What to Do With an Inheritance: A Step-by-Step Guide

The pause principle: 30 to 90 days before any major decision

The single most important piece of financial guidance for someone who has just received an inheritance is not about taxes, accounts, or investment allocation. It is this: do not make any major financial decisions for at least 30 days, and ideally 90.

This is not motivational advice. It reflects how the brain actually processes grief and decision-making. Grief and stress make slow, careful thinking harder, and decisions made in that state tend to favour immediate relief over long-term consequences. A pause gives the careful thinking time to come back before anything irreversible happens.

The behavioral finance evidence on windfall psychology reinforces this. Studies of lottery winners, structured settlement recipients, and heirs consistently show that impulsive early decisions — large purchases, gifts to family members, business investments — are the primary driver of inherited wealth depletion within five years. The pace of spending, not the amount inherited, is the strongest predictor of poor outcomes. Moving slowly is a return-generating strategy in its own right.

What to do immediately, while you wait:

• Park cash in an FDIC-insured high-yield savings account (HYSA). If the inheritance includes cash or liquid proceeds from sold assets, move it to an HYSA at a federally insured bank or credit union. High-yield accounts pay far more than the national average savings rate (0.37% in September 2026); at 3.5%, a $200,000 inheritance earns about $7,000 in interest a year while you plan deliberately. FDIC insurance protects up to $250,000 per depositor, per bank — if the amount exceeds this, use two institutions.
• Before you move any money, decide whether you might want to refuse the inheritance. Under 26 U.S.C. § 2518 you can make a “qualified disclaimer”: a written refusal received within 9 months of the transfer (for an inheritance, usually the date of death), so the assets pass as if you had never received them. It only works if you have not accepted the interest or any of its benefits, and moving inherited cash into your own account or using it can count as accepting. If a disclaimer is a possibility (for example, to pass assets to your children), ask an estate attorney before you touch the money.
• Do not move assets out of the estate until administration is complete. Estate administration takes time — often 6 to 24 months for complex estates. Attempting to move or liquidate assets prematurely can create legal complications and personal tax liability. Work with the executor and an estate attorney before taking any action on non-cash inherited assets.
• Update your own beneficiary designations immediately. This is the one productive action you can and should take right now. If the person who left you the inheritance was listed as a beneficiary on your own retirement accounts, life insurance policies, or TOD (transfer-on-death) brokerage accounts, those designations now need to be updated. A beneficiary designation supersedes a will — an outdated designation could route your assets to a deceased person's estate rather than to your intended heirs. Log into each account and update it now.
• Tell as few people as possible. Privacy is a financial strategy. News of an inheritance reliably generates pressure from family members, friends, and financial salespeople. The relational dynamics created by visible wealth — even temporary, undeployed wealth — are difficult to unwind. Share the information only with people who have a direct legal or logistical need to know.

The dominant pattern in inheritance community discussions is consistent: the regret overwhelmingly flows from moving fast, not from moving slowly. People who waited 60 to 90 days rarely report regret about the pause. People who committed capital in the first two weeks frequently do.

Step 1: Understand what you have actually inherited

Before any financial decision can be made, you need a complete, accurate inventory of what the inheritance actually consists of. Inheritances are rarely a simple wire transfer of cash. They typically involve multiple asset types, each with different rules, tax treatments, timelines, and administrative requirements.

Asset types and their distinct rules

Cash and bank accounts. The simplest case. Funds in accounts with a named beneficiary (POD — payable on death) or joint tenancy pass directly to the beneficiary outside of probate. If the account had no beneficiary designation and goes through the estate, it may take months to access.

Brokerage accounts (taxable). Inherited brokerage accounts receive a step-up in cost basis to the date-of-death value (covered in detail in Step 2). This is the most important tax rule in inheritance planning — it effectively forgives all embedded capital gains that accrued during the decedent's lifetime.

Retirement accounts (IRA, 401(k), 403(b)). These are the most complex assets to inherit. They do not receive a step-up in basis — all distributions are taxed as ordinary income. For most non-spouse beneficiaries, the SECURE Act of 2019 requires the full account balance to be withdrawn within 10 years (the 10-year rule, detailed in Step 4). Spouses have more favorable options. Never simply cash out an inherited IRA without understanding the tax consequences — it can trigger a six-figure tax bill in a single year.

Real estate. Inherited real estate also receives a step-up in basis to the date-of-death fair market value. If you sell it immediately for the appraised value, capital gains are minimal or zero. If you hold it and it appreciates, your new basis is the date-of-death value — you only owe gains on appreciation after inheritance. Real estate also involves property transfer taxes, title work, and — if rental property — a decision about whether to manage, sell, or hire a property manager.

Life insurance proceeds. Generally received income-tax-free by the named beneficiary (IRC Section 101(a)). These proceeds are not included in the decedent's gross estate if the policy was owned by an Irrevocable Life Insurance Trust (ILIT) — a common estate planning structure for larger estates. If you receive a lump sum from a life insurance policy, it goes directly to you outside of probate and does not require estate administration.

Business interests, collectibles, and other assets. These require specialized appraisals for estate tax purposes and may have unique liquidity challenges. A business interest may require a buy-sell agreement review. Collectibles (art, jewelry, coins) have their own capital gains rate (28% for collectibles vs. 15–20% for most long-term capital gains).

The probate process

Probate is the court-supervised process of validating a will, settling debts, and distributing assets to heirs. Assets that go through probate include anything owned solely in the decedent's name without a beneficiary designation.

Assets that skip probate entirely: accounts with named beneficiaries (POD/TOD), jointly-owned property with right of survivorship, life insurance proceeds to a named beneficiary, and assets held in a living trust.

Probate timelines vary significantly by state and estate complexity. Simple estates in states with streamlined procedures may close in 3 to 6 months. Complex estates with disputes, real estate in multiple states, or business interests routinely take 12 to 24 months. During this period, you may not have legal access to certain assets — plan accordingly and do not commit to spending money you have not yet received.

Gathering the documentation

Work with the executor to obtain a complete picture. The documents you need:

• Account statements for all financial accounts as of the date of death
• Property deeds and a professional appraisal for real estate
• Life insurance policy documents and death benefit amounts
• IRA and retirement account beneficiary designation forms
• Tax returns for the last three years (to understand income, deductions, carryforwards)
• A date-of-death valuation for all assets — required for step-up in basis calculation and estate tax purposes

The date-of-death valuation is not optional paperwork. For any asset you may sell, your cost basis is the fair market value on the date of death — not what the original owner paid. Without this valuation documented, you cannot accurately calculate capital gains if you later sell the asset.

Step 2: Know the tax rules before you touch anything

The US tax rules governing inherited assets are genuinely favorable to heirs in most cases — but only if you understand them before taking action. The most common and expensive mistakes in inheritance tax planning come from acting on incorrect assumptions.

The step-up in basis — the rule most heirs do not know

This is the most valuable tax provision available to heirs, and many people who receive an inheritance have never heard of it.

Here is how it works: when you inherit an asset — stocks, real estate, a brokerage account — your cost basis for capital gains purposes is reset to the fair market value on the date of the original owner's death. All appreciation that occurred during the decedent's lifetime is permanently forgiven. The IRS calls this a “stepped-up basis.” The authoritative source is IRS Publication 559 (Survivors, Executors, and Administrators).

A concrete example: the deceased purchased 1,000 shares of a stock in 1995 for $10 per share ($10,000 total). At death, those shares are worth $180 per share ($180,000 total). If they had sold those shares before death, they would have owed capital gains tax on $170,000 of appreciation. Because you inherit them, your cost basis is $180,000 — the date-of-death value. If you sell immediately, you owe zero capital gains tax on that $170,000 of growth. If you hold the shares and they rise to $200,000 before you sell, you only owe gains on the $20,000 of appreciation that occurred after you inherited them.

Practical implication: if you plan to sell inherited securities, doing so shortly after inheriting — while the price is close to the stepped-up basis — is often the most tax-efficient timing. Do not hold inherited appreciated assets simply to avoid a tax bill that has already been forgiven.

Important exception: inherited assets from a spouse in community property states get a double step-up — both the decedent's half and the surviving spouse's half of community property receive the stepped-up basis. Consult an estate attorney if you are in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin).

Federal estate tax — who actually pays it

The federal estate tax applies to the gross estate of the deceased, not to heirs directly. For 2026, the federal exemption is $15 million per individual ($30 million for married couples with portability). Estates below this threshold owe no federal estate tax, and the heirs receive assets free of any federal estate-related obligation.

A planning note that has changed: the Tax Cuts and Jobs Act doubled the estate tax exemption in 2017, and that increase was scheduled to sunset after 31 December 2025, cutting the exemption to roughly $7 million. That sunset was removed before it took effect. The One Big Beautiful Bill Act, signed on 4 July 2025, set the exemption at $15 million per person from 2026 ($30 million for a married couple) and made it permanent, indexed for inflation. If you were told to act before a 2025 deadline, that deadline no longer exists. See our estate tax guide for the current position.

Inherited IRAs and the 10-year rule

Unlike other inherited assets, retirement accounts do not receive a step-up in basis. Every dollar withdrawn from an inherited traditional IRA is taxed as ordinary income in the year it is withdrawn, at your marginal tax rate.

The SECURE Act of 2019 ended the “stretch IRA” strategy that previously allowed non-spouse beneficiaries to take distributions over their own lifetime. The current rule for most non-spouse beneficiaries: all funds must be distributed by the end of the 10th year following the original owner's death. Whether you also owe annual distributions inside that window depends on when the original owner died. Under the IRS final regulations issued in July 2024, if the owner died on or after their required beginning date, you must take an annual RMD in years 1 through 9 as well as emptying the account by year 10. If they died before their required beginning date, there are no annual RMDs and only the 10-year deadline applies. Missing a required distribution carries an excise penalty, so confirm which case applies to you before skipping a year.

Exceptions where more favorable rules apply: surviving spouses (can treat the IRA as their own), minor children of the deceased (special rules until age of majority), disabled or chronically ill beneficiaries, and beneficiaries not more than 10 years younger than the deceased.

The tax planning opportunity: because you have flexibility in how you spread the withdrawals across the 10 years, you can time larger distributions in years when your taxable income is lower — a career break, a sabbatical, a year with large deductions, or early retirement before Social Security begins. Here is the difference in practical terms for a $200,000 inherited IRA (assuming 24% marginal bracket throughout, for simplicity):

• Cash out entire IRA in year 1: $200,000 added to ordinary income. Depending on your other income, this could push substantial income into the 32%, 35%, or 37% bracket. Federal tax on the distribution alone could exceed $50,000–$70,000.
• Spread over 10 years ($20,000/year): $20,000/year in additional taxable income. At the assumed 24% bracket, this is $4,800 per year — $48,000 total over 10 years versus the $50,000–$70,000 year-1 figure above: a potential saving of up to $22,000 in federal taxes alone, largest when the lump sum would have pushed income into the 32–37% brackets.

The optimal strategy is not always equal-annual distributions. Modelling your expected income for each of the next 10 years — and pulling more from the inherited IRA in lower-income years — can reduce total tax paid substantially. A fee-only CPA or CFP can build this model for you.

State inheritance taxes — five states you need to know

The following states impose their own inheritance tax, separate from the federal estate tax: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa repealed its inheritance tax for deaths on or after 1 January 2025.

Key characteristics: spouses are exempt in every state that has inheritance tax. Direct lineal descendants (children, grandchildren) are exempt or face reduced rates in most of these states. Non-relatives — friends and unmarried partners — face the highest rates: 15% in Pennsylvania, and up to 16% in New Jersey and Kentucky, depending on the amount inherited. Step-children are treated as children: they pay the 4.5% rate for direct descendants in Pennsylvania and are exempt in New Jersey and Kentucky. Maryland is the only state that levies both a state estate tax AND a state inheritance tax.

If you live in one of these states, or if the deceased was a resident of one, consult a local estate attorney to understand what, if any, state tax applies to what you received.

Step 3: Prioritize the money — the financial decision hierarchy

Once the tax picture is clear, the question becomes: in what order should the inheritance be deployed? This hierarchy reflects both mathematical optimization and the behavioral reality that a windfall is a one-time event — the goal is to maximize its long-term impact, not the short-term emotional satisfaction of seeing a large number in an account.

1. Emergency fund first

If you do not currently have a funded emergency reserve of three to six months of living expenses in liquid, accessible savings, build it now before investing any of the inheritance. An inheritance does not replace the need for an emergency fund — it provides the opportunity to finally build one properly. The emergency fund should sit in an FDIC-insured high-yield savings account, separate from the inheritance proceeds, accessible without penalty.

Why this comes first: an emergency fund is the mechanism that prevents you from liquidating investments at the worst possible time when an unexpected expense (job loss, medical bill, car repair) arrives. Without this buffer, even a well-invested inheritance can be partially undone by a forced sale during a market downturn.

2. High-interest debt elimination (above 7% APR)

Paying off high-interest debt is a mathematically risk-free return. If you carry a credit card balance at 22% APR, paying it off delivers a guaranteed 22% return on that capital — equivalent to earning 22% annually on an investment, but without any market risk. No diversified portfolio can reliably deliver that return. The comparison is not even close.

The threshold of 7% is a rule of thumb. Over the long run, a diversified stock index fund has returned roughly 7% a year after inflation (about 10% before it). Below this rate, the expected market return begins to exceed the guaranteed return from debt payoff, and the case for investing grows stronger. Above this rate — credit cards, personal loans, most auto loans — eliminate the debt first.

3. Max tax-advantaged contribution limits

If you are not currently maxing your 401(k) and IRA, the inheritance provides the opportunity to do so. Tax-advantaged accounts deliver an immediate return in the form of reduced taxable income (traditional) or permanently tax-free growth (Roth).

2026 contribution limits:

• 401(k) / 403(b): $24,500 per year ($32,500 for age 50+; $35,750 for ages 60–63 under SECURE 2.0)
• IRA / Roth IRA: $7,500 per year ($8,600 for age 50+)
• HSA (if eligible): $4,400 individual / $8,750 family

Important: you cannot contribute directly from an inherited IRA to another IRA — you cannot move inherited retirement money back into your own tax-advantaged accounts. But if you have earned income and have not yet maxed your own accounts, using some of the cash inheritance to fund those contributions (while keeping your paycheck for expenses) is a sound strategy.

4. Lower-interest debt (3–6% range)

In this rate range, the mathematical case for paying off versus investing is genuinely close, and the right answer depends on your risk tolerance and psychological relationship with debt. A 3.5% mortgage: the expected long-term equity return (roughly 7% a year after inflation) suggests investing wins mathematically. A 6% student loan: closer to a coin flip, and many people are better served psychologically by eliminating the debt and investing the freed-up cash flow.

There is also a sequence consideration: paying off a 4% mortgage from an inheritance is often less valuable than maxing tax-advantaged accounts first, even if the emotional appeal of debt freedom is significant. Run both scenarios with actual numbers before deciding.

5. Invest the remainder in a taxable brokerage account

After the emergency fund is built, high-interest debt is eliminated, and tax-advantaged accounts are maxed, the remaining inheritance belongs in a diversified, low-cost taxable brokerage account. A three-fund portfolio — total US market index fund, total international index fund, and a bond index fund — is the approach that Bogleheads and most fee-only financial planners recommend for its simplicity, low cost, and historical performance.

The specific allocation between stocks and bonds depends on your investment timeline and risk tolerance. A general rule of thumb: subtract your age from 110 to get a rough equity percentage (a 35-year-old: 75% stocks, 25% bonds). For very long horizons — 20 or more years to retirement — a more aggressive equity allocation is typically appropriate.

6. One intentional splurge — capped at 5 to 10%

Many financial planners who work with windfall recipients recommend a deliberate, capped allocation to personal spending or enjoyment. The logic: if no enjoyment is allowed, the psychological pressure builds until an impulsive spending event occurs anyway — often for a larger amount. An intentional splurge of 5 to 10% of the inheritance, spent on something meaningful and pre-committed, satisfies the natural human impulse without undermining the financial plan.

This might mean funding a trip that honors the person who left you the inheritance, buying a piece of equipment for a shared hobby, or making a charitable gift in their name. Whatever it is, the key is to decide the amount in advance and treat it as a separate, bounded category — not a license for ongoing lifestyle inflation.

Step 4: The inherited IRA decisions

The inherited IRA deserves its own section because the stakes are high and the rules are frequently misunderstood. A large inherited IRA — $300,000, $500,000, even more — can either be a powerful tax-advantaged wealth transfer or a source of unnecessary six-figure tax bills, depending on how it is handled.

Confirm the account type and your beneficiary category

The first step is to determine whether you inherited a traditional IRA, a Roth IRA, a SEP-IRA, or a SIMPLE IRA — each has different rules. Also determine your beneficiary category:

• Eligible Designated Beneficiaries (EDBs) — surviving spouses, minor children, disabled/chronically ill individuals, and individuals not more than 10 years younger than the deceased — have more favorable distribution options including the ability to stretch distributions over their own life expectancy.
• Non-Designated Beneficiaries (estates, charities, certain trusts) — generally must distribute within 5 years if the deceased died before RMD age.
• Most other non-spouse beneficiaries fall under the 10-year rule described in Step 2.

Open an inherited IRA — do not take a distribution first

If you inherit an IRA, the correct procedure is to instruct the financial institution to transfer the funds into a new inherited IRA (also called a beneficiary IRA) titled in the form: “[Deceased Name], deceased, for the benefit of [Your Name].” This transfer does not trigger any tax.

Do not take a distribution first and then try to redeposit it. Once you take a distribution, a non-spouse heir cannot put it back: the 60-day rollover is not available for an inherited IRA, so only a direct trustee-to-trustee transfer keeps the money tax-deferred (IRS Publication 590-B). The inherited IRA must be titled correctly from the outset.

Build a 10-year distribution plan

Given the 10-year rule, you have meaningful flexibility in how to time distributions. The goal is to spread them across years where your marginal tax rate is lowest. To build this plan, you need a forecast of your taxable income for each of the next 10 years — which requires thinking through career trajectory, other income sources, major life changes, and expected deductions.

The lowest-tax years to consider pulling more from the inherited IRA:

• Years you take a career break or sabbatical
• Years with large deductible expenses (medical bills, charitable contributions)
• Early retirement years before Social Security begins (often lower-income)
• Years where you have business losses or significant deductions

For a Roth inherited IRA, distributions are income-tax-free (as long as the account is at least 5 years old). The 10-year rule still applies — the account must be fully distributed within 10 years — but there is no tax optimization needed. The Roth inherited IRA can simply grow tax-free until year 10, at which point you withdraw the entire balance tax-free.

If you have a large inherited IRA (above $250,000) and a complex income situation, the tax savings from a professionally modeled distribution plan can easily exceed $20,000–$50,000 in total tax paid. The cost of a fee-only CPA engagement for this analysis is typically $1,500–$3,000. The math strongly favors getting professional advice for accounts of this size.

Use the Retirement Calculator to model how incorporating the inherited IRA distributions into your overall income affects your retirement timeline. An inherited IRA that is managed as part of a complete retirement plan produces better outcomes than managing it in isolation.

Step 5: Getting the right financial advice

An inheritance is precisely the event that commission-based financial advisors and insurance salespeople actively market toward. Understanding who to hire — and who to avoid — is a financial skill in its own right.

Who to hire: fee-only fiduciary CFP

A fee-only Certified Financial Planner (CFP) who charges a flat fee or hourly rate is the appropriate professional for a one-time inheritance planning engagement. “Fee-only” means the advisor receives compensation exclusively from the client — no commissions from product sales, no trailing fees from investment products, no referral payments. “Fiduciary” means the advisor is legally obligated to act in your best interest at all times. Commission-based brokers must act in your best interest when they make a recommendation (Regulation Best Interest, since 2020), but they are paid by the products they sell, and that conflict remains.

For a one-time inheritance analysis, look for an advisor who offers project-based or hourly engagements. A comprehensive inheritance review typically costs $2,000 to $5,000 for a flat-fee engagement. This is significantly less expensive, over a 10-year horizon, than paying an AUM (assets under management) fee of 1% annually on a $500,000 inheritance — which would cost $50,000 in advisor fees over 10 years, before accounting for the compounding growth lost on those fees.

What to ask before hiring

Ask these questions directly, and expect direct answers. Any hesitation or evasiveness is informative:

• “Are you a fiduciary at all times — including when making specific product recommendations?”
• “How are you compensated for this engagement? Is there any fee I would pay that does not go directly to you?”
• “Do you receive any commissions, trail fees, or compensation from products you recommend?”
• “Can you provide your fee schedule in writing before we begin?”

The NAPFA (National Association of Personal Financial Advisors) directory at napfa.org lists fee-only advisors who have signed a fiduciary oath. It is the most reliable starting point for finding advisors who meet this standard. The Garrett Planning Network (garrettplanningnetwork.com) specializes in advisors who work with clients on an hourly or project basis — ideal for a one-time inheritance engagement.

For guidance on vetting and hiring a fee-only advisor, see the detailed guide at How to Find a Fee-Only Financial Advisor.

Red flags — the patterns that reliably precede bad outcomes

The following patterns, synthesized from documented inheritance financial planning failures, should prompt immediate caution or disengagement:

• Unsolicited outreach from wealth managers shortly after the inheritance. Inheritances are often matters of public record (probate court filings). Advisors actively prospect these lists. Legitimate advisors do not cold-approach grieving people within weeks of a death.
• Pressure to decide quickly or to “lock in” an offer. Artificial urgency is a sales technique, not a financial planning principle. Legitimate advisors welcome deliberate decision timelines.
• Promises of high guaranteed returns. The only guarantees worth the name come from FDIC-insured deposits and US Treasury securities held to maturity, and in September 2026 Treasury yields ran from about 3.8% on one-month bills to about 5.6% on 30-year bonds (Treasury daily par yield curve). Anyone promising guaranteed returns well above the top of that range is either misinformed or misrepresenting.
• Recommendations to invest in a family member's business or “can't-miss” opportunity. Informal business investments — funding a relative's startup, lending to a friend — reliably destroy both capital and relationships. They are a dominant pattern in inheritance depletion case studies.
• Complex insurance products presented as “tax-free investments.” Indexed universal life insurance (IUL), variable annuities, and similar products are frequently marketed to inheritance recipients as tax-advantaged investment vehicles. They carry high fees, complex surrender schedules, and benefits that are almost always achievable through simpler, lower-cost instruments.
• Reluctance to provide fee disclosure in writing. This is a regulatory requirement and a professional baseline. Any hesitation is disqualifying.

Step 6: Avoiding the most common mistakes

Inheritance wealth destruction follows predictable patterns. These are not edge cases — they appear consistently in financial planning literature, IRS data on inherited IRA distributions, and the documented experience of practitioners who work with windfall recipients. Understanding them is the most efficient form of inheritance protection.

Mistake 1: Moving too fast

Covered in the pause principle above, but worth restating with emphasis: the 30 to 90-day rule is not a suggestion. Financial planners who specialize in sudden wealth transitions report that the majority of adverse outcomes they encounter in inheritance cases trace to decisions made in the first two to four weeks, before the practical and emotional dimensions of the situation were properly understood.

Mistake 2: Telling too many people

An inheritance becomes public knowledge quickly once word spreads through a family or social network. The consequences include financial requests from family members (which are difficult to decline without damaging relationships), pressure to fund others' priorities, and altered social dynamics that can persist long after the money is deployed. Protecting the privacy of the inheritance — treating it as personal financial information, the same way you would treat your salary or retirement balance — reduces these pressures substantially.

Mistake 3: Cashing out an inherited IRA in year 1

Taking a full distribution in the year you inherit triggers ordinary income tax on the entire balance in a single year. On a $300,000 inherited IRA, taking a full distribution adds $300,000 to your taxable income. Depending on other income, substantial portions of that distribution could be taxed at 32%, 35%, or 37% federal rates — plus state income tax. The same $300,000 withdrawn over 10 years in a tax-optimized distribution plan might generate less than half the total tax bill.

This mistake is irreversible. Once the distribution is taken and the taxes are owed, there is no mechanism to redeposit it into a tax-advantaged account (for inherited IRA purposes) or reclaim the taxes paid. Model the 10-year distribution before taking any distribution from an inherited IRA.

Mistake 4: Concentrating in one asset class

Windfall psychology — the same pattern observed in lottery winners — often produces all-or-nothing investment decisions: putting the entire inheritance into a single stock (often the employer stock of the deceased, for familiarity), a single real estate investment, cryptocurrency, or some other concentrated bet. Diversification is not conservative cowardice — it is the mechanism that allows capital to survive the inevitable volatility and error in any single investment thesis.

Mistake 5: Using a commission-based advisor

This warrants explicit repetition because the financial planning industry still includes a large majority of practitioners who are compensated by commissions on product sales. Since 2020, commission-based brokers must act in your best interest at the time of a recommendation, but they are still paid by the products they sell. In the context of a large inheritance, the financial incentive to move assets into high-commission products (annuities, whole life insurance, managed funds with front-end loads) is substantial. This is not a criticism of all commission-based practitioners personally — it is an acknowledgment of how incentive structures shape advice.

Mistake 6: Letting it sit in cash indefinitely

The 30 to 90-day pause is appropriate. Parking the money in a high-yield savings account for 12 to 24 months while continuing to avoid decisions is not. A high-yield savings account may beat inflation modestly but significantly underperforms a diversified equity portfolio over multi-year horizons. After the pause period and once the tax planning is clear, the cost of inaction is real. Behavioral finance calls this “cash drag” — it is a meaningful drag on the long-term value of the inheritance.

Mistake 7: Skipping beneficiary designations on new accounts

Every new account you open with inherited assets — a new brokerage account, a new HYSA, a new taxable investment account — needs a beneficiary designation. Accounts without named beneficiaries go through probate at your death, which is slower, more expensive, and less private than a direct beneficiary transfer. After opening any new account, make beneficiary designation the second step, immediately after account funding.

Making it meaningful — the emotional dimension

Most inheritance guides treat the money as the primary subject and the loss as a footnote. This section acknowledges that for most people, an inheritance is not simply a financial event — it is money that came from someone they loved, and it arrived alongside grief.

Financial decisions made in this context carry emotional weight that purely analytical frameworks do not fully capture. The impulse to spend the inheritance quickly can reflect a desire to make something tangible from a loss that otherwise feels formless. The impulse to never touch it can reflect a need to preserve a connection. Neither of these is irrational — but both can produce suboptimal financial outcomes if not consciously recognized.

One heuristic that many financial therapists and planners who work with grieving clients find useful: ask what the person who left you this inheritance would have wanted you to do with it. Not as a binding obligation, but as a perspective that often clarifies priorities. Someone who worked for 40 years to accumulate a retirement account for their family would likely not want it cashed out in a single year and delivered to the IRS. Someone who prioritized education might find it meaningful if part of the inheritance funded a 529 for the next generation.

Some heirs find it psychologically grounding to allocate a small, deliberate portion of the inheritance to honor the source — a charitable donation in the deceased's name to a cause they cared about, a meaningful purchase related to a shared interest, or funding an experience that would have made them proud. This is not financial advice — it is an acknowledgment that inherited wealth carries meaning beyond its dollar value, and honoring that meaning thoughtfully can actually support better financial decision-making by reducing the unprocessed emotional charge around the money.

If the emotional weight of managing a large inheritance feels genuinely overwhelming, financial therapy (a field that combines financial planning knowledge with therapeutic training) is a legitimate resource. The Financial Therapy Association maintains a directory at financialtherapyassociation.org.

Frequently asked questions

How long should I wait before making financial decisions after receiving an inheritance?

Financial planners universally recommend a minimum of 30 days and ideally 60 to 90 days before committing to any major financial decision. During this period, park cash in an FDIC-insured high-yield savings account, allow estate administration to proceed, and give yourself time to consult a fee-only CFP and, if relevant, a CPA. The one productive action to take immediately: update beneficiary designations on your own existing accounts.

Do I owe income tax on an inheritance?

In most cases, no. Inherited assets receive a step-up in basis to the date-of-death fair market value, which eliminates any embedded capital gains tax obligation on appreciation that occurred during the decedent's lifetime (IRS Publication 559). The federal estate tax is paid by the estate, not the heir, and only applies to estates over $15 million (2026). Inherited IRA distributions are the major exception — those are taxed as ordinary income when you withdraw them. Also check whether you are subject to a state inheritance tax in one of the five states that levy one.

What is the 10-year rule for inherited IRAs?

The SECURE Act of 2019 requires most non-spouse beneficiaries to fully withdraw an inherited IRA within 10 years of the original account holder's death. Under IRS final regulations issued in July 2024, annual RMDs are also required in years 1–9 if the original owner died on or after their required beginning date; if they died before it, only the year-10 deadline applies — but either way the account must reach zero by year 10. Every dollar withdrawn is taxed as ordinary income. Timing withdrawals in lower-income years minimizes total tax paid. See the detailed breakdown in Step 4 above.

Should I pay off my mortgage with an inheritance?

The answer depends on your mortgage rate relative to expected investment returns. If your mortgage rate is 3.5%, the long-term expected return of a diversified equity portfolio (roughly 10% a year before inflation, 7% after) suggests investing produces better long-term outcomes. If your mortgage rate is 6–7%, the case is closer. Additionally, maxing tax-advantaged accounts (401(k), IRA) before paying off a low-rate mortgage typically produces better after-tax outcomes — the tax savings on contributions create an immediate return that often exceeds the mortgage interest cost. Consider the full picture with a fee-only CFP before making a decision on a large mortgage payoff.

Who should I talk to first — a financial advisor, a CPA, or an attorney?

Ideally, all three — but in sequence. An estate attorney first, if the estate involves real estate, business interests, or trust administration (they handle the legal administration of the estate). A CPA next, to model the tax implications of inherited IRA distributions and any planned asset sales. A fee-only CFP last, to build the overall financial plan once the tax picture is clear. For smaller, simpler inheritances (primarily cash or liquid securities), a fee-only CFP with tax planning experience may be able to cover both the tax and investment analysis.

What are the biggest mistakes people make with an inheritance?

The seven documented mistakes: moving too fast (decisions in the first 30 days); telling too many people about the inheritance; cashing out an inherited IRA in a single year and paying full ordinary income tax on the entire balance; concentrating the inheritance in a single asset class rather than diversifying; using a commission-based advisor who recommends high-fee products; letting the money sit in cash indefinitely; and failing to update beneficiary designations on newly opened accounts. See Step 6 for a detailed treatment of each.