What to Do When You Inherit Money

A $500K-$5M inheritance arrives at a hard moment. Grief + paperwork + decisions. Most wrong moves happen in the first 6 months because advisors pressure-sell products and tax deadlines create artificial urgency. Here's the actual playbook.

Month 1 — Don't do anything irreversible

Open a dedicated high-yield savings account and park cash there. Do nothing else with the money. Common mistakes in month 1:

• Buying whole life insurance from the agent who appears at the funeral (surprisingly common)
• Paying off the mortgage (almost never optimal)
• Buying a new car, house, or vacation property (you'll regret it in year 2)
• Lending money to family before thinking through the pattern it sets
• Selling inherited stocks before understanding step-up basis

Rule: the money can sit in a savings account earning 4%+ for 6 months while you get the real plan right. Nothing gets better by moving faster.

Month 2-3 — Inventory what you actually have

Categorize by type:

• Cash/savings — immediately usable, taxed already
• Brokerage accounts — stocks/bonds with step-up basis at date of death
• Traditional IRA / 401(k) — subject to 10-year rule, taxable on distribution
• Roth IRA — tax-free distributions, but 10-year rule still applies
• Real estate — step-up basis, then decide sell/hold/rent
• Life insurance payout — tax-free
• Business interest / partnership — valuation + buy-sell agreement complexity
• Personal property — generally low tax complexity

Month 3-6 — Make the big decisions

Inherited IRAs (the 10-year rule)

Under the SECURE Act, non-spouse beneficiaries must fully drain inherited traditional and Roth IRAs within 10 years. You choose the distribution schedule — one lump sum, steady payments, or backloaded. Tax strategy matters:

• If you're in a low-income year now and high-income years coming: distribute early while bracket is low.
• If you're in a high-income year now and retiring within 10 years: delay distributions into retirement's low-bracket window.
• Inherited Roth: no tax, so timing optimizes growth (usually max-late distribution to maximize tax-free compounding).

Inherited real estate

Step-up basis means if the property was worth $800K at date of death, your basis is $800K. If you sell soon after, capital gain is ~$0. The math:

• Sell within 6 months: minimal capital gains. Diversify proceeds into the broader portfolio.
• Hold and rent: rental income + depreciation + eventually sell at future step-up (for heirs). Builds wealth but adds management overhead.
• Move in: primary residence exclusion applies after 2+ years ($500K MFJ exclusion). Creates flexibility later.

Inherited brokerage accounts

Step-up basis applies to individual stocks and ETFs. Use this moment to rebalance. If the inherited account was 80% Apple stock (concentrated) and your plan wants 30/70 stocks/bonds, sell down without the usual tax cost because basis is stepped up.

Trusts

Read the trust document carefully (or have an attorney read it). Critical terms:

• Distribution requirements — mandatory distributions, ascertainable standard ("HEMS" — Health/Education/Maintenance/Support), or trustee discretion?
• Trustee responsibilities — who has decision authority?
• Termination date — when does the trust end and distribute remaining assets?
• Tax structure — grantor vs. non-grantor trust affects your tax return.

Month 6-12 — Integrate with your financial plan

After tax decisions are made, redirect remaining capital into your broader financial plan:

• Top off emergency fund
• Pay off high-interest debt (not low-interest mortgage)
• Max tax-advantaged savings for the year (Roth, 401k)
• Invest remainder in diversified portfolio matching your risk profile
• Update your estate plan — your own death now has different implications