If you inherit a significant sum, the most important first step is to do nothing for 30-90 days. Park the money in a high-yield savings account or short-term Treasury bills, decline major purchases, and use the cooling-off period to inventory what you've actually received, what taxes apply, and how it should integrate with your existing financial plan.
Inheritances often arrive during emotional upheaval, the death of a parent or spouse, and rushed decisions made in that window are commonly regretted. The single best financial decision most heirs can make in the first 60 days is to park the money safely and resist the urge to act. Treasury bills, money market funds, or high-yield savings currently offer 4-5%, enough to take time without losing purchasing power.
Tax treatment depends on what you inherited. Cash and brokerage assets receive a 'step-up in basis' to fair market value at the date of death, meaning if you sell inherited stocks, your taxable gain is calculated from the date-of-death value, not what the original owner paid. This is a major tax advantage. Inherited IRAs and 401(k)s, by contrast, do NOT receive a basis step-up: distributions are fully taxable as ordinary income, and most non-spouse beneficiaries must drain the account within 10 years under the SECURE Act.
Inherited real estate and inherited business interests have their own complications: appraisal requirements, decisions about selling vs holding, ongoing carrying costs, and potential entity restructuring. If you inherited a Northern Suburbs home worth $800K+, the step-up in basis and Illinois property tax exemptions for primary residence vs investment property change the math significantly depending on what you do with it.
Once the cooling-off period ends, the integration plan typically addresses: paying off high-interest debt; topping up emergency savings to 6-12 months; funding retirement accounts to the maximum allowed; reviewing life insurance and estate documents (heirs who suddenly have $500K+ may have new estate planning needs); and only then, after these foundations are in place, deciding how to invest the remaining balance for long-term goals.
Key facts
- Cash, stocks, and real estate inherited at death receive step-up in basis to date-of-death value
- Inherited traditional IRAs/401(k)s: no basis step-up; distributions taxable; non-spouse beneficiaries usually must drain within 10 years
- Inherited Roth IRAs: tax-free distributions; non-spouse 10-year rule still applies
- Spouses who inherit retirement accounts can roll into their own IRA, best treatment by far
- Illinois has NO inheritance tax (the recipient pays no Illinois tax on receipt)
- Federal estate tax exemption: $13.99M (2025); Illinois estate tax exemption: $4M (paid by the estate, not the heir)
Do I have to pay taxes on money I inherit?
In most cases, no, at least not on receipt. Illinois has no inheritance tax, and federal estate tax (if owed) is paid by the estate before distribution. Cash, real estate, and stocks pass to you with a stepped-up basis. The major exception is inherited retirement accounts (traditional IRA, 401(k), 403(b)): distributions you take from these accounts are taxable as ordinary income to you. Inherited Roth IRAs distribute tax-free. If you inherited a non-retirement annuity, the deferred gain becomes taxable as you take distributions.
What is the 10-year rule for inherited IRAs?
Under the SECURE Act, most non-spouse beneficiaries who inherit a traditional or Roth IRA after January 1, 2020 must drain the entire account within 10 years of the original owner's death. This replaced the prior 'stretch IRA' that allowed lifetime distributions. Required Minimum Distributions during the 10-year period depend on whether the original owner had started RMDs before death. Tax planning over those 10 years matters, concentrating distributions in low-income years and avoiding distributions in high-income years can save significant tax. Spouses, minor children, disabled beneficiaries, and beneficiaries less than 10 years younger than the deceased are exempt from the 10-year rule.
