You Inherited Money. Here Is What to Do First

The first thing to do with an inheritance is very little, deliberately. Park cash somewhere safe and liquid, leave investments where they are, and make no major financial decisions for a few months. Inheritances are generally not taxable income to you, inherited investments usually arrive with a stepped-up cost basis, and the main exception, an inherited retirement account, comes with its own deadlines and rules. The real work is sequencing: settle the mechanics first, then fold the money into a plan that reflects your goals rather than your grief.

Step one: do nothing fast

Almost nothing about an inheritance is urgent, and almost every costly mistake comes from acting quickly. Research on windfalls consistently finds that recipients who pause before spending or restructuring make better long-term decisions. A reasonable default is a self-imposed waiting period of three to six months before any irreversible choice: selling a family property, paying off a mortgage, funding a relative's business, or changing careers.

While you wait, put cash to work safely. Amounts above FDIC limits at a single bank belong in Treasury bills, government money market funds, or insured deposit programs spread across banks. Our article on cash management for wealthy families covers the options. The point is not yield maximization; it is keeping the money safe and liquid while you think.

What is taxable, and what is not?

Most of an inheritance is not taxed when you receive it. A few distinctions do the heavy lifting:

• The inheritance itself is not income. Under Section 102 of the Internal Revenue Code, property received by bequest or inheritance is excluded from your gross income. You do not report a cash inheritance on your Form 1040.
• Estate tax, if any, was the estate's problem. The federal estate tax applies only above the $15 million per-person exemption ($30 million per married couple) effective in 2026, and it is paid by the estate before assets reach you. Wisconsin has no state estate or inheritance tax; a handful of other states do impose one, which can matter if the decedent lived elsewhere.
• Appreciated assets get a stepped-up basis. Stocks, funds, real estate, and business interests generally take a new cost basis equal to fair market value at the date of death under Section 1014. Decades of embedded gains disappear for income tax purposes. Selling soon after death often produces little or no taxable gain.
• Income earned after death is taxable. Dividends, interest, and gains that accrue after the date of death are taxable to whoever holds the asset, and you may receive a Schedule K-1 from the estate or trust (Form 1041) reporting income distributed to you.
• Inherited retirement accounts are the big exception. Traditional IRAs and 401(k)s are "income in respect of a decedent." There is no basis step-up; every dollar withdrawn is ordinary income to you, and most non-spouse beneficiaries must empty the account within 10 years. Our article on the inherited IRA 10-year rule covers the deadlines and the bracket planning across the decade; read it before taking any distribution.

A hypothetical example: what a $3.2 million inheritance actually looks like

Suppose a hypothetical Madison professional inherits the following from a parent in 2026.

No federal estate tax applied because the estate was far below $15 million, and Wisconsin imposes none. The heir's only meaningful tax exposure is the $900,000 IRA, which will produce ordinary income as it is distributed. Spreading withdrawals across the 10 years, and coordinating them with the heir's own salary and bracket, can change the family's total tax bill by tens of thousands of dollars. This example is hypothetical.

Working with the executor: what to expect and what to ask

Estates take longer than people expect; even a clean probate or trust administration commonly runs six months to more than a year. The executor or trustee must inventory assets, pay debts and expenses, file the decedent's final income tax return and possibly estate returns, and only then distribute. Pressing for early distributions can create personal liability for the executor, so patience is appropriate.

Ask the executor for four things in writing: a copy of the will or trust, an inventory of what you are receiving, the date-of-death values that establish your stepped-up basis, and the expected timing of distributions and any Schedule K-1. If the estate's machinery is unfamiliar, our wealth transfer primer explains probate, beneficiary designations, and why the process runs the way it does.

Retitling, consolidating, and the paperwork that matters

Once assets transfer, retitle them properly. Brokerage assets move into an account in your name (or your trust's name); do not let them sit in a decedent's account longer than necessary. Inherited IRAs must be titled as inherited or beneficiary IRAs, naming both the decedent and you; rolling one into your own IRA is an error only a surviving spouse can make on purpose, and it is generally irreversible for anyone else. Confirm the custodian recorded the date-of-death basis on taxable holdings, and keep the estate's valuation documents permanently.

Update your own plan

An inheritance changes your balance sheet, which means your own planning needs a pass:

• Estate documents. Your will, trust, and beneficiary designations were written for a smaller estate. If the inheritance pushes your projected estate toward the $15 million exemption, the planning conversation changes in kind, not just degree.
• Insurance. Umbrella liability coverage should scale with net worth.
• Asset allocation. Inherited holdings are often concentrated, sentimental, or both. The stepped-up basis is the cheapest diversification window you will ever get; selling soon after death usually costs little in tax.
• The adviser question. A windfall that moves you from $2 million to $8 million may move you from generalist advice to a multi-family office model with coordinated tax, estate, and investment work. Our guide on how to choose a wealth manager lists the questions to ask anyone you interview, including us.

The emotional dimension deserves respect

Money that arrives through loss carries weight that spreadsheets do not capture. It is normal to feel reluctance to sell a parent's stock, guilt about spending, or pressure from family members with opinions. Naming those feelings, and separating the decisions that honor the person from the decisions that manage the money, is part of doing this well. A deliberate pause, a written plan, and an adviser who has seen the pattern before all help. There is no deadline for grief, and very few deadlines in the money, with the inherited IRA calendar being the main exception.

Frequently asked questions

Do I owe tax on inherited money?Generally no. Inheritances are excluded from your gross income under federal law, and Wisconsin has no inheritance tax. The exceptions are inherited retirement accounts, which are taxed as you withdraw, and income the assets earn after death.

What is stepped-up basis?Inherited assets generally take a cost basis equal to their fair market value at the owner's death under Section 1014. If you sell shortly after death, there is usually little or no capital gain to tax.

How fast must I empty an inherited IRA?Most non-spouse beneficiaries must withdraw everything within 10 years, and some must also take annual distributions during that window. Spouses have better options. See our inherited IRA article for the details.

Should I pay off my mortgage with the inheritance?Not as a reflex. Compare your mortgage rate with what safe and diversified assets can earn, weigh the liquidity you would give up, and decide inside a full plan rather than as a first move.

The estate sent me a Schedule K-1. Why?Estates and trusts that distribute income pass the tax liability to beneficiaries on Form 1041 Schedule K-1. It reports your share of the estate's income, not the inheritance itself, which remains nontaxable.

When should I get professional help?Before taking any distribution from an inherited retirement account, before selling real estate or a business interest, and whenever the inheritance materially changes your net worth. Mistakes in those three areas are the hardest to undo.