This article is part of the Biblically Informed Framework for Retirement Stewardship (BIFRS). It was originally published in November 2022 and updated in June 2026.
An increasing number of people in their 50s, 60s, and 70s are receiving inheritances as a result of the largest generational transfer of wealth in American history—an estimated $84 trillion in assets changing hands over the coming decades. Inheritances can come in many forms: possessions, real estate, financial assets in taxable and tax-deferred accounts, a small business, or life insurance proceeds.
Some studies show that one in three households that receive an inheritance spends it quickly. But as Christians, when we receive a large lump sum, we must wisely steward it, remembering that it is God’s money entrusted to us, not ours to consume thoughtlessly (Ps. 24:1). Because there are real tax implications and many options, it is often wise to seek professional advice before making significant decisions, especially for larger inheritances.
Taxes: what you need to know
Estate taxes
The estate tax is paid by the deceased’s estate, not the recipient. In 2026, the federal estate tax exemption is $15 million per individual ($30 million for a married couple), under the One Big Beautiful Bill Act signed July 4, 2025. This exemption is now permanent and indexed for annual inflation. The tax rate on amounts above the exemption remains 40%. For the vast majority of families, no federal estate tax will be owed. Some states impose their own estate taxes at lower thresholds, so if you are dealing with a large estate in a state like Massachusetts, Oregon, or Washington, state-level taxes may apply.
Inheritance taxes
There is no federal inheritance tax. However, six states impose an inheritance tax at the state level: Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland is unique in having both an estate tax and an inheritance tax. If you receive an inheritance in a state with an inheritance tax, your liability depends on your relationship to the deceased and the size of the bequest; spouses are typically exempt, and close family members often receive favorable rates.
Income taxes on inherited assets
Inherited tangible property (house, land, jewelry) has no immediate income tax consequence. But if you sell real property you have inherited, the cost basis is the fair market value at the date of death (the “stepped-up” basis), not the original purchase price. This means that if you inherit a home worth $400,000 and sell it promptly for $410,000, you owe capital gains tax only on the $10,000 appreciation, not on the full $400,000 gain accumulated over the original owner’s lifetime. This is one of the most valuable provisions in the tax code for heirs.
Inherited financial assets in taxable brokerage accounts also receive a stepped-up basis at the date of death. Dividends and interest generated going forward are taxable in your hands at your rates. Qualified dividends and long-term capital gains are taxed at preferential rates (0%, 15%, or 20% depending on income); ordinary dividends and bond interest are taxed at your marginal income tax rate.
Inherited retirement accounts—IRAs, 401(k)s, etc.
Inherited retirement accounts are where the rules are most complex and the tax implications most significant. The rules differ depending on your relationship to the deceased.
Surviving spouses have the most flexibility and are classified as “eligible designated beneficiaries.” They can roll the inherited IRA into their own existing IRA, keep it as an inherited IRA with favorable distribution rules under SECURE Act 2.0 (including the use of the more favorable Uniform Lifetime Table for RMDs), or, in some circumstances, disclaim it. Spouses also receive the most favorable treatment for RMD timing and calculation. I cover this in detail in the related article, “Surviving Spouses’ Options for Inherited IRAs.”
Non-spouse beneficiaries (adult children, grandchildren, siblings) who inherit an IRA from someone who died after December 31, 2019, are generally subject to the 10-year rule: the entire account must be fully distributed by the end of the tenth year after the original owner’s death. Under IRS final regulations effective 2025, if the original owner had already begun taking RMDs before their death, non-spouse beneficiaries must also take annual RMDs during years 1–9 of the 10-year period. Failure to do so triggers a 25% excise tax (10% if corrected within two years).
This “accelerator” effect compresses income tax into a shorter window and can push beneficiaries into higher marginal tax brackets. A child inheriting a $500,000 traditional IRA may face $50,000+ per year in taxable distributions, potentially at 24% or 32% rates. Strategic withdrawal planning—taking more in lower-income years and less in higher-income years—can meaningfully reduce the lifetime tax bill.
It’s important to note that, beginning in 2026, if you have inherited a traditional IRA and are age 70½ or older, Qualified Charitable Distributions (QCDs) may be available from the inherited IRA. The 2026 QCD limit is $111,000 per individual. Since QCDs are excluded from taxable income entirely (bypassing both the new 0.5% AGI floor and the 35% benefit cap for itemized charitable deductions under the OBBBA), they are especially advantageous in 2026 for charitably inclined beneficiaries.
What to do with the money
Build or strengthen an emergency fund
If your emergency reserve is thin, setting aside three to six months of expenses in a liquid, accessible account is the first priority. This is true of any windfall—it doesn’t require much deliberation.
Pay down high-interest debt
Paying off high-interest debt—credit cards, personal loans—is a guaranteed, risk-free return equal to the interest rate. If your interest costs exceed what you can safely earn in low-risk investments (money market funds, short-term Treasuries, CDs), debt payoff is the better use of capital.
Paying off a fixed-rate mortgage is more nuanced: it offers a guaranteed, after-tax return equal to the mortgage rate, but requires giving up investment liquidity. Whether this makes sense depends on the rate, your tax situation, your investment horizon, and your personal risk tolerance.
Strengthen retirement savings
If your retirement savings are underfunded, an inheritance offers a valuable opportunity. You can contribute up to $7,000 per year to a traditional or Roth IRA in 2026 ($8,000 if 50 or older)—but only if you have earned income to match. Inherited funds themselves cannot be contributed directly to an IRA unless you have equivalent earned income.
For employer-sponsored plans (401k, 403b), you cannot contribute lump-sum inherited funds. You could, however, maximize your paycheck deferral for the remainder of the year and use the inheritance to cover living expenses in the interim.
Consider an annuity for guaranteed future income
If retirement income is a concern, a simple immediate income annuity or deferred income annuity purchased outside a retirement account can provide a guaranteed income stream for life. Current interest rates remain meaningfully higher than in the 2010s, making annuity payouts more attractive than a decade ago. Keep it simple: look for low-cost, straightforward products from highly-rated carriers. Avoid complex variable or indexed annuities with high embedded fees.
Consider long-term care coverage
An inheritance may represent an ideal opportunity to fund long-term care coverage—either traditional LTC insurance or a hybrid life/LTC policy funded with a single premium. LTC costs in 2026 are substantial: assisted living averages $65,000 per year nationally, and nursing home care averages $118,000–$135,500 per year. Planning for this before it is needed is one of the most meaningful uses of a windfall.
Consider giving
When we receive an inheritance, it is a natural time to think about generosity—both in gratitude for what was received and in faithfulness to the stewardship principle that everything belongs to God. Giving to your church, a ministry you care about, or charitable causes you value—while you are alive and can see the impact—is a form of faithfulness that honors the steward-giver who left the inheritance.
In 2026, QCDs from IRAs (up to $111,000 per person) and direct charitable contributions both offer tax advantages, though the mechanics differ significantly under the new OBBBA charitable deduction rules. A financial advisor can help structure giving most efficiently.
Above all—don’t rush it
Unless there is a compelling reason to act immediately (such as paying off an urgent debt or avoiding a large RMD penalty), most financial decisions following an inheritance benefit from a period of reflection. Give yourself 60 to 90 days before making major commitments. Consult a fee-only financial planner, particularly for larger inheritances. And remember that the best stewardship of an inheritance honors both the giver who worked to accumulate it and the God who owns it all.