You Just Inherited. Now What? (Start by Doing Nothing.)

The biggest mistake people make with an inheritance is moving too fast. Here is the calm, in-order list, and why the kind of money you inherited changes everything. The finale of Passing It On.

Read the full article: https://news.americanretirementadvisors.com/what-to-do-when-you-inherit-money/

American Retirement Advisors helps families in Arizona and Nevada navigate healthcare, retirement income, and inheritance planning. Want to reach out? Text us at (602) 281-3898, email support@americanretire.com, or visit https://americanretirementadvisors.com.

Transcript

SPEAKER_00 0:01

Welcome to the American Retirement Advisor, coming to you from One to Three Z Studios. Real stories, real strategies, and straight talk about healthcare, retirement income, and inheritance planning. I'm Ian Schaefer, joined with Eddie and Betty. Let's get into it.

SPEAKER_08 0:16

Today we're wrapping up our series on passing wealth to the next generation, but we're flipping the script entirely. Instead of talking about leaving an inheritance, we're talking about what it's like to receive one. And honestly, this might be the most important conversation we've had in this whole series, because this is when families either honor what their loved ones built or accidentally undo it in a matter of weeks.

SPEAKER_04 0:40

Ian Schaefer's piece on this really hit me because he starts with something that sounds almost counterintuitive. When someone asks what they should do first with an inheritance, his answer is do nothing. And I think that's brilliant advice that goes against every instinct people have in that moment.

SPEAKER_08 0:57

Right, because you're dealing with grief and suddenly there's this pile of paperwork and decisions, and everyone around you has opinions about what you should do. It feels urgent when it's usually not urgent at all.

SPEAKER_04 1:09

Exactly. The pressure people feel isn't coming from the money itself, it's coming from the emotions, from people trying to sell them things, from relatives who think they know what's best. Ian suggests giving yourself 90 days before any major decision, and I've seen how much trouble that simple rule can save people.

SPEAKER_08 1:27

90 days to just park the money somewhere safe and boring. Don't quit your job, don't buy a new car, don't make any big investments, just breathe. But once you've given yourself that space, then what? Because I imagine different types of inheritances work differently.

SPEAKER_04 1:43

That's where it gets really important to understand what kind of money you actually inherited, because the word inheritance covers wildly different things. Each type plays by completely different rules, and what's smart for one can be a costly mistake for another.

SPEAKER_08 1:59

So let's start with the simplest case. What if someone inherits just regular money or property, like cash in a bank account, or a house that's paid off?

SPEAKER_04 2:08

Aaron Powell Here's something that surprises almost everyone. In most cases, simply receiving that inheritance isn't taxable income to you. Inherited cash, a paid-off house, a regular savings account, none of that shows up as income on your federal tax return just because you inherited it.

SPEAKER_08 2:26

Wait, that's not what most people expect, is it?

SPEAKER_09 2:29

I feel like everyone's first fear is that they're going to get hit with some massive tax bill the moment money shows up.

SPEAKER_04 2:36

Right. And for most families, that fear is completely unfounded. Now, you might owe taxes on any growth that happens after you inherit something, but just receiving it? Generally not taxable.

SPEAKER_09 2:47

Aaron Ross Powell What about estate taxes? Because I feel like that's another thing that sends people into a panic when they hear about it.

SPEAKER_04 2:54

The estate tax is probably the most misunderstood part of this whole conversation. People hear estate tax and immediately worry, but for the overwhelming majority of families, it simply doesn't apply. Under current law, the federal estate tax exemption for 2026 is $15 million per person.

SPEAKER_03 3:14

$15 million per person? So a married couple could pass roughly $30 million before owing a dime of federal estate tax.

SPEAKER_04 3:24

Exactly. Unless you're inheriting from an estate of that size, this just isn't your problem. Ian makes a great point that the myth causes far more stress than the tax ever does.

SPEAKER_02 3:35

So for most people, regular cash and property inheritances aren't as urgent or as taxing as they think. But I'm guessing there are exceptions where time really does matter.

SPEAKER_04 3:45

And that's where inherited retirement accounts come in. This is the one that really bites people if they don't understand the rules. If you inherit a traditional IRA or 401k and you're not the spouse of the person who passed, you generally can't just leave it sitting there.

SPEAKER_02 4:02

What do you mean you can't leave it sitting there? What's the rule?

SPEAKER_04 4:05

Under current rules, most non-spouse beneficiaries must empty the account within 10 years of the original owner's death. But it gets more complicated than that. Depending on whether the person had already started their required withdrawals, you may also have to take a minimum amount out every year along the way.

SPEAKER_11 4:23

And I'm guessing there are penalties if you mess this up?

SPEAKER_04 4:27

Missing one of those required annual withdrawals can trigger a penalty of up to 25% of what you should have taken. Now, that can often be reduced if you catch it and fix it quickly, but you definitely don't want to go there.

SPEAKER_10 4:40

25% penalty. That's not pocket change. But even beyond the penalties, there are tax implications just from taking the money out, right?

SPEAKER_04 4:49

Every dollar you pull from a traditional inherited account is taxable income to you. So if you have a large inherited IRA and you withdraw it carelessly in one or two big chunks, you can push yourself into a much higher tax bracket and end up owing far more in taxes than you needed to.

SPEAKER_08 5:06

So the timing of how you take that money out over those 10 years really matters. This sounds like exactly the kind of thing where you'd want to map out a strategy before you touch the account.

SPEAKER_04 5:16

Ian calls this the single most common and most expensive inheritance mistake they see. And it's exactly the kind of thing worth sitting down with a professional to work through, because the difference between doing it well and doing it poorly can be tens of thousands of dollars.

SPEAKER_08 5:32

I bet our team at American Retirement Advisors sees this all the time and knows exactly how to help people think through the timing. But let's talk about houses, because I imagine that's another big category people inherit.

SPEAKER_04 5:43

Inherited houses come with what Ian calls a quiet gift, and it's something most people have never heard of. It's called stepped up basis.

SPEAKER_08 5:52

Stepped up basis? That sounds technical. What does it actually mean?

SPEAKER_04 5:56

When you inherit property, its value for tax purposes resets to what it's worth on the day the owner passed, not what they originally paid for it. So let's say your parents bought their home for $100,000 decades ago, and today it's worth $500,000.

SPEAKER_05 6:13

So there's $400,000 of appreciation that happened while they owned it.

SPEAKER_04 6:18

Right, but if you sell the house near the time you inherit it, you generally own no capital gains tax on that $400,000 of growth, because your starting point for tax purposes is the $500,000 value, not the original $100,000 they paid.

SPEAKER_08 6:34

That's an enormous tax break. So the appreciation that happened during their lifetime essentially becomes tax-free to you?

SPEAKER_04 6:42

In many cases, yes. And that's one more reason not to rush into decisions. Knowing this rule exists can completely change how and when you decide to sell inherited property.

SPEAKER_08 6:53

But I'm guessing this stepped-up basis doesn't apply to everything you inherit.

SPEAKER_04 6:58

That's a really important catch that trips people up. Money inside a retirement account, like a traditional IRA, does not get this step up. That's a big part of why an inherited house and an inherited IRA are treated so differently under tax law.

SPEAKER_08 7:14

So with the house, you might not owe capital gains tax on decades of appreciation, but with the IRA, every dollar you withdraw is taxable income. Completely different rules.

SPEAKER_04 7:25

Exactly. And this is why that first step of figuring out what kind of money you actually inherited is so crucial. The strategies that make sense for one type can be completely wrong for another.

SPEAKER_08 7:37

This is making me think about all the people who are dealing with this right now, in the middle of grieving someone they loved, trying to figure out these complex rules. It feels overwhelming.

SPEAKER_04 7:49

And that brings us back to Ian's main point about slowing down. None of these decisions have to be made in the first week or even the first month. The money will still be there in 90 days, but your ability to think clearly about it will be so much better.

SPEAKER_08 8:04

You know, there was something at the end of Ian's piece that really struck me. He talks about how underneath all the accounts and paperwork, there's the actual reason any of this exists.

SPEAKER_04 8:15

That someone worked and saved and went without so that you would have a little more room than they did.

SPEAKER_08 8:21

The most important thing you inherit isn't the balance, it's what it represents. And as you're sorting through all these practical pieces, you don't want to let the logistics erase the meaning.

SPEAKER_04 8:31

That's the part no advisor and no tax rule can handle for you, taking a moment to understand what they were really trying to pass on.

SPEAKER_08 8:39

But once you've had that moment and you've given yourself time to grieve and think clearly, then the practical questions do need answers. So let's make sure we're clear on a few of the big ones people ask.

SPEAKER_04 8:50

The first one we hear all the time: do I have to pay taxes on inherited money? And we covered this, but it's worth repeating because it's such a common worry.

SPEAKER_08 8:59

In most cases, no. Simply inheriting cash or property generally isn't taxable income to you on your federal return.

SPEAKER_04 9:08

The main exceptions are withdrawals from inherited traditional retirement accounts, which are taxable, and any growth on assets after you inherit them. A few states have their own inheritance taxes, too, so it's worth checking the rules in your state.

SPEAKER_07 9:22

Aaron Powell What about that 10-year rule on inherited IRAs? Because that one seems to catch a lot of people off guard.

SPEAKER_04 9:29

Most non-spouse beneficiaries who inherit an IRA must withdraw the entire balance within 10 years of the original owner's death. In some cases, you also have to take a required amount each year during that 10-year window.

SPEAKER_06 9:42

Aaron Powell And because those withdrawals are taxable, how you time them over the 10 years can make a huge difference in what you actually end up with.

SPEAKER_04 9:50

Right. Pull it all out in year one, and you might push yourself into the highest tax bracket, spread it out thoughtfully, and you could save thousands or even tens of thousands in taxes. And then with inherited houses, we talked about stepped up basis. If you inherit a house and sell it relatively soon after inheriting it, you generally won't owe capital gains tax on the appreciation that happened during the previous owner's lifetime. The property's value for tax purposes resets to the fair market value on the date of death. So if you sell near that time, you're only taxed on any additional growth that happens after you inherit it.

SPEAKER_08 10:28

But here's what I keep coming back to. Even though we can explain these rules, every family situation is different. The size of the inheritance, the mix of assets, your own tax situation, what other income you have, all of that affects the best strategy.

SPEAKER_04 10:44

And that's where the real value of professional guidance comes in. It's not just knowing the rules exist, it's knowing how they apply to your specific situation and how to coordinate all the moving pieces.

SPEAKER_08 10:56

Plus, there are probably details and exceptions that we haven't even touched on. I bet when our team sits down with someone who's recently inherited, they're looking at factors we haven't even mentioned.

SPEAKER_04 11:06

Absolutely. Things like the timing of when the original owner passed during the year, whether there are multiple beneficiaries, if there are any trust structures involved, how it interacts with your own retirement planning. The specifics can get pretty complex pretty quickly.

SPEAKER_08 11:22

Which brings me back to Ian's advice about not trying to untangle all of this alone, and definitely not trying to untangle it in the first week after someone passes.

SPEAKER_04 11:31

The calmest path is to slow down first, then sit down with someone who can help you sort the different buckets, figure out which clocks are actually ticking and which aren't, and help you avoid the few mistakes that actually cost serious money.

SPEAKER_08 11:45

And that's exactly what our team does in an inheritance planning meeting. They can help you understand what you've inherited, what the timelines really are, and how to make decisions that honor both the practical side and the meaning behind what you received.

SPEAKER_01 11:59

Ian mentions their beneficiary box system, too, which is designed to keep all of this organized in one place so nothing important slips through the cracks.

SPEAKER_08 12:08

Because when you're grieving and dealing with all this complexity, the last thing you need is to worry about missing some critical deadline or losing track of important documents.

SPEAKER_04 12:18

And really, that's what this whole series has been about. Whether you're planning to leave something behind or you've just inherited something, the money is actually the easy part. It's the care behind it that's worth getting right.

SPEAKER_08 12:30

If you've recently inherited and you'd like that steady second set of eyes to help you think through your options, you can reach our team at American Retirement Advisors. They understand that this isn't just about tax strategies and withdrawal schedules. It's about honoring what someone built and making sure their care for you translates into real financial security for your future. The number is 602-281-3898.

SPEAKER_04 12:58

A quick note before we wrap up. American Retirement Advisors does not provide tax or legal advice. Please consult a CPA or tax professional before making any decisions based on what you heard today.

SPEAKER_08 13:17

This is Betty with the American Retirement Advisor. Thanks for listening. If this episode helped you think differently about your retirement, share it with someone who needs to hear it. You can read the full article and browse hundreds more at AmericanRetire.com. Wanna reach out? You can text us at 602-281-3898. Or email support at AmericanRetire.com. Be sure to subscribe so you never miss an episode. We publish daily. See you next time.

SPEAKER_00 13:51

Thanks, Eddie. Thanks, Betty. Until next time, this is Ian Schaefer coming to you from 123 Easy Studios. I hope you've enjoyed this recording of the American Retirement Advisor, where we make healthcare, income, and inheritance planning 223 Easy.