What Is an Inheritance? Taxes, Legal Rules, and What to Do With It
Last updated 05/04/2026 by
Ante Mazalin
Edited by
Andrew Latham
Summary:
An inheritance is money, property, or assets transferred to heirs or beneficiaries after someone’s death. The size and type of inheritance vary widely, as do the taxes and legal processes involved.
- Estate planning required: Without a will or trust, state law dictates how assets are distributed.
- Tax implications: Federal and state inheritance or estate taxes may apply depending on the value and your relationship to the deceased.
- Probate process: Most estates go through probate, a court-supervised process that validates the will and oversees distribution.
- Beneficiary eligibility: Spouses, children, and other relatives may inherit, or assets may pass to designated beneficiaries.
What Is an Inheritance?
An inheritance is property, money, or other assets that pass from a deceased person (the decedent) to their heirs or beneficiaries. Inheritances can include real estate, bank accounts, investment accounts, vehicles, jewelry, artwork, or a business.
Who receives an inheritance depends on whether the decedent left a will, trust, or other estate plan. If there’s no plan, state intestacy laws determine distribution, typically favoring spouses and close relatives.
Types of Inheritances
Inheritances vary in size, structure, and how they’re transferred.
- Cash inheritance: Money from a bank account or the sale of estate assets, paid directly to beneficiaries.
- Real property: A house, land, or other real estate transferred to one or more heirs.
- Investment accounts: Stocks, bonds, mutual funds, or retirement accounts with named beneficiaries.
- Business interests: Ownership stakes in family businesses or partnerships.
- Conditional inheritance: Assets left in a trust with conditions, such as “only if the heir reaches age 25” or “only for education expenses.”
How Inheritance Taxes Work
The federal government taxes large estates, and some states impose inheritance or estate taxes. The tax treatment depends on your relationship to the deceased and the size of the inheritance.
For 2026, the federal estate tax exemption is $13.61 million per person (according to the IRS), meaning estates under that amount owe no federal estate tax. However, some states have lower thresholds. Maryland, for example, taxes estates above $5.5 million.
| Scenario | Federal Tax | State Tax |
|---|---|---|
| Small estate ($500K) | None | None (most states) |
| Medium estate ($5M) | None | Possible in high-tax states |
| Large estate ($20M+) | 40% on amount above $13.61M | Likely in high-tax states |
Inheritances to spouses are typically tax-free due to the marital deduction. Inheritances to non-spouses, including adult children, are usually tax-free for federal purposes if the estate is small enough, though some states tax such inheritances.
Good to know: Inherited assets receive a “step-up in basis,” meaning their value resets to the price on the date of death for tax purposes. If you inherit a stock worth $100,000 at death, your basis is $100,000, even if the deceased bought it for $50,000 years earlier. This can significantly reduce capital gains taxes if you sell soon after inheriting.
The Probate Process
Most estates go through probate, a court process that validates the will, identifies heirs, pays debts and taxes, and distributes remaining assets. Probate can take months to years and involves court fees and attorney costs.
Some assets bypass probate entirely, including assets held in a trust, retirement accounts with named beneficiaries, and accounts with a payable-on-death designation.
What to Do If You Inherit Money
Don’t rush. Take time to understand what you’ve inherited and the tax implications before making major decisions.
Consult professionals. Meet with an estate attorney and tax professional who can explain your obligations and options specific to your situation.
Manage inherited assets wisely. If you inherit an investment account, consider whether to hold, sell, or rebalance it. If you inherit real estate, decide whether to keep or sell. If you inherit cash, create a plan—pay off high-interest debt, fund an emergency fund, or consider retirement planning strategies to maximize long-term growth. For unexpected inheritance windfalls, many beneficiaries benefit from opening a high-yield savings account as a temporary holding area while developing a comprehensive strategy.
Update your own estate plan. An inheritance may trigger changes to your will, trust, or beneficiary designations on retirement accounts.
Pro Tip
If you inherit a large amount, consider working with a financial advisor to develop a strategy. Many people who suddenly receive a windfall benefit from a thoughtful plan rather than impulsive spending or investing.
How to manage an inheritance
- Understand what you’ve inherited: Request a detailed inventory of all assets from the executor or estate attorney. Know whether the inheritance is cash, real estate, investment accounts, or a mix.
- Consult professionals: Meet with an estate attorney and tax professional (CPA or enrolled agent) to understand your legal rights, tax obligations, and any required actions.
- Place funds in a safe account: Deposit cash inheritance in a money market fund or high-yield savings account temporarily. This avoids impulsive decisions while you develop a long-term plan.
- Evaluate inherited real estate: Assess whether to keep or sell inherited property. Consider property taxes, maintenance costs, and whether it fits your financial goals.
- Review inherited investment accounts: Determine the step-up basis, analyze the asset allocation, and decide whether to hold, rebalance, or sell individual positions.
- Develop a long-term strategy: Create a plan allocating the inheritance toward debt payoff, emergency funds, retirement savings, education, or other financial goals aligned with your life situation.
Planning your own estate now ensures your wishes are honored and reduces burden on your family.
Related reading on estate planning and wealth transfer
- Living trust — a legal arrangement allowing you to transfer assets to heirs outside of probate while maintaining control during your lifetime.
- Step-up in basis — a tax provision that resets an inherited asset’s value to the price on the date of death, potentially reducing capital gains taxes.
- Gift tax — a federal tax on money or property transferred to others during your lifetime, separate from inheritance tax.
- Retirement planning — long-term strategies for building wealth that may include provisions for heirs and beneficiaries.
Frequently asked questions
Do I owe taxes on an inheritance?
Federal estate tax applies only to very large estates (above $13.61 million in 2026), and the estate itself pays it—not the inheritors. Most beneficiaries don’t owe income tax on inherited money or assets. However, some states impose inheritance tax, and you may owe taxes on income generated by inherited assets (like investment gains).
How long does the probate process take?
Probate typically takes 6 months to 2 years, depending on estate complexity, state laws, and whether disputes arise. Simple estates with clear wills and few assets may finish in 3–6 months, while contested estates can take much longer.
What is the step-up in basis and how does it help?
When you inherit an asset, its value is “stepped up” to its worth on the death date, resetting your tax basis. If you sell soon after, you pay capital gains tax only on appreciation after inheritance, not on gains the deceased accrued. This can save substantial taxes, especially on appreciated real estate or stock.
Can I refuse an inheritance?
Yes, you can disclaim (refuse) an inheritance within a specific timeframe set by law (typically 9 months). Disclaiming passes the asset to the next beneficiary and can be useful for tax planning or if you don’t want the asset.
What should I do first if I inherit a large sum?
Don’t make major decisions immediately. Instead, deposit the funds in a safe account (like a money market fund), consult with an estate attorney and tax professional about your obligations, and develop a plan before investing or spending anything significant.
Key takeaways
- An inheritance is money, property, or assets transferred to beneficiaries after someone’s death.
- Federal and state taxes may apply to large inheritances, though spouses and small estates are often exempt.
- Inherited assets typically receive a step-up in basis, which can reduce capital gains taxes.
- After inheriting, consult professionals, develop a plan, and update your own estate documents.
Protecting and growing an inheritance starts with the right financial plan — explore investment platforms to put inherited assets to work.
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