Financial Advisor for Inheritance: What to Do with Inherited Money

Not tax or legal advice — your situation requires qualified professionals. This page explains the financial decisions that follow an inheritance and how an advisor can help.

An inheritance is a one-time event with permanent tax consequences. The decisions you make in the first 12 months — particularly with inherited retirement accounts — largely cannot be undone. The tax rules are complex enough that many people make costly mistakes without knowing it: missing annual RMD requirements in an inherited IRA, selling appreciated property before getting a basis step-up, or rolling over funds into an account structure that eliminates their best options.

What you inherited determines which rules apply. The three main categories — retirement accounts (IRA, 401(k), 403(b)), taxable investment accounts, and real estate — each operate under different tax treatment and require different decisions.

Inherited IRA and retirement accounts

This is the most complex piece. The rules changed substantially in 2019 (SECURE Act), 2022 (SECURE 2.0), and 2024 (T.D. 10001, the final regulations), and many people are operating on outdated assumptions.

The 10-year rule for most beneficiaries

If you inherited an IRA or 401(k) from someone other than a spouse (and you don't qualify as an Eligible Designated Beneficiary — see below), you must fully deplete the account by December 31 of the tenth year after the original owner's death.¹ There are no minimum annual amounts — except in one critical scenario.

Annual RMDs if the decedent was past their Required Beginning Date

Under T.D. 10001 (finalized July 2024), if the original account owner had already reached their Required Beginning Date (RBD) — which is April 1 of the year after they turned 73, or 75 for those born 1960 or later — you must take annual distributions in years 1 through 9, not just empty the account in year 10.¹ The waiver period that had previously covered missed distributions from 2021–2024 ended. Missing a required distribution starting in 2025 triggers a 25% excise tax on the amount that should have been taken (reducible to 10% if corrected within two years).¹

If the original owner died before their RBD — common for people in their 50s or early 60s — annual distributions during years 1–9 are not required. You have full flexibility on timing, subject only to the year-10 deadline.

Eligible Designated Beneficiaries: who qualifies for a stretch

Five categories of beneficiaries are exempt from the 10-year rule and can stretch distributions over their own life expectancy:

Spouses who inherit an IRA have the most flexibility: rolling over into their own IRA restores full lifetime RMD rules (based on their age, not the decedent's), defers required withdrawals until their own RBD, and preserves Roth conversion options. A surviving spouse who simply continues the account as an "inherited IRA" loses that flexibility. The rollover election is one of the most valuable — and most commonly missed — decisions in inheritance planning.

Inherited Roth IRA: same 10-year rule, different annual RMD logic

The 10-year rule applies to inherited Roth IRAs as well, but with an important difference: since Roth IRA owners have no Required Beginning Date during their lifetime (Roth IRAs have no lifetime RMD requirement), there is no "past RBD" scenario. Annual distributions during years 1–9 are not required for inherited Roth accounts. The only requirement is emptying the account by year 10. The optimal strategy for most beneficiaries is to delay all distributions until year 10, letting the tax-free growth compound as long as possible.

Distribution strategy: the 10-year window as a planning opportunity

For a pre-tax inherited IRA, every dollar you withdraw is ordinary income in the year you take it. If you're in a high-income year — say, a large business exit or equity vesting event — pulling $200,000 from an inherited IRA in the same year could push a significant amount into the 37% bracket. An advisor models your income over the 10-year window and designs a withdrawal schedule that spreads distributions into lower-bracket years. The tax savings from this planning — versus taking the account in a single year — can easily exceed $50,000 on a $1 million inherited IRA.

If you expect lower income in some years (a sabbatical, early retirement, a slow business year), those are the right years to accelerate inherited IRA distributions and consider Roth conversions of your own accounts in the same window.

Inherited taxable brokerage account

Taxable investment accounts receive a step-up in cost basis to fair market value at the date of the original owner's death under IRC §1014.² This means all capital gains that accumulated during the decedent's lifetime are permanently eliminated — they're never taxed. A portfolio of $2 million that was purchased decades ago at a basis of $400,000 has a $1.6 million unrealized gain. At death, the basis steps up to $2 million. If you sell immediately, the gain is $0.

This creates a clear decision framework: if you want to sell and diversify, the window immediately after death (before values fluctuate) is typically the most tax-efficient time. If you hold and the portfolio appreciates further, any additional gain above the stepped-up basis will eventually be taxed at long-term capital gains rates — 0%, 15%, or 20% depending on income, plus the 3.8% Net Investment Income Tax above $200,000 (single) / $250,000 (married filing jointly).³

Inherited real estate

Real estate also receives the IRC §1014 step-up. A rental property purchased for $150,000 that's now worth $900,000 steps up to a $900,000 basis at death. The rent-vs.-sell decision then becomes: does the rental income justify the management complexity and future capital gains exposure? Or does selling now — while basis is at maximum and gains are minimal — make more sense for your situation?

If you choose to continue renting, note that the depreciation schedule resets. You may be required to recapture prior depreciation deductions taken by the decedent at 25% (unrecaptured §1250 gain) if you sell within a few years.

State inheritance taxes

Most states have no inheritance tax. But five states do levy one — paid by the heir, not the estate — with rates and exempt relationships varying significantly:⁴

• Kentucky: 0% for immediate relatives; up to 16% for distant relatives and non-relatives
• Maryland: 0% for immediate relatives; 10% for non-relatives. Maryland is the only state with both a state estate tax and an inheritance tax.
• Nebraska: 1–15% depending on relationship; $25,000 exemption for immediate relatives reduced in recent years
• New Jersey: 0% for lineal heirs; 11–16% for non-relatives. No estate tax for deaths after 2017.
• Pennsylvania: 0% for surviving spouse; 4.5% for lineal heirs; 12% for siblings; 15% for others

Iowa phased out its inheritance tax entirely as of January 1, 2025. If the decedent lived in one of the five states above, the state inheritance tax return timeline matters — confirm deadlines with a local estate attorney early.

The investment decision: lump sum or gradual

Once inherited assets are in your hands as cash or liquid securities, the question of how to invest often feels daunting. Research consistently shows that lump-sum investing outperforms dollar-cost averaging approximately two-thirds of the time over any 12-month forward period — because markets trend upward over time, and staying in cash means missing that drift.⁵ But DCA is a reasonable behavioral hedge if a large lump sum would cause you significant anxiety about short-term volatility.

The more important question is asset allocation, not timing. A one-time financial plan engagement with a flat-fee advisor — $2,000–$6,000 — that models your complete picture (existing assets, inherited assets, tax situation, timeline) and produces an actionable allocation plan is often the right decision before investing a large inheritance.

Why flat-fee is the right advisor model for inheritance

An AUM advisor's business model creates a structural conflict when you inherit money. Their income goes up when you move assets under their management. That creates incentive to:

• Recommend rolling the inherited IRA into their managed account — even when leaving it in the inherited IRA structure or taking a different distribution strategy might serve your tax situation better
• Recommend liquidating inherited assets and reinvesting in a managed portfolio — when the optimal decision might be to hold the portfolio as-is with minor adjustments
• Downplay the value of one-time advice versus an ongoing management relationship

A flat-fee advisor charging $3,000–$8,000 for an inheritance planning engagement earns the same whether you roll assets into management, keep them where they are, or distribute the IRA over 10 years. The advice is conflict-free because the compensation doesn't change based on what you decide to do with the money.

Typical cost for inheritance financial planning

• One-time project engagement: $2,500–$8,000 for comprehensive planning — inherited IRA distribution modeling, step-up optimization, investment plan, state tax review
• Hourly: $300–$500/hr for targeted questions (e.g., inherited IRA distribution schedule, rollover decision analysis)
• Annual retainer: $4,000–$12,000/year if you want ongoing planning as the inheritance unfolds over multiple tax years