The Great Wealth Transfer: What You Need to Know

Many of us will eventually face the responsibility of managing an inheritance. With the earliest members of the Silent Generation nearing the century mark and the tail-end of the Baby Boomers at retirement age, the United States is on the cusp of what experts are calling the ‘Great Wealth Transfer’. This will result in an estimated $72.6 trillion in assets transferring to heirs through 2045.

Understanding how to plan for an inheritance, including managing sudden wealth and minimizing tax implications, is crucial for those who soon may receive a financial windfall. Whether you inherited real estate, cash, investments, or other assets, the steps you take to preserve wealth and make informed financial decisions can have lasting effects on your future.

Planning Ahead: Start the Conversation Early

One strategy for handling an inheritance is to start planning while your parents are still with you. It can be an uncomfortable conversation, but most parents want to make the process as simple as possible for their children, just as you probably would for your own.

Here are a few key steps to take while planning:

• Obtain copies of your parents’ estate planning documents: Wills, powers of attorney, and trust agreements
• Locate the original copies: Know where they’re stored for easy access.
• Keep copies of important documents: account statements, insurance policies, etc.
• Create a contacts list: Include your parents’ financial advisor, tax preparer, and attorney.
• Ask for Introductions: If they are comfortable with it, get to know these professionals in advance.

The Emotional Impact of Receiving an Inheritance

Receiving an inheritance may stir a bittersweet mixture of emotions, especially with the loss of a loved one. You may not feel like a significant windfall is coming your way, or you might be too deep in grief to focus on the legal, financial, and tax complexities.

It’s normal to feel overwhelmed but understanding the scope of what you may inherit is critical.

Once your loved one has passed away, it is important to grieve. Regardless of the size of their estate, remember that it’s a legacy of their hard work and achievements. They created a plan for how their legacy should be shared with the people and causes that meant the most to them. If you’re named as a beneficiary, honor their memory and be thankful for the love that comes with your inheritance.

What You Need to Know Before Spending: Key Questions

Once the emotional impact subsides, you’ll likely have several questions about the inheritance process. It’s important to understand these details before you start spending.

How Much Inheritance Will I Receive?

Understanding how much you will inherit is a natural first step. Knowing how much is important, but it’s just as important to ask what you will receive.

• Cash or investments: These are typically easy to value.
• Real estate, jewelry, and collectibles: May require appraisal or be valued based on the sale price. 

Keep in mind that the total amount of inheritance you receive may be reduced by estate expenses, including:

• Outstanding debts: The estate must pay off any debts before distributions to heirs. 
• Taxes and Fees: The estate may also be responsible for taxes and attorney fees.

If your inheritance is to be held in trust, the trustee may control your ability to access the funds. You should find out who is named as trustee and request a copy of the trust agreement or governing legal instrument. Depending on the terms of that agreement, the trustee may be obligated to pay only the investment income from the assets in trust. They may have the discretion to pay for a specific purpose listed in the agreement. There may only be a specific dollar amount or percentage of assets payable each year, or a schedule of distributions coincident with the attainment of certain ages.

It is wise to understand the net amount you will receive and the distribution process before you start to consider spending.

When will I Receive My Inheritance?

The timeline for receiving assets will vary depending on the type and how it was titled at the time of the owner’s death. Here’s the breakdown:

• Assets with Beneficiary Designations: Items like retirement accounts, annuities, and insurance usually transfer quickly. 
  • You may need to obtain a death benefit package from the issuer, which will provide you with options for receiving the benefit, including:
    • Rolling over your share into your account
    • Receiving annual payments
    • A lump sum distribution
  • Once you decide, you will usually have your inheritance within a few weeks.
• Jointly Owned Assets: If you jointly-own assets with the deceased with rights of survivorship, the ownership will automatically pass to you, although you may need to retitle items like bank accounts or cars.
• Probate Assets: Property solely in the decedent’s name will have to pass through probate, which can take months to a year or more, depending on the complexity. 

While it may be frustrating to have to wait, try to utilize that time to gather all the facts and develop a plan for what you will do once you receive your inheritance.

Will I Have to Pay Taxes? The Tax Implications of Inherited Wealth

It is critical to consult with a financial advisor and your tax preparer for proper inheritance planning, especially when managing the tax implications of inherited wealth. Your choices in doing so can affect the taxes you will have to pay. There are generally two types of taxes to consider:

1. Income Tax: Inherited assets are not considered income, so no income tax is due on the value of property received. However, any dividends, interest, or investment income derived from the property must be reported on your income tax return.
2. Transfer tax: These taxes, often referred to as “death taxes,” apply to the transfer of wealth between generations.

Common Death Taxes to be Aware Of

Federal estate tax is a type of transfer tax levied based on the size of the estate. In 2025, the estate and gift tax exemption is $13.99 million. Therefore, the estate tax should not be an issue unless the decedent’s estate, along with any lifetime gifts to heirs, totals more than that figure. Even if federal estate tax is due, it should be paid from the estate before you receive any distribution.

Inheritance tax is another transfer tax that varies based on the amount inherited and the relationship to the deceased owner. Six states—Pennsylvania, Maryland, Kentucky, New Jersey, Iowa, and Nebraska—currently impose an inheritance tax that may apply if the decedent was a resident. The estate typically pays the tax as part of the probate process. However, if there are insufficient assets available to the executor, it may need to be paid by the beneficiary. You should coordinate with the executor to identify the responsible party. Life insurance death benefits are generally not subject to inheritance tax; however, annuities may be treated as investments, making the benefit potentially taxable.

Managing Retirement Assets and Capital Gains

When inheriting tax-deferred retirement assets, such as traditional IRAs, the tax treatment can vary. If these assets are moved into an inherited IRA in the beneficiary’s name, the assets are not taxed at the time of transfer. However, any distributions the beneficiary takes from their inherited IRA are considered taxable income. 

Lump Sum vs. Inherited IRA Distributions

Taking the benefit as a lump sum payment can be inefficient for tax purposes, as it may push the beneficiary into a higher tax bracket. Under current law, transferring assets into an inherited IRA allows the recipient to spread the taxable distributions over time, usually up to 10 years.

However, if the deceased IRA owner had an unmet required Minimum Distribution (RMD) for their year of death, the beneficiaries will still have to distribute the RMD amount and report it as earned income in the year of death.

Understanding Capital Gains Tax

Capital gains tax is assessed on the profit made from selling an inherited asset. The tax is based on the difference between the sale price and the original purchase price, or cost basis. Fortunately, assets included in the decedent’s estate receive a cost basis adjustment, or step-up, to the price as of their death. 

Tip: It’s important to determine the adjusted cost basis before selling inherited assets, as this can significantly reduce the taxable gain on the sale.

Inherited assets are automatically considered to have a long-term holding period of more than one year. As a result, any gain on the sale, regardless of how long it is held after receipt, is taxed at long-term gains rates, which are typically lower than short-term capital gains rates, which are taxed as ordinary income.

Assets that were held in an irrevocable trust prior to death are typically not included in the decedent estate, so they do not receive any cost basis adjustment.

What should I do with what I am inheriting? Financial Planning After Inheritance

Receiving an inheritance can be a life-changing event and integrating it into your existing financial plan is essential. Working with your financial advisor to make informed decisions that align with your long-term goals is important. Since every client has unique needs and goals, there is no universal answer to what that will look like.

Here are some steps to consider after you receive your inheritance:

1. Create or Update Your Net Worth Statement
   A net worth statement helps you visualize your complete financial picture. Make sure to include all of your assets (real estate, bank accounts, investments) and liabilities (mortgages, loans, credit card debt).
2. Adjust Your Tax Planning Strategy
   Incorporate any income or capital gains from your inheritance into your existing tax planning strategy. This will help ensure you’re properly managing any tax implications. Be sure to discuss strategies to help minimize taxes with your financial advisor.
3. Revisit Your Investment Goals
   Whether your goal is funding your children’s education, saving for retirement, or preparing for a major life event like a wedding, make sure your inheritance is factored into your financial projections. It can help accelerate your savings, pay down debt, and provide new opportunities.
4. Prepare for Unanticipated Expenses
   It’s always a good idea to set aside enough cash in an emergency fund to cover 3-6 months of living expenses or to manage potential emergency repairs. This helps give you financial security in case of the unexpected.
5. Consult Legal Counsel During Divorce
   If you are going through or anticipating a divorce, you should consult your legal counsel on how your inheritance will be treated. Generally, inherited assets are not considered marital property but holding them in joint title or using them for common interests and expenses could introduce them as such. Legal guidance can help protect your inheritance.
6. Charitable Giving: Honor Their Legacy
   A meaningful way to honor your loved ones is by making charitable gifts with a portion of what you receive from them. Support causes that were important to them, organizations they were passionate about, places they volunteered their time, or the medical facilities that assisted them. This is a beautiful way to continue their legacy, while also potentially providing tax benefits by offsetting income tax liability.
7. Enjoy What You Inherited
   If your financial foundation is stable, you should also enjoy some of your inheritance. If someone cared enough about you to include you as an heir, they probably wanted your happiness and your needs fulfilled. A family vacation, a personal project, or a deferred education or artistic endeavor could be the perfect tribute to their memory.
8. Revisit Your Estate Plan
   After receiving your inheritance, it’s a great time to revisit your own estate plan. Review your beneficiaries and detail any specific items or amounts you want each to receive. Ensure that you are comfortable with them receiving assets outright, or if not, consider incorporating a trust or guardianship for minors. Confirm that your executor is someone that you trust to follow your wishes. Explore life insurance, lifetime gifts, or other strategies to help reduce estate or inheritance tax drag. If your will or estate plan needs fine-tuning, make those changes now for your heirs.

Conclusion: Protecting Your Legacy

An inheritance can provide both financial freedom and new complexity. With patience and professional guidance, you can safeguard that legacy for yourself and your own eventual heirs. If you’re navigating the complexities of managing an inheritance, consulting with a trusted financial advisor can provide clarity and peace of mind.

Sources:

• Estate tax | Internal Revenue Service
• What to do with an inheritance – tips| Fidelity
• Dos and Don’ts When You Get an Inheritance | Charles Schwab
• What to Do With an Inheritance – Ramsey