re among those in line to receive an inheritance, there’s more good news: You generally won’t owe taxes on it. Although the IRS levies a tax on very large estates — more than $13.99 million in 2025 — individuals generally do not pay federal income taxes on assets they inherit. And only five states (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) charge an inheritance tax, according to the Tax Foundation.
Still, there may be challenges in managing your windfall. “For people who may be dealing with the loss of a loved one, it can be difficult to understand the tax rules or think about how the gift fits into your long-term plan,” says Marguerita Cheng, a certified financial planner (CFP) in Gaithersburg, Maryland. To help you sort out your options, here are tips for five major types of inherited assets.
1. Cash, stocks and other taxable accounts
A cash gift is the most straightforward form of inheritance. It’s simple to turn around and invest — or spend — the money as you like, and it isn’t considered taxable income. There is one caveat, however. “If interest is paid on the cash before it’s distributed to you, that amount may be taxable,” says Mary Kay Foss, a certified public accountant (CPA) in Carlsbad, California.
If you inherit investment assets, such as stocks or bonds, you will receive what’s called a “step-up in basis,” which resets the value to the price on the day of the owner’s death. Say your dad purchased Amazon stock 20 years ago at $2 a share, and you’re receiving it now at its current price, recently $175 a share. You can sell the investment right away and pay little or no capital gains taxes, says Foss. If you wait to sell, you’ll owe taxes on any future gains when you do.
Whatever type of asset you receive, take your time before making an investment decision. “You’ll want to make sure you use that money in a way that helps you reach your financial goals,” says Cheng. Consider consulting a financial planner; many work on an hourly basis or for a flat fee. (You can search for one on the CFP board’s website.)
2. Retirement accounts
Tax rules for inherited IRAs and 401(k)s can be tricky. According to new IRS requirements, most non-spouse beneficiaries must empty an inherited traditional IRA within 10 years of the owner’s death. Exceptions include surviving spouses, chronically ill individuals and people with disabilities, who can stretch distributions over their lifetime. If you’re a non-spouse beneficiary, you’ll need to set up an inherited traditional IRA in your own name, where you can directly transfer the funds from the original account. (Surviving spouses can transfer the funds to a new account or use an existing traditional IRA account.) You’ll owe income taxes on any withdrawals.
Be aware, if the original account owner died before the starting date for required minimum distributions (RMDs), the beneficiary can wait until year 10 to pull money out. To empty the account by year 10, however, you may want to withdraw some each year. If you wait until the last year, you could end up with a big tax bill.
If you inherit a Roth IRA and you’re a non-spouse beneficiary, you face the same time limit: You must empty the account by year 10. But spouses who inherit Roth IRAs have several options, including designating themselves as the account owner and taking RMDs over their lifetime. Roth distributions are not taxed.
Surviving spouses could also put the money into their own 401(k) or IRA, roll the funds into an inherited IRA or take a lump-sum distribution. If you take a lump sum distribution, you won’t incur an early withdrawal penalty, but the money will be taxed as ordinary income, which could push you into a higher tax bracket.
For any of these assets, consider working with a tax professional to help you understand your options and avoid penalties.
3. Real estate
You may find that you’ve inherited real estate, such as a family home. You might be able to benefit from a step-up in basis if you sell the home, since the value of the property resets to its fair market value when the owner dies. Say the house that your grandfather bought originally cost $100,000, but today it’s worth $500,000. You could sell the home right away for that amount without incurring a capital gains tax, says Kevin Hegarty, a CFP in Garden City, New York. If the value rises before the sale closes, though, you’ll owe taxes on any increase.
There are special tax rules for a surviving spouse. You have the option of selling the house within two years from the date of your spouse’s death and claiming a $500,000 exclusion. After that, you can only apply your half of the exclusion, or $250,000, but half the house will receive a step-up basis. (In community property states, both halves receive the step up.)
Taxes aren’t the only costs to consider. You’ll need to maintain the house, as well as pay bills for insurance and property taxes. And if the property is co-owned by other family members, be sure to reach an agreement about its sale or use, Hegarty recommends.
4. Life insurance and annuities
For those who receive a life insurance death benefit, the amount is generally not taxable. (One exception: If you receive the payout in installments, rather than a lump sum, you may have to pay tax on any interest earned on the principal.) And if you live in one of the handful of states with an inheritance tax, it will generally not apply, since a life insurance policy is typically considered separate from the estate, says Mark Luscombe, a CPA and principal analyst at Wolters Kluwer Tax & Accounting.
If you inherit an annuity, the tax rules depend on several factors, including the type of annuity, how it was funded, and whether it was purchased through a retirement account. Given the complexity, Foss says, it’s best to talk to a financial adviser with expertise in these products before you make any decisions.
5. Personal items
For most families, a major part of a loved one’s estate is the deceased’s personal possessions, everything from furniture to clothing to jewelry. “All of these possessions could have emotional value, if not financial value,” says Sonya Weisshappel, CEO of Seriatim, a firm that provides organizing and estate clearing services.
Figuring out what to do with these items can be daunting. To simplify the process, work with your family members to identify the pieces they wish to keep. The rest could be sold, donated or perhaps recycled. And don’t forget to preserve or digitize records of family history, such as photo albums and recipes.
If there are items that may be valuable, like jewelry or antique furniture or artwork, consider seeing an appraiser. “You probably want a generalist who can look at different categories of items,” says Weisshappel. To find one, you can search online directories for the Appraisers Association of America or the American Society of Appraisers, or get a referral from a local auction house. That way, whether you intend to sell the items or keep them in the family, you’ll have a clear idea of their market value.
As for the tax implications if you choose to sell some of the items? You don’t have to disclose any money you make on items that you sell for less than what the deceased person paid for them. And since the federal inheritance tax exemption is $13.99 million in 2025, unless you inherit and sell something incredibly valuable, you likely won’t owe taxes.
https://www.aarp.org/money/personal-finance/inheritance-next-steps/
