Make the most of your inheritance. Explore key steps for financial planning, investing, and minimizing taxes after receiving an inheritance with Vanguard.
What to do with an inheritance
Receiving an inheritance—whether a small sum or a large windfall—can be a life-changing event. In the midst of grief, it's common to feel pressure to act quickly. But you don't have to. Once you've taken the time to grieve and heal, you can begin to think clearly about what to do with your inheritance. When you're ready, here's a guide that can help.
Key takeaways
- Tax implications vary by state and type of inherited asset.
- Creating a comprehensive inheritance plan can help you make the most of your inheritance.
- Taking time to make thoughtful decisions can prevent costly mistakes.
- Working with professionals, like financial advisors and tax experts, can help you maximize the value of your inheritance and avoid common pitfalls.
What is an inheritance?
An inheritance is the transfer of assets from a person who's passed (the decedent) to their chosen beneficiaries.
When a person passes away, their assets are typically distributed according to the instructions outlined in their will or trust. Heirs or beneficiaries named in the will or by law are entitled to receive the assets specified in these documents.
Dying without a will is also known as dying intestate. If no legal documents exist, state laws determine the distribution of the estate. When this happens, the decedent's estate will be distributed to their heirs according to their state's inheritance laws. However, certain assets, such as retirement accounts, life insurance policies, or other investment accounts with named beneficiaries, transfer directly to those beneficiaries, overriding any instructions in the will.
Commonly inherited assets include:
- Cash. This includes any liquid funds such as bank accounts, savings accounts, checking accounts, and cash equivalents like CDs (certificates of deposit).
- Real estate. Real estate encompasses properties like homes, land, commercial buildings, and rental properties.
- Investment accounts. These include brokerage accounts, mutual funds, stocks, bonds, and other securities.
- Retirement accounts. IRAs, 401(k) plans, and other tax-advantaged savings plans.
- Personal property. Tangible items like jewelry, art, vehicles, furniture, and collectibles.
Inheriting a Vanguard account?
Do you have to pay taxes on an inheritance?
Although there are no federal inheritance taxes in the United States, some states do tax assets transferred from a decedent to their heirs. The amount of inheritance tax you may owe at the state level depends on factors like the value of the assets and your relationship to the decedent.
While there's no federal inheritance tax, there is a federal estate tax in 2025 on estates over $13.99 million.1 The threshold amount is adjusted annually for inflation. Unlike an inheritance tax, which is paid by the heir, an estate tax is paid by the estate before the money is distributed. In addition to the federal estate tax, several states impose their own estate taxes at much lower thresholds.
For example, Oregon has an estate tax exemption of $1 million and Rhode Island's is $1.8 million.2 Estate taxes can significantly reduce the wealth passed to your beneficiaries. Tax-efficient estate planning strategies can minimize this burden and leave a bigger estate for heirs.
States with estate and inheritance taxes
The following localities currently impose either estate taxes, or inheritance taxes, or both:
| State/District | Estate tax | Inheritance tax |
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Connecticut |
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| District of Columbia | |
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| Hawaii | |
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| Illinois | |
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| Kentucky |
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| Maine | |
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| Maryland | |
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| Massachusetts | |
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| Minnesota | |
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| Nebraska |
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| New Jersey | |
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| New York | |
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| Oregon | |
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| Pennsylvania | |
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| Rhode Island | |
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| Vermont | |
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| Washington | |
As of January 1, 2025, Iowa no longer imposes inheritance taxes on beneficiaries if the decedent passed away on or after January 1, 2025. For deaths before 2025, some heirs may still have tax obligations.
Tax considerations for inherited retirement accounts
Inherited retirement accounts have unique tax implications that depend on your relationship to the deceased and the type of account:
Spouse beneficiary: You can roll over a deceased spouse's IRA into your own IRA. By doing that, those assets will become your own and you will follow the required minimum distribution (RMD) rules that apply to you. Alternatively, you can choose to remain a beneficiary of the inherited IRA and defer RMDs until your late spouse would have reached RMD age.
Nonspouse beneficiary: You must start RMDs by December 31 of the year following the owner's death. Your options depend on whether you qualify as an "eligible designated beneficiary," which includes:
- Disabled or chronically ill individuals.
- Beneficiaries who are no more than 10 years younger than the owner.
- Minor children of the owner.
Eligible designated beneficiaries can take distributions over their life expectancy using IRS life expectancy tables. For minor children, when they reach age 21 the 10-year rule takes effect, and they must fully distribute the account by the end of the year they turn 31.
All other beneficiaries, such as adult children, grandchildren, siblings, friends, or other relatives, must withdraw the entire balance within 10 years of the owner's death. However, if the original owner died after their required beginning date (currently age 73), annual RMDs will be required during years 1 through 9 for traditional IRAs and 401(k)s, with full liquidation required by the end of year 10.
For more information on inherited IRA distribution options and tax strategies, explore our inherited IRA guide.
Consult with a tax professional to help you make withdrawals in the most tax-advantaged way.
Capital gains and cost basis for inherited accounts
Understanding how inherited assets are valued for tax purposes is crucial for managing your inheritance effectively. When you inherit assets and later sell them, you may owe capital gains taxes on any profit from the sale.
Capital gains are the profits you realize from selling an asset. The amount of a capital gain is calculated by subtracting the cost basis from the proceeds of the sale of the asset. Short-term capital gains taxes will apply if you sell the asset within one year of inheriting it. Long-term capital gains taxes will apply if you hold the asset for more than one year before selling it. Long-term gains are typically taxed at a lower rate, depending on your income level.
The way cost basis is determined for inherited assets has special tax rules that can impact what you owe. The 2 main methods of determining cost basis are:
- Stepped-up basis: Following the "stepped-up basis rule," cost basis is determined by the fair market value of the asset on the date of the owner's death. For example, if the owner purchased a property 20 years before for $300,000, but at the time of their death it was worth $600,000, the higher value will become the new cost basis for the heir. This can significantly reduce capital gains taxes when the asset is sold.
- Alternative valuation date: In some cases, the executor of the estate may choose an alternative valuation date, which is 6 months after the date of death. This can be used if it results in a lower estate tax liability.
Legal considerations
In addition to inheritance tax, there may also be other legal considerations associated with an inheritance. These include probate, which is the legal process of authenticating a will and distributing the assets of the individual who has passed away.
Probate can be a complex and time-consuming process, and it may involve various legal fees and expenses. It's also important to be aware of any potential claims or disputes that may arise in relation to the inheritance. These include challenges to the validity of the will or disputes among beneficiaries. Seeking legal advice can help ensure that the inheritance process is handled smoothly and that all legal obligations and requirements are met.
What to do with an inheritance
Once you understand the tax and legal implications of your inheritance, you can begin the inheritance planning process and decide how to use these assets most effectively. Consider these common ways to put your inheritance to work:
- Pay off debt. Eliminate high-interest debt like credit cards or personal loans.
- Build an emergency fund. Establish 3–6 months of living expenses in savings.
- Invest for growth. Put money into diversified investment portfolios for long-term wealth building.
- Fund education. Pay for your own or a loved one's educational expenses.
- Plan experiences. Create lasting memories through travel, family support, or other meaningful life experiences.
Simplify your inheritance by identifying the essential documents you'll need
How to make the most of your inheritance
An inheritance often comes with complex paperwork and important financial decisions. It can feel like a lot to manage. By taking it one step at a time, you can use your inheritance to get closer to your financial goals.
Assess your financial situation
Begin by thoroughly understanding your current financial status. Make a detailed list of your income sources, debts, expenses, and financial obligations. This assessment will provide a clear picture of your financial health and help you make informed decisions about managing your inheritance.
Create a financial plan
Before investing an inheritance or taking other long-term financial actions, prioritize paying off high-interest debts. Credit card debts, personal loans, and other high-interest obligations can quickly erode the value of your inheritance through compound interest working against you.
Once debts are managed, develop a comprehensive financial plan with short-, medium-, and long-term goals to help guide you as you move through life and go through financial changes. Your short-term goals might include building an emergency fund, while medium-term goals could focus on education funding or major purchases. Long-term goals typically center on retirement savings and building wealth.
A financial advisor can provide personalized guidance tailored to your unique circumstances, helping you make informed decisions about how to get closer to your financial goals.
Explore investment opportunities
Consider exploring various investment options to help grow your inheritance over time. It can be helpful to consult with a financial advisor to identify investment options based on your goals and risk tolerance.
To help spread risk and maximize potential returns, consider diversifying your investments across different asset classes with investments like stocks, bonds, and short-term investments. Time horizons can inform how much risk to take. Generally, longer time frames allow you take on more risk, while shorter time frames may call for a more conservative approach.
Keep in mind that you can have multiple time horizons simultaneously, allowing you to allocate portions of your inheritance across different investment strategies based on when you'll need to access those funds. For example, you may want to invest a portion of your inheritance for a down payment on a home that you plan to buy in the next 5 years, while investing the remainder for retirement.
Portfolio allocation by time horizon
Time horizon: 1–3 years
Goal: Capital preservation, income
Examples: Treasury bonds, CDs, money market funds
Time horizon: 3–10 years
Goal: Growth and income
Examples: Balanced mutual funds, dividend stocks, corporate bonds
Time horizon: 10+ years
Goal: Long-term wealth
Examples: Growth stocks, international stocks, real estate
For more detailed guidance on aligning your investment strategy with your specific goals, consider reviewing types of investment goals.
Plan your estate
Estate planning is essential to ensure your assets are distributed according to your wishes after your passing. It also includes minimizing estate taxes and making sure your loved ones are financially secure in the future.
After receiving an inheritance, it's especially important to create or update your will and any trusts you may have to reflect changes in your financial situation. Working with an attorney to establish clear instructions for how your assets should be distributed can prevent probate court delays and avoid having your estate settled according to state laws instead of your wishes.
You can also enlist the help of a wealth management advisor to help build your wealth for future generations.
To learn more about estate considerations, visit Vanguard's estate tax resources.
Give to charity
If you're passionate about a particular cause or organization, consider donating part of your inheritance to charity. Research different charities and choose those that align with your values and goals.
Charitable donations offer significant tax benefits that can help maximize your giving impact. When you donate to a qualified nonprofit organization, you may be able to claim a deduction on your federal income tax return, which can lower your taxable income and reduce your tax liability. This deduction is subject to certain limits, depending on your income and the type of donation. Additionally, donating appreciated assets, such as stocks or real estate, can help you avoid capital gains taxes while still receiving a tax deduction.
For detailed strategies on maximizing the impact of your charitable giving, explore Vanguard's charitable giving strategies.
Managing the inheritance process
Inheriting assets can be complex. Expert guidance can be invaluable in helping you navigate the legal requirements and get the best financial outcomes. Working with financial planners, estate attorneys, and accountants ensures that you get comprehensive advice tailored to your specific situation.
When you inherit property or assets, it's also important to review and update your life insurance and retirement plans. Consider modifying your life insurance coverage based on your new net worth, and adjust your retirement contributions to maximize savings and diversify investments. Finally, reassess your financial goals to reflect your new financial circumstances, which might include the possibility of early retirement or lifestyle changes.
Consider these additional tips to help manage the inheritance process effectively:
- Don't rush major decisions after emotional loss. Grieving can cloud judgment, so give yourself time to process both the emotional and financial aspects of your inheritance before making significant commitments.
- Keep track of important documents. Maintain organized records of all inheritance-related paperwork, including legal documents, tax forms, account statements, and correspondence with professionals.
- Consider pros and cons before making a big purchase. Large expenses can diminish your inheritance's long-term value. Carefully evaluate whether these purchases help or hinder your progress toward your long-term financial goals.
- Determine whether to keep inherited property. Consider the financial impact of maintenance and taxes, your emotional attachment to the property, the legal considerations and transfer requirements, whether keeping it aligns with your personal goals, and the time and effort required to manage it.
Frequently asked questions about inheriting money
There's no one-size-fits-all when it comes to making inheritance decisions. But certain legal and tax deadlines may apply. For instance, required minimum distributions (RMDs) from inherited retirement accounts must typically start by December 31 of the year following the original owner's death. Also, estate tax returns, if required, are generally due 9 months after death. However, for most financial decisions, it's wise to take a few months to fully understand your options and consult with professionals before making major commitments.
Unclaimed inheritances typically remain part of the deceased person's estate until they are claimed. Each state has different laws governing unclaimed property, but assets may eventually transfer to the state's unclaimed property division after a specified period. Beneficiaries can still claim these assets at that point. But the process becomes more complex over time and will require additional documentation. It's important to formally accept or disclaim an inheritance within the time frames specified by state law and the estate's terms.
Investing an inheritance can be an excellent way to grow your assets over time thanks to the power of compound returns. However, like all investments, an invested inheritance carries risk. It could potentially lose money depending on market conditions and your investment choices. The key is developing a diversified investment strategy that matches your risk tolerance and time horizon.
If your inheritance is held in a trust rather than distributed directly, additional fiduciary and tax rules may apply, such as how income from the trust is taxes. These rules can affect how and when you receive funds. Working with an investment professional can give you investment guidance to create an appropriate strategy for your inherited assets.
Not sure what to do with your inherited Vanguard account?
1IRS, What's new—Estate and gift tax, Accessed July 31.
2Tax Foundation, Facts & Figures: How Does Your State Compare?2025(PDF), Accessed July 31.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Investments in bonds are subject to interest rate, credit, and inflation risk.
We recommend that you consult a tax or financial advisor about your individual situation.
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