Inherited Money? Don’t Blow It: 7 Smart Steps Every Beneficiary Needs in 2025

Knowing how to handle an inheritance is becoming even more important than it’s ever been before. The “Great Wealth Transfer” refers to the amount of money that’s being passed down from one generation to the next, and according to experts, that number will reach $84 trillion by 2045. While a sudden windfall of money can feel like a huge victory, it’s important that you know how to handle the assets that you receive.

Whether you’ve recently inherited millions or you know that a large sum of money is coming your way, these seven tips can help you. Smart inheritance planning is the key to making the most out of the gift that a loved one leaves to you.

Understand What You Owe in Taxes

Your inheritance tax strategies need to begin with an understanding of what you owe in taxes. You cannot assume that all of the money you inherit is yours to spend. Depending on several factors, Uncle Sam may have a claim to a portion of your inheritance.

In 2025, the federal tax exemption stands at $13.99 million for individuals and $27.98 million for couples. However, this exemption expires after this year, so you’ll need to be prepared to pay federal taxes for any inheritance that you receive starting in 2026. While most inheritances don’t reach these levels, you’ll also need to consider any state-level inheritance taxes.

When determining the taxes that you’ll owe, look for taxable retirement accounts like traditional IRAs and 401(k)s. Also, if you have inherited property with a “step-up in basis” that resets capital gains taxes, you’ll need to consider that. This is not the time for guesswork. It’s recommended that you work with a tax advisor to avoid surprises.

Leverage the Step Up in Basis on Investments

Inherited stocks, mutual funds, and real estate often receive a step-up cost basis, which resets the taxable value to the market price at the date of the owner’s death. For instance, if your late parent left you stock that they paid $1,000 for, which was worth $10,000 when they died, your step-up basis stock value is $10,000. If you sell immediately, you’ll owe no capital gains taxes.

What you do with the stock or step-up basis inheritance will impact your taxes that year and in the future. You can sell the assets immediately to pay down debt or make a down payment on a home. You can also reinvest in a diversified portfolio. Again, working with a tax advisor is the best way to protect yourself.

Navigate Inherited Retirement Accounts Carefully

Retirement accounts like 401(k)s and IRAs come with complex tax rules that vary by beneficiary type. For instance, spouses can roll over inherited IRAs into their own accounts, delaying withdrawals until age 73. Meanwhile, non-spouses must follow the “decade rule,” which allows them to withdraw the entire amount within 10 years, though timing distributions can impact taxes.

With the changes that the SECURE Act is bringing into play, it’s easy to make a mistake. Check with a tax accountant before making any decisions about how you’re going to handle an inherited retirement account.

Evaluate and Decide What to Do with Inherited Real Estate

When it comes to learning how to manage inherited money, you need to consider more than dollars and cents. Inherited real estate brings with it a unique set of challenges, but owning real estate is one of the most proven methods of building wealth. Still, you’ll need to consider all factors, including the step-up basis. If a home was purchased for $200,000 but is valued at $400,000 at the time of the owner’s death, selling right away avoids capital gains tax.

Owning property provides the chance for you to earn consistent income by using it as a rental property. However, that not only leads to you earning more taxable income in the future, but also creates recurring costs such as insurance, taxes, mortgage, utilities, and more.

When it comes to inherited real estate, take your time and consider your options. Many people find long-term passive income by converting an inherited home into a rental property, while others cash out early by selling the property as soon as possible.

Life Insurance Generally Pays Off Tax-Free

One of the greatest benefits of life insurance is that the payout that beneficiaries receive is generally tax-free. This means that if you inherit a $200,000 life insurance policy, you shouldn’t have to worry about triggering an IRS claim. Generally, the only exception to this rule is that you may owe taxes if the entire estate triggers estate tax thresholds.

Still, there’s no need to panic about those thresholds. If the insurance payment stays within the estate’s taxable value, it won’t push you over the exemption level. In virtually every case, life insurance is known as a “clean inheritance,” which makes it ideal for building liquidity or addressing pressing financial issues.

Avoid Spending the Windfall Too Fast

When you come into a large sum of money, even if you know that it’s coming, it’s easy to spend it without thinking. If it’s been a few years since you’ve been able to go on a vacation, you may be tempted to book that luxury cruise that you’ve been dreaming of. If you need a new vehicle, it’s tempting to rush out to buy a new luxury car. However, even large inheritances can vanish quickly if you spend them without thinking.

When it comes to how to manage inherited money, it’s important to have a plan, not only for taxes, but for how you want to manage your newfound funds. While there’s nothing wrong with spending some of the money on things you need or treating yourself if there’s room in the budget for it, taking a responsible approach provides long-term benefits. Taking a systematic, calm approach honors the legacy of the person who left you money while also protecting your own financial future.

Create or Update Your Own Estate Plan
Finally, when you receive money and other assets through an inheritance, it’s an opportunity to update or create your own estate plan. Contrary to what you may have heard, estate planning isn’t just for the wealthy. Everyone needs an estate plan, since it also covers durable powers of attorney for health and finances. You can also establish trusts to protect your heirs.

Inheritance estate planning tips begin with meeting with a financial advisor. A professional can guide you through the process of getting the financial aspects of your inheritance in order. With that done, work with an estate planning attorney to get everything organized for those to whom you will one day leave an inheritance.