What to do with an inheritance and avoid common mistakes

Getting an inheritance can be a lot to wrap your mind around, and it’s easy to rush into decisions that might backfire later. Instead of reacting quickly, take the time to step back and get organized. This article walks through smart steps like understanding what to do with inheritance assets, sorting out taxes, setting investment goals, and planning for estate and giving strategies. With these strategies, you can position yourself to turn a windfall into lasting financial security.

First steps when you inherit money

Before making any big financial decisions, take a moment to pause and weigh your options. Inherited assets can come in many forms—cash, stocks, retirement accounts, or property—and each type has its own rules and tax implications.

How Do You Receive Inheritance Money?

Distribution requirements and timeframes can vary across asset types. For example, retirement accounts may require withdrawals to occur within a set timeframe, and real property often receives a “step-up” in basis, which can impact capital gains taxes. It’s also important to understand the estate settlement process, which may involve probate or trust administration and can take months to complete. Confirm procedures and timelines before accessing funds, and consider working with a financial advisor or estate attorney to help you navigate the details.

Understanding the tax implications of inheriting money

Understanding the tax implications of an inheritance is key to protecting and preserving your wealth. From inheritance and estate taxes to income tax on retirement accounts and capital gains on inherited assets, each category comes with its own rules and planning issues. Here’s what you need to know to navigate these issues with confidence.

Federal and State Inheritance Taxes

The US does not impose a federal inheritance tax, meaning beneficiaries typically don’t owe federal taxes on what they receive; however, some states do. Currently, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose inheritance taxes, with rates and exemptions varying by state and by the beneficiary’s relationship to the deceased.

Estate taxes apply to the total value of a decedent’s estate before distribution. The federal estate tax is applicable only to estates exceeding $13.99 million in 2025 , but several states also have their own estate tax rules and thresholds. Understanding both federal and state laws is key to avoiding surprises and planning effectively.

Income Tax On Inherited Accounts

If you inherit a retirement account, it’s important to understand how taxes apply. Inherited traditional IRAs and other pre-tax retirement accounts typically trigger required minimum distributions (RMDs), which are taxed as ordinary income. Under the SECURE Act, most non-spouse beneficiaries must withdraw the full balance within 10 years of the original owner’s death. Roth IRAs, while generally tax-free, still have distribution rules, and beneficiaries may need to take RMDs and may be taxed if the account is less than five years old. Navigating these rules can be complex, especially when planning for tax efficiency. Nixon Peabody Trust Company can help you make informed decisions and avoid surprises.

Capital Gains On Inherited Assets

When you inherit property or investments, the tax treatment is sometimes more favorable than if you had purchased them yourself. Thanks to a tax provision commonly known as “step-up in basis,” the value of inherited assets is reset to their fair market value at the time of the original owner’s death. This means that if you sell the asset shortly after inheriting it, you may owe little to no capital gains tax. However, selling inherited assets can still trigger tax consequences, especially if their value increases after the date of inheritance. Unlike personal investments, which are taxed based on the original purchase price, inherited assets often benefit from this basis adjustment, potentially reducing your taxable gain. Understanding these rules can help you make smarter decisions about what to do with inheritance money and when and how to sell inherited assets.

How to manage an inheritance wisely

Receiving an inheritance is a financial blessing that also requires responsibility. To make the most of it, it’s important to approach the process with clarity and intention. Take the time to set financial priorities, choose where to allocate your inheritance, and work with trusted advisors to ensure your decisions support long-term financial goals.

Set Financial Priorities First

Before making any major purchases or investments, it’s wise to create a financial plan for how you will allocate your inherited assets. An inheritance can be a powerful opportunity to strengthen your financial baseline, but without clear priorities, it’s easy to lose momentum (and money). Start by reviewing high-interest debt, ensuring you have adequate emergency savings, and evaluating your retirement goals. These steps help you build long-term security and avoid common pitfalls like overspending or under-saving.

Decide Where To Put Inheritance Money

When deciding how to allocate inheritance money, it’s essential to align financial choices with personal goals such as liquidity, growth, or estate planning.

• Savings accounts offer uncomplicated liquidity and are ideal for emergency funds or short-term needs, though they typically yield lower returns.
• Brokerage accounts offer access to stocks, bonds, and mutual funds, making them suitable for long-term growth.
• Trusts, such as revocable or irrevocable trusts, can be powerful tools for those focused on legacy and asset protection, allowing for controlled distribution of assets and potential tax advantages.

In addition to these choices, inheritance received as retirement accounts or real estate can help build wealth over time, though these options typically offer less liquidity. Each option serves a distinct purpose, and understanding these differences will help you make informed decisions that respect both immediate needs and long-term aspirations.

Work With Trusted Advisors

A team of trusted professionals, such as financial and tax advisors and estate attorneys, can provide guidance aligned with your unique circumstances to help you manage your inheritance wisely. These specialists help navigate complex issues such as investment strategy, tax implications, and legal filings, ensuring that inherited assets are preserved and aligned with long-term financial goals. Your team of advisors should help you balance multi-generational needs, craft strategies that reflect both family dynamics and market realities, and support your big-picture financial objectives. By working collaboratively with qualified professionals, individuals can transform a one-time windfall into a lasting foundation for financial security and legacy building.

Final thoughts

Inheriting money presents a unique opportunity but also carries risks. Without careful planning, it’s easy to fall into common traps that erode wealth rather than build it. By taking a strategic approach that includes setting clear priorities, diversifying investments, and working with experienced advisors, individuals and families can transform a one-time windfall into lasting financial security. Professional guidance can help you confidently navigate tax rules, align inheritance with long-term goals, and avoid costly missteps. Contact Nixon Peabody Trust Company for personalized support in managing inherited wealth and building a sustainable financial roadmap for the future.

FAQs about inheriting money

How Long Does It Usually Take To Receive An Inheritance?

Receiving an inheritance typically takes anywhere from several months to over a year, depending on the complexity of the estate and whether it goes through probate. Large estates can take even longer due to tax obligations and other administrative responsibilities like appraisals or business succession issues.

Can I Refuse Or Disclaim An Inheritance?

Yes, you can refuse or disclaim an inheritance. While uncommon, reasons for doing so include wanting the assets to go to the next beneficiary in line, to avoid tax complications, or to maintain the ability to qualify for certain types of federal benefits such as student loans. This legal process involves formally rejecting the assets you were meant to receive via written statement, which is typically required to be submitted within nine months of the decedent’s death.

Is Inheritance Money Considered Taxable Income?

Inherited money is not treated as income by the IRS. However, any financial gains the inherited assets generate, such as interest or dividends, is likely to be taxable unless it comes from an explicitly tax-exempt source. When choosing where to put inheritance money, your financial advisor will consider your unique tax circumstances and guide you towards options that help you maximize deductions and credits to reduce your tax burden.

Can I Gift Part Of My Inheritance To Family Members?

You can gift part of your inheritance to someone else, but be aware that certain tax rules still apply. If you accept the inheritance first, you can then give it away, though this may trigger gift tax implications. Work with your financial advisor to review annual and lifetime exclusions before making significant gifts. Alternatively, you can disclaim the inheritance entirely, allowing it to pass to the next beneficiary in line—though you will not be able to choose who that person is.

Gina Coletti
Chief Fiduciary Officer
Office: +1 617.345.1110
gcoletti@nixonpeabody.com

Mark Hannon
Director of Tax Services
+1 617.345.1064
mhannon@nixonpeabody.com