When you receive an inheritance, it’s natural to start thinking about all the possibilities. You may imagine paying off debt, taking a dream vacation, helping your children, or investing for the future. But before making any major financial decisions, it’s important to understand what to do after inheriting money. While an inheritance can create new opportunities, it also comes with legal, financial, and emotional considerations that deserve careful thought.
Give Yourself Time
Before making any significant financial decisions, give yourself time to process what has happened. An inheritance usually follows the loss of someone important in your life. Grief can affect judgment, and delaying major purchases or investments until you’ve had time to think clearly is often one of the wisest decisions you can make.
You May Not Want to Accept the Inheritance
It may sound surprising, but there are situations where accepting an inheritance may not be in your best interest. Through a legal process called a disclaimer, you can refuse all or part of an inheritance.
When you disclaim an inheritance, the assets pass as though you had predeceased the person who left them to you. Depending on the terms of the estate plan, the inheritance may instead pass to your children or other beneficiaries. This strategy can be beneficial in certain tax, creditor protection, or estate planning situations and should always be discussed with an experienced estate planning attorney before making a decision.
Will You Owe Taxes?
One of the most common concerns people have is whether they must pay income tax on an inheritance.
In most cases, the answer is no. Cash inheritances and most inherited property are not considered taxable income. For example, if you inherit a home, you generally do not report its value on your income tax return.
Inherited real estate also receives what is known as a step-up in basis. Rather than using the original owner’s purchase price to calculate capital gains, the property’s tax basis is generally adjusted to its fair market value on the date of the owner’s death. If you later sell the property, you may owe capital gains tax only on any appreciation that occurs after you inherit it.
There are some exceptions. Certain inherited retirement accounts, such as traditional IRAs or other tax-deferred retirement plans, may be subject to income tax when distributions are taken. The rules surrounding inherited retirement accounts have become more complex in recent years, making professional guidance especially valuable.
Don’t Expect Immediate Distribution
Many beneficiaries are surprised to learn that receiving an inheritance often takes time. Before assets can be distributed, the executor or trustee typically must:
- Inventory the estate’s assets
- Pay outstanding debts and expenses
- Resolve creditor claims
- Complete any required tax filings
- Obtain court approval when necessary
If a federal estate tax return is required, the process may take even longer. Executors and trustees have fiduciary duties and can become personally liable if they distribute assets before satisfying legal obligations. As a result, waiting a year—or sometimes longer—is not unusual, especially for larger or more complex estates.
Protect Your Inheritance
Knowing what to do after inheriting money involves much more than deciding how to spend it. A substantial inheritance may affect your own estate plan, beneficiary designations, tax planning, and long-term financial goals. It may also be an appropriate time to consider strategies that protect inherited assets for future generations.
Reviewing your estate plan after receiving an inheritance can help your documents reflect your current financial circumstances and your wishes for your family.
Conclusion
Receiving an inheritance is both a financial event and an emotional one. Taking time to understand your options can help you avoid costly mistakes and make informed decisions that honor your loved one’s legacy. Whether you’re considering disclaiming an inheritance, have questions about taxes, or simply want to protect what you’ve received, experienced legal guidance can make all the difference.
Contact Tesfaye O’Neill Law and Financial today to schedule a consultation. We can help you understand your rights, evaluate your options, and develop an estate plan that protects your inheritance and your family’s future.
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