Inheriting Money: What you Need to Know About Taxes, Probate and Next Steps

What is an Inheritance?

An inheritance is money or property that transfers to another individual or entity due to the death of the donor. Inherited assets can be cash, stocks, bonds, retirement accounts, real estate, a business and property such as automobiles, artwork, jewelry, collectibles and personal property.

Inherited property often transfers to an individual family member or friend, but it may be transferred to a charity or non-profit or other entity.  

How Does Property Pass at Death?

The first thing most people think about when property transfers at death is the Last Will & Testament or simply a will.  The will is a necessary legal document however, a will is not the only instrument that determines who receives an inheritance.

Property may pass at death based on a beneficiary designation.  Beneficiaries are usually named on retirement accounts such as a 401k or IRA.  Life insurance policies have designated beneficiaries.  You can also name a beneficiary in a checking or savings account at your bank.  That document is called a Payable on Death clause or POD.  Brokerage accounts sometimes have a beneficiary under a Transfer on Death clause, or TOD.  Beneficiary designations by-pass the will.  This means that regardless of what your will says, if property has a designated beneficiary it never goes to the will.  It goes directly to the named beneficiary.  The process is private and efficient.

Some assets are held in joint names.  Married couples often own bank accounts and brokerage accounts and automobiles under a Joint and Survivor registration.  In Virginia married couples may own their primary residence as Tenants by the Entirety.  Both registrations mean that they own the asset jointly and the survivor of the two will own the asset at the first death.  This method of transferring assets does not go through the will.

Some assets are owned in a Trust. A trust is a separate entity, and the trust document spells out how assets will transfer at the death of the grantor or beneficiary.   A trust may also be the beneficiary of an asset. Assets owned in a trust or payable to a trust upon death do not go through the will.

Only assets owned in a person’s name alone with no beneficiary designation go to the will at death.  Depending upon the size of the estate and the state of residence of the deceased, the assets in the will must go through a court process called probate. 

Do I have to Pay Taxes on an Inheritance?

There is no federal inheritance tax and you do not have to report an inheritance on your income tax return.

Virginia residents do not pay a state inheritance tax.  There are only five states that have an inheritance tax, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Whether or not a state inheritance tax is owed depends upon the final state of residence of the deceased, and close family members may be exempt or owe very little.   

Estate taxes are different from inheritance taxes.  The estate tax is levied on the estate before assets are transferred to the recipient. The federal estate tax applies only to very large estates.  Only estates over $15 million will pay a federal estate tax.   

Virginia no longer has an estate tax. Twelve states and the District of Columbia currently have an estate tax in addition to the federal tax. Whether or not a state estate tax is owed depends upon the final state of residence of the deceased.

Whether you pay any tax depends upon the kind of asset you inherit.  Retirement accounts come under separate rules and are subject to income taxes.

What Happens if I inherit a Retirement Account?

The income tax liability on a traditional pre-tax retirement account does not go away at the death of the owner. If you inherit a tax-deferred retirement account, there are special rules you need to know. Making a mistake could reduce the size of your inherited money due to unintended taxes and penalties.  

The first option the heir has is to pay the income tax due and receive a check for the remainder to spend or invest anyway you want.  Depending upon the size of the IRA, this is probably your worst choice because taxes will be due on the entire amount of the IRA in one year.  

A surviving spouse has the most flexible options. He or she may remain the beneficiary of the existing IRA.   If the surviving spouse is under age 59 ½ that may be a good choice. You can take distributions as needed as a beneficiary with no early withdrawal penalty.  You will owe tax on the distributions you receive.

Another option is to rollover the IRA into an IRA in your own name.  A spouse is the only beneficiary who can do this.  Then, she would follow the regular rules for distributions from her own IRA.  When the surviving spouse over 59 ½ this might be the most favorable option.

There are different rules for a non-spouse beneficiary of an IRA. If you inherit an IRA from your parent, you will not be able to move this money into an IRA in your own name.  You must open a separate account called an Inherited IRA.  In 2019 SECURE Act 2.0 introduced the 10-Year Rule for deaths occurring in 2020 and later.   A non-spouse beneficiary must receive all the proceeds from the IRA over a 10-year period.  Depending upon the size of the IRA, receiving all the money in 10 years could significantly increase your own taxes, and it requires careful tax planning.

What if I Inherit a Roth IRA?

An Inherited Roth IRA is generally distributed under the same rules as a traditional IRA, except that the distributions are income tax free.  Non-spouse beneficiaries have 10 years to receive all the proceeds.  

Roth IRA owners can defer distributions during their lifetime and continue accumulating tax free money. They are not subject to Required Minimum Distributions.   Beneficiaries are treated differently and must distribute the entire Inherited Roth IRA in 10 years.  

What is Probate?

Probate is the process of proving and recording the will. In Virginia this is done in the circuit court of the county where the deceased was a resident at the time of death.  

The executor must first be appointed by the court and must notify all heirs and beneficiaries of the appointment within 30 days. The executor is responsible for paying debts and collecting any debts owed to the decedent and filing a final income tax return. The executor must create an inventory of the assets which the decedent owned on the date of death that are subject to the will. Only assets in the decedent’s name alone with no beneficiary designation are reported to the court. This inventory must be presented to the court within four months of the executor’s appointment.

The probate process is slow.   In many cases it is nine months to a year before the probate process is complete.  Larger estates can take two years or more to complete.

Once complete, the will is public record at the courthouse. The probate process is not private.  The privacy issue alone is a reason many people arrange their estate to avoid probate.  A well-planned estate will have as little as possible transfer through the will.  

What Happens When Someone Dies without a Will?

If you die without a will it is called intestate. There are laws of succession in the Commonwealth of Virginia that determine how property owned in your name alone without any beneficiary designation will transfer after your death.

This is the state’s plan. When a person is married, all property which would have been transferred through a will goes to the surviving spouse.  If your children are shared with your spouse, then the spouse still inherits everything. If you have children from a former relationship, your surviving spouse receives one-third, and the children receive two-thirds.

If you are unmarried at the time of your death, your children will inherit your property in equal shares. If you have no children, then your parents will inherit your property.   If your parents are not living, the property goes to siblings or their descendants.  

All property that has a designated beneficiary, that is owned jointly with rights of survivorship, or that is owned by a trust will be transferred outside of a will, and the lack of a will has no bearing.  

Should I pay off Debt or Invest Inherited Money?

This is an individual question and the answer will vary from person to person.  It depends on the size of your inheritance and the type of debt you have.  Do you already have a retirement account that you contribute to on a regular basis so you are building wealth?

What is the interest rate on your debt? If your only debt is a mortgage at 3% or 4%, it could be a better strategy to continue making monthly payments and invest your inheritance for long term growth.  

If you have credit cards with high interest rates, it makes sense to pay those off.  At the same time, you want to protect yourself from getting into credit card debt in the future.  If you use your inheritance to pay off high interest debt and you have no savings to keep you from using a credit card again, you are likely to end up in the same situation, and your inheritance will be gone.  

A combination approach could be in your best interest.  Keep at least three to six months of average expenditures in an emergency fund. This fund should be FDIC insured and liquid so you can access it easily when needed. It is important to have a cash reserve to prevent using credit cards in the future.

In a perfect world, investing your inheritance for your long-term security is ideal. But, if you are struggling with interest rates that approach double digits, a strategy to pay off the debt and maintain an emergency fund of cash could be in your best interest.  

Statistics are not in your favor.  Texas Tech and the University of Alabama published research in 2026 showing that 42% of heirs spent all their inheritance in one year. Many inheritances are spent quickly because beneficiaries make large purchases, pay off low interest debt, or fail to account for income taxes on inherited retirement accounts.  A plan to preserve some of the money to invest and build wealth and financial security is strongly recommended.   

What Should I Do Immediately After Inheriting Money?

Avoid making any major financial decisions immediately after the death of a loved one.  Place cash in a secure interest-bearing account, don’t sell property for several months or perhaps a year, and give yourself time to process your emotional loss before dealing with financial aspects of the inheritance.  

Heirs are faced with decisions on a variety of topics including taxes, investing, debt repayment, retirement planning, selling a residence, and estate settlement. It is important to take your time and become familiar with all your options so you can make educated decisions.  The choices you make could have long-term financial consequences.

It may be helpful to meet with a financial advisor before making any major changes. Careful planning should preserve your inherited wealth and support your own long term financial goals.

If you inherited money or property and live in the Roanoke Valley, Salem, Blacksburg, Smith Mountain Lake, Charlottesville, or surrounding areas, we offer professional financial guidance that can help you avoid costly mistakes and create a long-term investment strategy. Give us a call today to get answers to your questions and develop a tax-efficient plan for your inherited wealth.  540-772-4545.  info@guelichcapital.com

This article is for educational purposes only.  It should not be considered tax, investment or legal advice.  Consult a qualified professional regarding your own specific situation.  

Written by Connie C. Guelich, CFP® this article represents our views at the time written, and it is subject to change.