I Just Inherited Money. What Should I Do First?
Losing a parent and inheriting money at the same time is a strange kind of whiplash. One part of you is grieving, and another part is suddenly staring at a number in a bank account that feels too big to ignore and too complicated to touch. I see this a lot with clients in their thirties and forties, the first wave of millennials whose parents are now in their seventies and eighties. The inheritance conversation used to feel distant. Now it's not.
The most common mistake I see isn't a bad investment or a rash purchase. It's paralysis, or the opposite: rushing to "do something" with the money just to feel like you're handling it responsibly. Neither serves you well. What actually helps is knowing the order of operations, because inherited money comes with a few decisions that are time sensitive and several that genuinely aren't, and mixing those up is where people get into trouble.
Give Yourself Permission to Wait on the Big Decisions
Here's something I tell every client who inherits a meaningful sum: parking the money in a high-yield savings account or money market fund for three to six months while you sort through everything is not a failure to act. It's often the smartest first move you can make. Inherited assets don't have a clock running on when you need to invest them or pay off your mortgage or buy a house. The clock runs on a few specific administrative items, and those are what deserve your attention first.
I worked with a client, a marketing director in her late thirties, who inherited close to $400,000 from her father. Her instinct was to immediately pay off her student loans and put the rest into the market. We slowed down for a few months instead, and in that window we discovered her father's estate included an inherited IRA with a distribution deadline she hadn't known about, plus a life insurance payout that needed a beneficiary claim filed. Rushing into investment decisions would have meant missing both.
Figure Out What You Actually Inherited
Inheritances rarely arrive as a single lump sum. They usually show up in pieces: a bank account, a brokerage account, retirement accounts like an IRA or 401(k), maybe real estate, maybe life insurance. Each of these has different rules attached to it, and that matters more than most people realize.
A regular brokerage or bank account typically transfers with far fewer strings attached. An inherited IRA comes with its own set of distribution rules that changed significantly under recent tax law, and getting those wrong can trigger penalties or push you into a higher tax bracket than necessary. Real estate carries its own considerations around whether to sell, rent, or move in, along with property tax rules that can shift depending on how the transfer happens. I go into the retirement account piece in more depth in a post on integrating tax and financial planning, because this is exactly the kind of decision where taxes and investment strategy can't be separated.
Before you do anything else, make a simple list: what did you inherit, and in what form. That list becomes the roadmap for every decision after it.
Understand That Inherited Assets Often Get a Tax Advantage
One thing that surprises a lot of people is that inherited assets like stocks, real estate, or other investments usually receive what's called a step up in basis. In plain terms, the asset's value gets reset to what it was worth on the date your parent passed away, rather than what your parent originally paid for it decades earlier. This can meaningfully reduce or even eliminate capital gains tax if you sell shortly after inheriting.
This is genuinely good news, but it also means the decision of when to sell an inherited asset deserves some thought rather than a reflexive "sell everything and simplify." Tax rules around estates, exemptions, and step up in basis do shift over time, so it's worth confirming the current rules with a tax professional before you act on anything based on what you've read, including this article.
Don't Let Guilt or Grief Drive the Decision
This part rarely gets talked about, but it matters as much as anything financial. A lot of my clients feel an odd guilt about inherited money, especially when it's substantial. There's a pull to either spend it in a way that honors the parent, or avoid touching it entirely because it feels wrong to benefit from a loss. Both instincts are human, and neither one should be the thing steering your financial plan.
I had a client whose mother passed unexpectedly, leaving her a paid off condo in Corona del Mar. She felt guilty even considering selling it, as if letting it go meant letting go of her mother. We talked through what her mother would have actually wanted, which was for her daughter to be financially secure, not tied to a property she didn't need or particularly want. She ended up selling it and using the proceeds to pay down her own mortgage. The guilt didn't disappear overnight, but it stopped running the decision.
Watch for the Tax and Legal Deadlines That Do Matter
While most of your decisions can wait, a few things genuinely can't. Inherited retirement accounts often come with a required distribution window, and missing it can mean an unnecessary tax hit. If real estate is involved, there may be deadlines related to property tax reassessment depending on your state and how the property transfers. Life insurance claims, while not usually time sensitive in the same way, are easy to forget in the fog of settling an estate.
This is where I'd encourage anyone in this situation to sit down with an advisor who can look at the whole picture rather than one piece at a time, since a probate attorney may handle the estate but not necessarily flag the tax implications of your specific choices, and a general financial advisor may not be looped in on the tax side either. I write more about why this gap between advisors causes real problems in my post on how every major financial decision carries tax consequences, and it's especially true here.
Think About What This Money Is Actually For
Once the administrative pieces are handled, the more interesting question becomes what role this money should play in your financial life. For some people, it's the difference between renting and owning. For others, it accelerates retirement by a decade. For some, it's an opportunity to give more intentionally, whether that's to family or causes they care about.
If charitable giving is part of what you're considering, especially if the inheritance pushed you into a higher tax bracket this year, a donor advised fund can be a useful tool worth understanding, something I cover in my post on donor advised funds as a giving strategy. But that's a later conversation. The first job is simply understanding what you have and protecting it while you figure out what you want it to do for you.
When It Makes Sense to Bring in an Advisor
Not every inheritance needs a financial planning team behind it. If you inherited a modest amount and your finances are otherwise straightforward, some of this you can likely handle on your own with a bit of research. But if the inheritance includes retirement accounts, real estate, or a meaningful enough sum that the tax decisions could genuinely swing your outcome, it's worth having a conversation with someone who can look at your full financial picture rather than just the inheritance in isolation. This is where being both a CPA and a CFP® changes the advice I give clients, because I'm not handing off the tax questions to someone else who's never seen your investment picture, or vice versa.
Summary
Give yourself three to six months before making major decisions with inherited money, outside of specific deadlines
Make a full list of what you inherited and in what form, since each asset type has different rules
Understand that inherited investments and property often receive a step up in basis, which can reduce future capital gains tax
Watch for time sensitive items, particularly inherited retirement account distribution rules
Don't let guilt or grief dictate financial decisions that don't actually serve you
Tax rules around estates and inherited assets shift over time, so confirm current figures before acting
Consider bringing in an advisor who can coordinate the tax and investment sides together, especially for larger or more complex inheritances
Losing a parent changes you, and the money that sometimes comes with it doesn't need to be sorted out in the first few weeks. Give yourself room to grieve first. The financial decisions will still be there, and they'll be better ones once you're ready to make them with a clear head.
FAQ
Do I have to pay taxes on inherited money?
It depends on the type of asset. Cash inheritances themselves generally aren't taxed as income, but inherited retirement accounts like IRAs can create taxable income when distributed, and inherited investments may trigger capital gains tax if sold for more than their stepped up value.
What is a step up in basis?
It means an inherited asset's cost basis is reset to its fair market value on the date the original owner passed away, rather than what they originally paid. This can significantly reduce capital gains tax if you sell the asset.
How long do I have to decide what to do with inherited money?
For most assets, there's no strict deadline, and taking a few months to think it through is reasonable. Inherited retirement accounts are the main exception, since they often come with distribution timelines.
Should I pay off debt with an inheritance?
It can be a smart move, particularly for high interest debt, but it's worth weighing against other priorities like retirement savings or an emergency fund before committing the full amount to debt payoff.
Do I need to report an inheritance on my tax return?
Generally, receiving an inheritance itself isn't reported as income, though any income the inherited assets generate afterward, such as interest, dividends, or distributions, typically is.
What should I do with an inherited IRA?
Inherited IRAs have specific distribution rules that differ depending on your relationship to the original owner and other factors, and getting this wrong can mean unnecessary taxes or penalties. This is worth reviewing with a tax professional before taking any distributions.
Is inherited real estate taxed differently than other property?
Inherited real estate typically receives the same step up in basis as other inherited assets, but property tax treatment can vary depending on your state and how the property transfers to you.
Should I invest an inheritance or keep it in cash?
That depends on your timeline, goals, and what else the money needs to accomplish, but there's rarely a reason to rush into investment decisions in the first few months.
What if my siblings and I inherited money together?
Shared inheritances add complexity, especially with real estate or a family business, and it often helps to have a neutral advisor involved to keep the financial decisions separate from family dynamics.
Can inheriting money affect my own taxes going forward?
Yes, particularly if the inheritance includes income producing assets or retirement account distributions, both of which can affect your tax bracket in the years you receive them.
Author bio: Katherine Leonard, CPA, CFP®, is the founder of KCL Wealth Management, a Newport Beach advisory firm specializing in tax-efficient financial planning and investment management. She began her career in tax at PricewaterhouseCoopers before becoming a Certified Financial Planner™ at a national RIA. Today, she helps clients build and preserve wealth by bringing their tax strategy, investments, and financial plan together into one coordinated approach. Many of her clients find her when they are going through one of life’s big transitions, like a divorce, the sale of a business, or the loss of a spouse. Read more about Katherine here.