I’m Yair Klyman, founder of Klyman Financial, the father-and-son planning firm I run with my father, David, in Midtown Manhattan. Before starting the firm, I advised high-net-worth families, entrepreneurs and business leaders at major financial institutions. Together, David and I have worked with more than 1,600 clients.
When someone asks me how to invest an inheritance, my first answer usually surprises them: not yet. That isn’t a dodge. An inheritance tends to arrive in the middle of grief, paperwork and family conversations nobody wanted to have. The decisions you make in the first few months can carry tax consequences for a decade.
So this guide is less about picking investments and more about order. First you pause and then you figure out exactly what you inherited and which rules come with it. After that, you build a plan. Only then do we talk about putting money to work. Some of it may never need to be invested at all, and that’s fine.
Start by Pausing: Most of the Money Can Wait
There is rarely a financial emergency in the first weeks after a death. Estates move slowly. Merrill notes that probate, where it applies, generally takes at least six months to a year, depending on how complicated the estate is. Assets held in a trust or passed by beneficiary designation usually move faster, but even those involve forms and waiting.
At our firm, the first meeting after a loss isn’t about investments at all. It’s about reassurance, and about showing the family what their assets can actually provide. My father, David, puts it this way: “The first thing I do is tell them that it’s going to be okay,” he says. “We do a quick analysis of all their assets and show them how much income they’ll have and what that will actually do. I lost a client about a month ago, and that was the first conversation we had with her. Most of the time it works out, because smart people plan. It’s really about telling them: you’re going to be okay, and this is what your monthly income can be.”
That conversation usually includes a review of any life insurance, since it’s often a big piece of the picture.
If cash lands in your account before you’re ready, park it somewhere boring. An FDIC-insured savings account, a money market fund or short-term Treasuries all work while you think. Keep bank balances within FDIC coverage limits, which may mean spreading a large deposit across more than one bank.
A few deadlines don’t wait, though, so put them on the calendar now:
- The year-of-death RMD. If the person who died was already taking required minimum distributions and hadn’t taken that year’s amount, the beneficiary generally has to take it.
- Estate tax returns. When one is required, the federal return is generally due nine months after death. New York’s return follows the same nine-month window.
- Disclaimer deadlines. If you’re thinking about refusing (disclaiming) an inheritance so it passes to someone else, talk to an attorney quickly. There are strict time limits under both federal and state law.
Take Inventory of What You Actually Inherited
Before you can decide what to do, you need a complete list. When people have planned properly, their family knows where every account is, who to call and even how to log in. When they haven’t, this step takes real detective work.
Inherited assets rarely sit in one place. Retirement accounts, life insurance and accounts with transfer-on-death or payable-on-death designations go directly to the named beneficiaries, even if the will says something different. Everything else usually flows through the will, a trust or state intestacy law.
For each asset, write down five things:
- What it is (IRA, brokerage account, house, bank account, policy, business interest)
- Who holds it (bank, custodian, insurer, county records)
- How it passes to you (beneficiary form, will, trust or probate)
- Its value on the date of death
- Who your contact is (executor, trustee, plan administrator)
That date-of-death value matters more than people expect. For most property you inherit, your tax basis is the fair market value on the date of death, and the IRS points heirs to the executor for that figure. If the estate filed a federal estate tax return, you may receive a Schedule A to Form 8971. In that case, you may be required to use a basis consistent with the estate tax value.
What to Do With Each Type of Inherited Asset
The rules change completely depending on the kind of asset. This table is the quickest way to see where you stand.
Inherited IRA Rules, Explained Without the Jargon
Inherited retirement accounts cause more mistakes than any other asset, so they get their own section. Under the SECURE Act, the IRS splits beneficiaries into groups. Eligible designated beneficiaries are:
- a surviving spouse
- a minor child of the account owner
- someone disabled or chronically ill
- someone not more than 10 years younger than the owner
They can generally still stretch withdrawals over their life expectancy.
Almost everyone else, including most adult children, falls under the 10-year rule. The account has to be empty by the end of the tenth year after the year of death.
Here’s the part many people miss. If the original owner had already reached their required beginning date, the IRS’s final regulations require annual RMDs in years one through nine, with the rest out by year ten. The IRS waived penalties for missed amounts from 2021 through 2024, but those annual withdrawals have been enforced since 2025.
Missing one isn’t a small thing. The penalty can reach 25% of the amount you should have taken. It drops to 10% if you correct it in time and file Form 5329.
Two practical points:
- Titling. A non-spouse can’t fold an inherited IRA into their own IRA. It has to be retitled as an inherited IRA, ideally by a direct trustee-to-trustee transfer.
- Timing. The 10-year rule gives you some control over when withdrawals happen. Spreading them across lower-income years, such as a sabbatical or the years between retirement and Social Security, can meaningfully lower the total tax bill.
Potential Taxes: Who Actually Pays What
There is no federal inheritance tax. There is a federal estate tax, but the estate pays it before anything is distributed, and it only applies to large estates. For deaths in 2026, a federal estate tax return is required only when the gross estate plus certain lifetime gifts exceeds $15 million.
State rules are where people get caught off guard, and New York is a good example. New York’s own estate tax exclusion for 2026 is $7.35 million, about half the federal figure. It also has a “cliff.” Once the taxable estate passes 105% of the exclusion (about $7,717,500 in 2026), the exclusion disappears. At that point the whole estate becomes taxable, not just the excess.
A handful of states tax the heir instead of the estate. As of 2026, five states have an inheritance tax: Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Iowa’s was repealed for deaths on or after January 1, 2025. Surviving spouses are exempt in all five, and rates for everyone else depend on your relationship to the person who died. Pennsylvania, for instance, taxes transfers to adult children at 4.5%, while New Jersey exempts children entirely.
Finally, some inherited money is taxable income to you. Withdrawals from traditional IRAs and 401(k)s are taxed at your ordinary income rate. The IRS calls this kind of money income in respect of a decedent. It’s income the person earned but never paid tax on, such as final wages or bonuses paid after death.
Cost Basis, in Plain English
Cost basis is what an asset “cost” for tax purposes. When you sell, you pay capital gains tax on the difference between the sale price and your basis.
For most inherited property, basis resets to the value on the date of death. Here’s a simple example:
- Your mother bought shares for $50,000 decades ago, and they were worth $200,000 when she died.
- Your basis is $200,000, not $50,000.
- If you sell for $205,000, your taxable gain is $5,000.
Because it’s inherited property, the IRS treats that gain as long-term no matter how soon you sell. Some popular articles say otherwise, but the IRS publication is clear on this.
Three caveats keep this from being a free pass:
- Retirement accounts don’t get a step-up. Every dollar out of an inherited traditional IRA is taxed as income.
- The executor may pick a different date. For estates filing a return, an alternate valuation date six months after death can be used in some cases.
- Records matter. If you can’t document the date-of-death value, you may overpay later. Save the valuation statements now.
Should You Pay Off Debt First?
Sometimes, but not automatically. High-interest balances like credit cards and personal loans are usually the first thing I’d look at. Paying off a card charging well into the double digits is a guaranteed return that no portfolio can promise.
A low-rate mortgage is a different conversation. Merrill’s wealth strategists make the point that paying off a mortgage at a rate below 3% may not be the best use of the money. There’s also a liquidity question. Once cash goes into your house, getting it back out means a sale or a new loan. For some families, the peace of mind of owning the home outright is worth that trade. The point is to decide deliberately.
Build (or Rebuild) Your Emergency Reserve
If you don’t have a cash cushion, an inheritance is a good way to create one. A common guideline is three to six months of living expenses. Business owners, single-income households and people with irregular pay often want more. This money isn’t meant to earn much. Its job is to keep you from selling investments at a bad moment.
How to Invest an Inheritance Once the Groundwork Is Done
The most important step comes before you buy a single investment: build a full financial plan. The plan tells you how much income you need, and that answer shapes everything else. As David explains: “The most important piece of it is to create a full financial plan before you start structuring investments, so you know how much income you’ll have,” he says. “That’s going to decide whether you put the money into conservative vehicles that are more income-heavy, or into growth vehicles over the intermediate or long term. Once you create the plan, you can plug it in and invest in the market over time. Just dollar-cost average and do what prudent investing should do.”
Here’s how that plays out in practice:
For the long-term portion, I prefer low-cost, globally diversified portfolios rebalanced on a schedule. That’s how we manage money at Klyman Financial, because it keeps decisions tied to the plan instead of the headlines. Like David, I usually invest new money gradually rather than all at once. It puts the plan into motion without betting everything on a single day in the market.
If the inheritance frees up cash flow, it may also let you max out a 401(k), fund an IRA, or open a 529 plan for children or grandchildren.
Consolidate Accounts, but Carefully
Inheritances often leave people with a scattered collection of accounts. Pulling them together at one custodian makes the money easier to track, rebalance and eventually pass on. Just follow a few rules:
- Inherited IRAs must stay titled as inherited IRAs unless you’re the surviving spouse.
- Keep the date-of-death basis records attached to any securities you move.
- Before selling anything to simplify, check the tax cost first.
Update Your Own Estate Plan
An inheritance changes your net worth, and it may change who you need to protect. Ameriprise raises a point that’s easy to overlook. If the person who died was named in your documents as a beneficiary, power of attorney, trustee or executor, those documents need updating.
Review your will, any trusts and every beneficiary designation. This is also a good moment to ask what your own heirs would face. If you haven’t put an estate plan in place, do it now. The families who have the easiest time are the ones where everything was organized and written down before anyone needed it. You can see how we approach this on our estate planning services page.
Revisit Your Insurance
Inherited property changes what you need to insure:
- A house needs a policy in the right name, and a vacant home may need special coverage.
- Jewelry, art and collectibles may need to be scheduled separately.
- More assets can make you a bigger target for lawsuits, which is where umbrella liability coverage comes in.
Your life insurance needs may go up or down, too. If the inheritance already covers what a policy was meant to protect, you might need less.
Talk With Your Family
The hardest part of an inheritance usually isn’t the money. It’s the family. David has seen this play out many times: “The hard part when it comes to inheritance is typically the hairiness of families, and there’s usually a lot of contention,” he explains. “I kind of break it down into kids arguing over a teddy bear. It’s ‘Mommy loved me more,’ ‘Dad loved me more,’ so they wanted me to have the house. But the real fighting is not about the money. This is all the parents have left, and it’s about how much love a child felt from the person who has passed.”
When there is a will and an estate plan, the cleanest path is to follow it closely and let the process run its course. Some patterns come up often:
- Family businesses. The children who work in the business often receive a larger equity stake and a management fee, since they’re the ones taking it over.
- The family home. A child who has been living in the house or paying for it may end up with a larger share.
Those decisions belong in the estate documents, though, not in an argument at the kitchen table.
My own preference is simple: get in and out as cleanly and quickly as possible. If nobody is going to use the home, sell it, take the cash and split it. Trying to divide real assets among several people gets complicated fast. It leads to a lot of family drama at a time when everyone is already hurting.
One more thing to discuss at home. In many states, an inheritance kept in your name alone is treated differently from money mixed into joint accounts. Ask your attorney before commingling inherited money with marital assets.
Get Your Attorney, CPA and Advisor Working Together
A lot of mistakes happen in the gaps between professionals. The attorney settles the estate, the accountant files the return, and nobody connects either one to the investment plan.
If you’re not sure whether you need that kind of coordination, our guide to whether you need a financial advisor is a good place to start. Our financial planning service is built for exactly this kind of transition.
A Realistic Timeline for Your First Year
Frequently Asked Questions
Do I have to pay taxes on an inheritance?
Usually not on the inheritance itself. There’s no federal inheritance tax, and federal estate tax only applies to estates above $15 million in 2026. However, withdrawals from inherited traditional IRAs are taxable income, and five states tax some heirs.
How long do I have to withdraw money from an inherited IRA?
Most non-spouse heirs must empty it by the end of the tenth year after the year of death. If the owner had already started RMDs, you’ll also need annual withdrawals in years one through nine.
Should I use my inheritance to pay off my mortgage?
It depends on your rate, your cash reserves and how much you value being debt-free. High-interest debt usually comes first. A low-rate mortgage is a judgment call.
What’s the best way to invest an inheritance?
Build a financial plan first so you know how much income you need. Then match each portion to a goal. Keep short-term money in cash or Treasuries, and invest long-term money gradually in a diversified, low-cost portfolio.
Final Thoughts
Learning how to invest an inheritance really means learning what to do in the right order. Pause first. Understand what you have and the rules that come with it. Build a plan, and then invest with it, a little at a time. Some of the money may go to debt, some to a cushion, and some may never be invested at all. That’s not a failure. That’s the plan working.
If you’d like help thinking it through, schedule a conversation with David or me, in our Midtown office or by video.
This article is for general educational purposes and isn’t personalized financial, tax or legal advice. Please speak with qualified professionals about your situation.
