What is an Inheritance?

Losing a loved one can be a painful experience, full of emotional ups and downs. In the midst of mourning, you may also need to understand how assets left to you by your loved one, called an inheritance, work.

An inheritance is any money or property that someone receives from a person who has died. Inheritance can be complicated by the deceased person’s estate plan. In some cases, the inheritance needs to go through the court system, for example.

How does an inheritance work?

People can inherit property, such as a house, a vehicle, and other belongings from someone who died. They can also inherit investment and retirement accounts, a business, patents that the deceased person owned, and nearly anything else.

An estate plan is a collection of legal documents that lets someone make decisions about what happens after they die. The person gets to choose their beneficiaries — the people who will inherit their money and property — such as their spouse or their children. Some people leave assets to friends or a favorite charity. An estate plan also allows the person to detail decisions such as who raises their children if they die. When someone dies without an estate plan, the state makes decisions for them.

There are two main types of estate planning documents that people use.

When a person draws up a will, they choose someone they trust to be their executor after they die. The executor’s job is to pay any outstanding bills or debts and then distribute the person’s remaining assets according to their wishes. (Some assets, like retirement accounts and life insurance policies, aren’t covered by a will and pass directly to the beneficiary.) A will usually goes through probate, which is a legal process. A court ensures that the will is valid, makes sure that any debts are paid, and guides the executor to distribute the assets properly. The contents of a will become public.

Some people have a trust, in which they designate a third party, called a trustee, to manage their assets while they’re alive and after they die. One advantage of a trust is that beneficiaries inherit assets without going through the court system. A trust also allows for more flexibility than a will. Someone can direct their assets to be distributed to their beneficiaries in stages, for example, or for a specific purpose such as college expenses. Trusts are a great option for someone who has a complex estate or a blended family, because assets are organized under one umbrella. Unlike a will, a trust doesn’t become public.

Some people have both a will and a trust. In that case, they must choose both an executor and a trustee. They can choose a different person for each role, or they can choose the same person to perform both roles.

Can you inherit debt?

In the US, people generally can’t inherit a deceased person’s debt. There are some exceptions, however. You certainly don’t want to pay a debt that isn’t yours — or ignore one that is — so it’s important to understand the difference.

Lenders and creditors have a specific period of time to bill the estate for any money that the deceased owed them for things like medical expenses and taxes. They usually need to make a claim within a few months of the person’s death. If the estate doesn’t have enough money to pay the debts, they go unpaid.

However, a living person can be responsible for certain debts such as:

• a joint account, such as a joint credit card. If you shared a credit card with someone who died, you’ll need to pay off the balance yourself.
• a co-signed loan, such as a personal loan, a car loan, or certain student loans that were co-signed. If you co-signed a loan with someone who passed, the remaining balance may now be your responsibility.
• your deceased spouse’s debt if you live in a community property state. In community property states like California, any debt your spouse took on during the marriage is also your debt, even if you didn’t sign on for the debt. So if your spouse dies, you’ll be expected to pay it off.

Inheritance tax

When property exchanges hands after someone dies, a tax may be charged, but not always.

An estate tax is a tax that the deceased person’s estate pays for the right to transfer property to his or her beneficiaries. Very few estates need to pay this tax. As of 2026, if a person’s estate is worth less than $15 million (or a married couple’s estate is valued at less than $30 million), the estate is exempt from the federal estate tax. If the estate exceeds $15 million (or $30 million for a couple), the estate may be taxed at up to 40%.

The State of California does not charge beneficiaries a state inheritance tax or estate tax (although some states do). However, if someone inherits an income-producing asset — such as a rental property or an investment account that pays dividends — they will pay California state income tax on any income that asset generates.¹

Types of inheritance

Heirs usually don’t receive large amounts of cash. It’s much more common to inherit property and financial accounts. Here are some typical situations.

Inherited a house

If you inherit a home, you have some options. You can keep it, rent it out to generate income, or sell it. Before making your move, it’s important to get your bearings.

Check the homeowners insurance.

If the deceased had a will, probate could take months. But if a home is unoccupied for 30 to 60 days, many standard homeowners policies become void. If no one can move into the house right away, speak to the insurer about getting a vacancy endorsement or a separate vacant homeowners policy.

Keep the home maintained.

Make sure the utilities continue running and keep the lawn maintained, so the home looks occupied. Otherwise pipes may freeze or thieves may assume the home is an easy target.

Find out if there’s a mortgage (and which kind).

If you inherit a home with a mortgage, the type of mortgage matters.

With a conventional mortgage, you can simply take over the mortgage payments until you decide what to do with the home. You don’t need to qualify for a new home loan. (If the estate needs to go through probate, the estate will make mortgage payments while the estate is being settled.)

If the deceased homeowner has a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, you’ll need to think more quickly. The lender will send you a notice, and you’ll then have 30 days to decide whether to repay the amount due to purchase the home. You’ll then typically have about six months to repay it, either with your own funds, by getting your own loan, or by selling the home. (Otherwise, you’ll need to relinquish the home to the lender.)

In some cases, the reverse mortgage balance might exceed the home’s market value. But there’s good news: heirs can pay just 95% of the home’s current appraised value, and FHA insurance covers the rest.

Pay taxes if you sell the home and profit.

If you inherit a home, then sell it for a profit, you’ll pay capital gains tax. Happily, you’ll only pay tax on the difference between the fair market value on the date you inherited the home and the sale price. So if the market value was $450,000 when you inherited the home and you sell it for $480,000 later that year, you’ll only pay tax on the $30,000 difference. The federal capital gains rates for 2026 are 0%, 15%, or 20% depending on your taxable income. High earners will pay a 3.8% net investment income tax as well.

Inherited IRA or other retirement account

When someone opens a retirement account, they designate a beneficiary (or beneficiaries) who will inherit the account when they die. The beneficiaries listed in that account paperwork override any will, so the retirement account doesn’t need to go through probate, and the financial institution generally transfers funds directly to the beneficiary’s account.

Inherited retirement accounts can be complicated, however, due to required minimum distributions and other restrictions. Surviving spouses who inherit a retirement account have more flexibility in when they must withdraw funds than non-spouse beneficiaries, for example.

So if you inherit a retirement account, make sure you understand the structure of the account and all the variables that go into your unique situation. A financial advisor can help you understand withdrawal rules, tax implications, and other considerations.

Early Days: Where to Keep Funds

If you inherit money, you might want to take some time to decide how to use it. In the meantime, put it somewhere safe but accessible, perhaps in a high-yield savings account. If you won’t need the money for a while, consider opening a share certificate, an account that earns a locked-in interest rate.

What to do with an inheritance

If you receive an inheritance, you might be tempted to buy a new car or add a swimming pool to your backyard. But avoid rushing into decisions. When losing a loved one, emotions can run high, which may affect your judgment.

In most cases, you don’t need to make any decisions immediately. So take some time to grieve, then carefully consider your options so you can use your inheritance to get ahead. Consider speaking to a financial advisor, who can help guide you.

You might use your inheritance to:

• pay off debt. Not all debt is bad. A mortgage can help you build financial security, for example, as will an interest-free business loan. So focus on paying off credit card debt and high-interest loans.
• create an emergency fund. It’s best to have 3 to 6 month’s worth of expenses saved as a financial cushion. Consider opening a dedicated savings account for this purpose.
• save for your goals. Would you like to build a college fund for your kids? Take a dream vacation? Use your inheritance to work toward those goals.
• invest, whether in financial vehicles, a rental property, or another investment that suits you. Investing a portion of your inheritance now will set you up for a comfortable retirement later in life.
• Have some fun — at least with some of it. Your loved one would want you to get some enjoyment out of your inheritance. So prioritize paying off debt and building financial security, then treat yourself.

You’ll likely want to do a mix of all of the above. A financial advisor can help you define your goals and use your inheritance to work toward them.