How to handle a large inheritance and maximize your financial outcome

Handling a large inheritance is a blessing and a huge responsibility. It’s essential to approach this windfall carefully and strategically to maximize your financial opportunity. Managing a large inheritance involves a series of crucial steps and decisions. This article explores various topics to help you navigate this process successfully and secure your financial future.

Inheriting a large sum of money can be a life-changing event. It can allow you to secure your future, pay off debt, or pursue your dreams. However, it can also be overwhelming and complex.

It’s crucial to take some time to plan, understand and manage your inheritance in order to get the best financial outcome for yourself. Following this guidance ensures that you use your inheritance wisely, follow all tax rules, and achieve your financial goals.

Take a deep breath.

Inheriting a large sum of money can be a daunting experience. It’s natural to feel overwhelmed, excited, and even a little bit guilty. The first thing you need to do is take a deep breath and allow yourself some time to process what has happened.

Before making any hasty decisions, take a moment to pause and reflect. The emotional impact of inheriting a significant sum can be overwhelming. Allow yourself time to process the news and come to terms with the responsibility that lies ahead. Seek support from loved ones, consider consulting a financial advisor, and approach the following steps with a clear mind.

Here are some tips for managing a large inheritance:

  • Don’t make any rash decisions. Take time to think about what you want to do with the money.
  • Get professional advice. A financial advisor can help you make the most of your inheritance and ensure that you handle it in accordance with your goals.
  • Be patient. Determining what you want to do with the money may take some time. Don’t feel pressured to make any decisions right away.

Assess your financial situation.

Once you’ve had a chance to calm down, it’s time to take stock of your financial situation. This includes your income, expenses, debts, and assets. It’s important to understand where you stand financially before you start making any decisions about how to use your inheritance. Evaluate your existing investment portfolio, savings, and any outstanding debt. Understanding your financial landscape will provide a solid foundation for making informed decisions about utilizing your inheritance.

Taxes on Inheritance

There is no Federal Inheritance Tax. However, there are six US. States that impose an inheritance tax – Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Your inheritance is not taxable as income for federal tax purposes either. Yet, subsequent earnings on your inherited assets, including capital gains, interest income, and dividends, will be taxable.

Estate Tax

It’s important to differentiate between inheritance and estate tax. The person who receives the inheritance pays the inheritance tax. On the contrary, the estate of the deceased person is responsible for the estate tax.

For 2023, the federal estate tax exemption threshold is $12.92 million for individuals. The exemption threshold for married couples is doubled to $25.84 million.

If the value of the estate is below the threshold, no taxes are due. If the value exceeds the exemption amount, the estate pays taxes only on the amount surpassing the threshold.

Consult with a tax professional to understand the implications of inheritance and estate taxes in your specific situation.

Inheriting Stocks

Receiving stocks can be an impactful and potentially lucrative aspect of your inheritance. You can start by thoroughly understanding your stock portfolio by reviewing your statements. It’s important to evaluate the risk profile of your holdings concerning your overall financial goals, diversification, target asset allocation, and risk tolerance. Consider the concentration of holdings in specific industries or companies and assess the overall risk exposure. Diversification can help manage risk and reduce the impact of volatility. Consider rebalancing or diversifying the portfolio to align with your risk tolerance and investment objectives,

You inherit stocks on a stepped-up cost basis. The stepped-up cost basis refers to the adjusted value of the investment portfolio at the time of the original owner’s death. When an individual passes away and leaves assets to their heirs, the cost basis of those assets is “adjusted” to their fair market value on the date of death. This is a significant tax benefit that substantially reduces your future tax liability.

For comparison, when you receive stocks as a gift during the original owner’s lifetime, you automatically transfer the original cost basis at which the stock was purchased.

Lastly, you will be responsible for future taxes on dividends, interest, and capital gains from your inherited stock portfolio. Consider your overall tax situation before making any big moves.

Inheriting Real Estate

Inheriting real estate can present both opportunities and challenges. Whether it’s a family home, vacation property, or investment property, inheriting real estate requires a unique set of considerations and decision-making.

Get started by fully understanding what you own. Gather important information such as location, property type, condition, and outstanding mortgages or liens. Assess the property’s market value to determine its potential for sale or rental income and evaluate the costs associated with maintaining and managing the property.

Consult with an estate attorney to ensure the legal aspects of inheriting real estate are handled appropriately. Confirm that the property has been transferred to your name through the appropriate legal channels, such as probate or trust administration. Understand any local laws or regulations impacting the inheritance process or property management.

Lastly, real estate inheritance can sometimes lead to negative family dynamics. As much as possible, keeping open and transparent communication with other beneficiaries or family members is crucial. Engage in open discussions, consider their perspectives, and work towards a mutually beneficial resolution when making decisions about inherited real estate.

Inherited IRA and 401k

Inheriting an individual retirement account (IRA) or a 401(k) plan can provide a significant financial opportunity. However, it’s essential to understand the different beneficiary types and withdrawal rules to manage your taxes and maximize your financial outcome effectively. The withdrawal rules for Inherited IRAs and 401k differ depending on the beneficiary’s relationship with the original IRA owner. “Eligible Designated Beneficiaries” refers to a specific group of individuals with more favorable distribution options for an Inherited IRA.

Spouse as Primary Beneficiary

If you are a surviving spouse inheriting an IRA, SEP IRA, or 401k plan, you can treat your inheritance as your own. You have several options as the primary beneficiary.

  • You can roll over the inherited IRA or 401(k) into your own retirement account, treating it as yours. This transfer will allow you to continue continued tax deferral on your investments.
  • You must take the required minimum distributions (RMDs) at age 73, based on your life expectancy.
  • Unlike other beneficiaries, you can do a Roth conversion on your savings from an inherited IRA
  • You can withdraw the entire or portion of your inherited IRA subject to taxes and penalties if you are under 59 ½ years of age.

Non-Spouse Individual Beneficiaries

Non-spouse individual beneficiaries have more limited choices depending on which category they fall into.

Eligible Designated Beneficiaries

Eligible Designated Beneficiaries have more favorable and flexible withdrawal requirements. This category includes:

  • Minor Children of the IRA Owner: Children of the IRA owner who have not reached the age of majority are also eligible designated beneficiaries.
  • Disabled Individuals: Any individual who meets the Social Security Administration’s definition of disabled qualifies as an eligible designated beneficiary.
  • Chronically Ill Individuals: Individuals who meet the criteria for chronic illness, as defined by the IRS, are considered eligible designated beneficiaries.
  • Individuals Not More Than Ten Years Younger than the IRA Owner: This category typically includes siblings or other relatives who are within ten years of the age of the deceased IRA owner.

As an eligible designated beneficiary, you can establish an inherited IRA and take distributions over your own lifetime using the life expectancy method. This strategy is popular with the term “stretch” IRA, as you can extend your distributions throughout your lifetime.

Alternatively, you can choose to liquidate the account altogether, which will be subject to taxes. There are no penalties for early withdrawal for eligible designated beneficiaries.

Lastly, you can withdraw your inherited IRA within ten years using the 10-year rule. Consider the impact on your tax situation and financial goals when deciding between these options.

If the beneficiary is a minor child of the original account holder, the life expectancy distribution method is no longer available once the individual turns 21.  From that point, the adult child has to switch to the 10-year method and withdraw all remaining assets in their Inherited IRA by the end of the 10th year after turning 21.

Non-eligible designated beneficiaries

All other individual beneficiaries that don’t meet the above criteria are non-eligible designated beneficiaries. This group can include adult children, parents, relatives, and friends. If you are a non-eligible beneficiary, you can transfer the tax-deferred assets to an Inherited IRA. From there, you only have two options. You can take a lump sum distribution. Or you can withdraw all assets over a period of 10 years using the 10-year rule method.

10-year rule for Inherited IRA

The 10-year rule requires you to withdraw all assets from your Inherited IRA by December 31 of the 10-year anniversary of the original owner’s death.

If the original account holder did not initiate taking Required Minimum Distributions before their death, you can withdraw any amount from the inherited IRA as long as the entire amount is liquidated by the 10th year anniversary.

If the original IRA owner had started taking the required minimum distributions, you must use the life expectancy method for withdrawal for the first nine years and fully liquidate the account at the end of the tenth year.

Roth conversion on Inherited IRA

Only a spousal beneficiary can perform a Roth conversion from an Inherited IRA. All other non-spousal beneficiaries do not have the option to do a Roth conversion.

Inheriting through trust

Trusts are estate planning tools that provide a level of control, protection, and flexibility over how assets are distributed to beneficiaries. A trust is a legal entity created to hold and manage assets on behalf of beneficiaries. The person who establishes the trust, known as the grantor or settlor, designates specific instructions on how the assets are to be distributed among beneficiaries. The trust document outlines the rules and conditions that govern the distribution of assets and the responsibilities of the trustee, who is appointed to manage the trust. In many cases, establishing a trust could help avoid a lengthy and costly court probate process.

If the inheritance is being distributed through a trust, you will need to follow the terms of the trust to receive your inheritance. This may involve paying taxes, making distributions to other beneficiaries, or managing the trust assets as a trustee.

Trusts can offer asset protection benefits.  They can help shield the inherited assets from creditors, lawsuits, and potential financial mismanagement by beneficiaries.

Furthermore, the trusts allow grantors to exercise significant control over how their assets are distributed. As a beneficiary, you may receive distributions at specific intervals, under certain conditions, or for specific purposes outlined in the trust document. This control ensures that the assets are managed prudently and align with the grantor’s intentions.

Invest in your future.

Receiving a large inheritance can help you get a fresh start.  If you’re looking to grow your inheritance, consider investing it. However, it’s important to do your homework and choose investments appropriate for your risk tolerance and financial goals.

If you have any high-interest debt, such as credit card debt or student loans, one of the best things you can do with your inheritance is to pay it off. This will free up your cash flow and save you money on interest payments in the long run. Reducing or eliminating debt can free up your cash flow, increase your financial stability, and improve your overall well-being.

If you’ve always dreamed of starting your own business, traveling the world, or going back to school, your inheritance may give you the opportunity to make those dreams a reality. However, it’s essential to ensure that you’re using the money in a way that aligns with your values and goals.


Handling a large inheritance can be a complex task. However, you can make the most of your inheritance by taking time to assess your financial situation, understand your options, and consider financial and tax implications. You need to ensure that you use it wisely. It’s important to note that tax laws and regulations may change over time. Every situation is unique.  It’s crucial to consult with a qualified financial advisor or tax professional to understand the specific rules and options that apply to your situation.

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