Taxes on an Inheritance: 9 Questions to Ask Before You Touch the Money

Inheriting significant wealth rarely comes with a tax bill the way people fear — and almost always comes with tax decisions they don't expect. The anxiety usually centers on a “death tax” that, for most families, never applies. The real money is made or lost elsewhere: in how an inherited retirement account is drawn down, whether inherited assets are sold before or after a step-up in basis, and how the whole picture is coordinated in the first year.

The heirs who keep the most aren't the ones who know the tax code — they're the ones who asked the right questions before they moved anything. Here are nine worth asking your advisor and CPA.

What's Actually Taxable

1. Will I owe estate or inheritance tax on what I inherited?

For the large majority of families, no. Federal estate tax is paid by the estate, not by you as the heir, and only on amounts above the exemption — $15 million per person in 2026 (about $30 million for a married couple using portability), a level made permanent and inflation-indexed under 2025's tax law. Separately, there is no federal inheritance tax; a handful of states impose their own — Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — but Texas does not. The practical upshot: most heirs owe no tax simply for inheriting. The questions that follow are where the real planning lives.

2. What is my cost basis in what I inherited — and how does the step-up work?

This is the most valuable concept most heirs have never heard of. Under IRC Section 1014, most inherited assets — stocks, a home, a business interest — receive a “step-up” in cost basis to their fair-market value on the date of death. If you sell shortly after, there may be little or no capital-gains tax, because the gain that built up during the original owner's lifetime is effectively erased. Knowing your stepped-up basis before you sell anything is essential.

Inherited Retirement Accounts

3. What are the rules for the inherited IRA or 401(k) I received?

Retirement accounts are the big exception to the good news above. They do not receive a step-up — they are “income in respect of a decedent” under Section 691, meaning withdrawals are taxed to you as ordinary income, just as they would have been to the original owner. And under the SECURE Act, most non-spouse beneficiaries must now empty the account within 10 years of the owner's death. How you handle those ten years is one of the largest tax decisions you'll face.

4. Do I have to take a withdrawal every year, or can I wait until year 10?

It depends on your relationship to the deceased and whether they had already started required distributions. Spouses and certain “eligible designated beneficiaries” (a minor child, a disabled or chronically ill person, or someone not more than 10 years younger) have more flexibility, sometimes including a lifetime stretch. Most adult children are “non-eligible” and fall under the 10-year rule — and if the original owner had already begun required distributions, annual withdrawals are required in years one through nine, with the balance emptied by year ten. The penalty for missing one is steep (a 25% excise tax, reduced to 10% if corrected promptly), which is why this question matters early.

5. How should we time the withdrawals to manage the tax hit?

Emptying a large inherited IRA in a single year can push you into the top bracket; spreading it evenly across the ten years, or concentrating it in lower-income years, can save a meaningful amount. The right schedule depends on your other income, any liquidity event on the horizon, and where you expect rates to go. This is planning, not paperwork — and it's the single place a good advisor most often pays for themselves on an inheritance.

Inherited Assets & Timing

6. Should I sell inherited assets now, or hold them?

Because of the step-up, selling soon after death often triggers little capital-gains tax — which makes an inheritance a rare, clean opportunity to diversify out of a concentrated or unwanted position. But it cuts both ways: assets you hold that keep appreciating will build new gain from the stepped-up basis. The decision should weigh tax, diversification, and your own plan — not inertia.

7. What do I need to know about inherited real estate specifically?

Inherited property also gets a step-up to date-of-death value, which can dramatically reduce tax if you sell. But the details matter: renting it out later introduces depreciation and recapture; moving into it may eventually qualify you for the home-sale exclusion under Section 121; and multiple heirs, or property in another state, add complexity. Get a date-of-death appraisal before making any move.

Coordination

8. Will you coordinate directly with my CPA and the estate's attorney or executor?

Almost every question above requires the advisor, the CPA, and the estate's counsel to be working from the same facts — date-of-death valuations, the beneficiary designations, and any estate tax the estate itself paid (which can create an income-tax deduction for you under Section 691(c) when you draw down an inherited retirement account). Ask whether your advisor quarterbacks that coordination or simply hands you a list.

9. How does inheriting this change my own estate plan?

You now have more — which means your own exemption, gifting strategy, and trust structures deserve a fresh look, partly so the next generation inherits as efficiently as you just did. An inheritance is the natural moment to make sure your own plan reflects the wealth you now hold.

Very few heirs owe a “death tax.” Many quietly overpay anyway — by cashing in an inherited IRA all at once, selling before they know their stepped-up basis, or missing a required withdrawal. None of that is about knowing the tax code; it's about asking the right questions before you act. That's the conversation worth having first.