Takeaways
- Inheritance is the transition of assets from a deceased person's estate to a beneficiary.
- By 2045, Millennials are estimated to inherit $27 trillion and Gen X $40 trillion.
- There is no federal inheritance tax; only six states levy an inheritance tax.
- Most inheritances are orderly passed down through a last will and testament.
- Inheritance can consist of various assets, including cash, houses, retirement savings, stocks, bonds, art, and heirlooms.
What Is an Inheritance?
An inheritance is a set of assets you receive upon the death of a friend or family member. Inheritance can take the form of cash, investments in stocks and bonds, real estate, cars, vacation properties, art, or jewelry.
You can receive inheritance as a beneficiary through a will. Alternatively, you can be named beneficiary in someone’s account, such as a 401(k)-retirement plan, stock brokerage account, or health savings account. In this case, the assets flow to you automatically if the account holder dies.
An inheritance can be a financial windfall if you need to pay off your student loans, buy your first home, or increase your savings and investments. Depending on your relationship with the deceased and how you receive inheritance, you might need to pay inheritance tax (more below).
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Estimated Wealth to be Inherited Through 2045:[1]
- Gen X: $30 trillion
- Millennials: $27 trillion
- Gen Z: $11 trillion
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How Inheritance Works
Inheritance is a collection of items, property, or money you leave to an individual, also known as a beneficiary, when you die. You can assign multiple beneficiaries if you would like to. How an inheritance is disbursed depends on what type of estate plan you have in place.
- $46,200 is the average inheritance received by American households, according to the Federal Reserve.[2]
If you have a will, the executor will allocate your assets according to the document. Whether or not your estate goes through probate will depend on the type of assets, the total value of your estate, and the state you live in. To avoid probate entirely, you can use a trust to hold and transfer your assets upon death.
If you do not have a will, all your assets are divided based on your state's laws. Each state has its own established process to determine where your assets will go, whether to your surviving spouse, children, parents, or other relatives. Your assets are frozen until the probate court can review and settle your estate.
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5 Common Forms of Inheritance
1. Cash and Cash Equivalents: Cash is likely the most common form of inheritance. The best part about receiving money is knowing exactly what it is worth. Unlike other assets, you can use or save it immediately upon receipt.
2. Real Estate: Real estate tends to hold its value well over time, making it a relatively safe investment. It can come in the form of primary or vacation homes, office buildings, rental properties, or tracts of land. You can sell, use, or keep property as an investment if you inherit property.
3. Roth IRAs: Post-tax dollars fund Roth IRAs, which means tax has already been paid on the contributions. You can withdraw contributions and earnings from inherited Roth IRAs without paying taxes (unless the Roth IRA is less than 5 years old).[3] Inherited Roth IRAs require minimum distributions, and you must liquidate the account within 10 years. However, you could be subject to taxes and penalties if you do not take the minimum distribution.
4. Traditional IRAs: Traditional IRAs are funded with pre-tax dollars. As a result, a beneficiary will pay tax on any distributions based on the beneficiary's tax bracket at the time of withdrawal. This account is also subject to required minimum distributions.
5. Brokerage Accounts: These investment accounts can be transferred to the beneficiary and often include a beneficiary designation within the account itself. Because these accounts contain investments like stocks, bonds, CDs, mutual funds, and ETFs, they will continue growing if left alone in a bull market. Alternatively, the beneficiary could sell the investments and take the cash. Any withdrawal or disbursement may be taxed.
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How Is Inheritance Taxed?
The U.S. does not have a federal inheritance tax. However, a few states levy inheritance tax. If the deceased lives in Nebraska, Iowa, Kentucky, Maryland, New Jersey, and Pennsylvania, you could pay 0-16% inheritance tax.[4]
These taxes are assessed based on where the deceased lived, not where the beneficiary lives. For example, if your mother lives in Pennsylvania when she dies, even if you live in Texas, you will be subject to inheritance tax. Each state may have exemptions based on the type of asset, value of the inheritance, and your relationship to the deceased.
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How the Probate Process Works
The purpose of the probate court is to oversee the disbursement of a deceased person's estate. There is no set time for how long the probate process takes. Having a will simplifies the matter, but those cases take months to process. More complicated estates can take several months, or even years, to settle. Here’s how it works:
- Opening Probate: Probate starts once the death is recorded with the court. This requires the submission of an official death certificate.
- Authenticating the Will: If the deceased had a last will and testament, the court will determine its validity. Once validated, the court will appoint the executor based on the document. If no executor is listed, the court will assign one based on state laws.
- Notification: The executor will notify family, friends, creditors, and other interested parties who may have a financial claim of the death.
- Inventory: Taking inventory includes noting all bank accounts, debts, insurance policies, and property and reporting to the probate court. These assets will be used to settle the deceased's estate.
- Distribution: The executor uses the assets to close out all accounts and settle debts on behalf of the deceased. The remaining assets are allocated to the beneficiaries listed in the will. If there is no will, the remaining property will be distributed based on state law.
- Dissolution: After settling all assets and accounts, the executor will file with the court to dissolve the estate.
Smart Summary
Inheritance is the assets that are bequeathed to a beneficiary by a grandparent, parent, spouse, or family member who dies. These assets are usually valuable, including cash, investments, jewelry, and real estate. Receiving an inheritance is often more complicated than you would expect. Inheritance taxes will be applied based on the transferred asset composition and your liquidation preferences. Transferring an inheritance through a last will and testament will simplify the process.
(1) Cerulli Associates. Cerulli Anticipates $84 Trillion in Wealth Transfers Through 2045. Last Accessed January 13, 2025.
(2) Federal Reserve. Wealth and Income Concentration in the SCF: 1989 – 2019. Last Accessed January 13, 2025.
(3) Internal Revenue Service. Retirement Topics – Beneficiary. Last Accessed January 13, 2025.
(4) Tax Foundation. Estate and Inheritance Taxes by State, 2023. Last Accessed January 13, 2025.
