What to Do When You Inherit Money: A Step-by-Step Guide

Inheriting money is one of the most emotionally and financially complex events in a person's life. Studies show that 70% of inherited wealth is dissipated within two generations — often because of poor decisions made in the emotional fog of grief.

The first rule: wait

Put every inherited dollar in a HYSA for 6–12 months. Don't pay off the mortgage, don't invest in the market, don't give it away, don't buy a boat. The grief period distorts financial judgment. Earning 4%+ in an HYSA while you wait is an excellent outcome. Financial decisions made in the first 6 months of grief are disproportionately regretted.

How inherited assets are taxed

• Inherited IRA: Taxable as ordinary income when withdrawn (10-year distribution rule for most non-spouse beneficiaries). Develop a multi-year withdrawal strategy to minimize bracket impact.
• Inherited brokerage account: Receives a "stepped-up basis" — your cost basis is the value on the date of death. If your parent's portfolio was worth $500,000 when inherited, your cost basis is $500,000, not their original purchase price. Capital gains from before death are eliminated.
• Inherited real estate: Same stepped-up basis as brokerage. Selling immediately after inheritance: minimal capital gains. Selling years later: gain from inheritance value to sale price.
• Life insurance proceeds: Income tax-free to beneficiaries. Not estate tax-free if owned by decedent.

The investment decision after the waiting period

After the waiting period with a clear head: treat inherited money as an accelerated version of your normal financial plan. Pay off high-interest debt (above 6%). Max tax-advantaged accounts. Invest remaining in age-appropriate diversified index fund portfolio. The "windfall" mentality — treating it as different from regular money — is why inherited wealth gets spent on things that don't build lasting value.