What to Do When You're Expecting an Inheritance

A plain-language guide to the tax rules, the decisions you'll face, and how to make the most of what you receive.

In this Article:

• Do You Have to Pay Taxes on an Inherited Brokerage Account?
• Understanding the Step-Up in Basis
• Are Inherited Mutual Funds Taxable?
• How Are Inherited Traditional IRAs Taxed?
• Are Inherited Roth IRAs Taxable?
• Do You Pay Taxes on Inherited Real Estate?
• Is Life Insurance Taxable When You Inherit It?
• Estate Taxes: Federal and New York Rules
• Quick Reference Guide
• Frequently Asked Questions

When a loved one passes away, questions about taxes on inherited assets tend to surface quickly, and they often create anxiety that is bigger than the actual tax bill.

One of the most common questions we hear is: 

"Do I have to pay taxes on an inherited brokerage account?"

The answer is usually no.

Most inherited brokerage accounts receive what's called a step-up in basis, which means the value of the investments is adjusted to their fair market value on the date of death. As a result, beneficiaries generally do not pay taxes simply because they inherited the account, and they may owe little or no capital gains tax if the investments are sold shortly afterward.

The good news is that for most people inheriting most assets, the tax picture is more manageable than they expect. The rules vary significantly depending on what type of asset you're inheriting, so it's worth understanding each one clearly.

To make this concrete, we'll walk through the Smith family. John passed away recently, leaving behind a range of assets to his wife Anne and their two adult children, Jessica and Ryan. Their situation covers many of the inheritance questions families commonly face.

Inherited Brokerage Accounts: 

Do You Have To Pay Taxes?

This is the question we hear most often: do you have to pay taxes on an inherited brokerage account?

The short answer is not immediately, and probably less than you think when you do.

When Jessica and Ryan inherited John's brokerage account, which held stocks, bonds, and mutual funds, something important happened automatically. The cost basis of every asset in that account was stepped up to the fair market value on the date John died.

Here's why that matters.

John may have bought shares of a mutual fund 20 years ago for $50,000 that were worth $200,000 when he passed away. Under normal circumstances, selling those shares would trigger capital gains tax on the $150,000 of growth.

But because Jessica and Ryan inherited the account, their cost basis resets to $200,000. If they sell the shares immediately, there is no taxable gain at all.

The Step-Up in Basis

The step-up in basis effectively erases the capital gains that accumulated during the original owner's lifetime. It is one of the most valuable and least understood provisions in the tax code for people inheriting taxable investment accounts.

Many people search for phrases like "inherited brokerage account tax" or "brokerage account inheritance tax" because they assume the IRS immediately taxes inherited investments. In reality, most inherited brokerage accounts receive a step-up in basis, which often eliminates years or even decades of unrealized gains.

When Jessica and Ryan eventually sell inherited securities, they will owe taxes only on gains above the stepped-up value. If they hold the investments for more than one year before selling, those gains are generally taxed at long-term capital gains rates.

Are Inherited Mutual Funds Taxable?

This is another common question.

Inherited mutual funds are generally not immediately taxable. Like stocks, ETFs, and bonds held in a taxable brokerage account, inherited mutual funds typically receive a step-up in basis to their fair market value on the date of death.

If Jessica and Ryan sell inherited mutual funds shortly after receiving them, they may owe little or no capital gains tax. Taxes generally apply only to growth that occurs after the inheritance.

The same treatment typically applies to:

• Mutual funds
• Exchange-traded funds (ETFs)
• Individual stocks
• Corporate bonds
• Treasury securities

Inherited Traditional IRAs: 

Taxes Are Coming, But You Have Time

The rules for inherited IRAs changed significantly with the SECURE Act in 2020, and many families are still catching up.

When Jessica and Ryan inherited John's traditional IRA, distributions became taxable as ordinary income, just as they would have been for John.

The 10-Year Rule

Under current rules, most non-spouse beneficiaries must withdraw the entire balance of an inherited traditional IRA within 10 years of the original owner's death.

They do not have to take equal distributions each year, but the account must be empty by the end of year ten.

This creates both a challenge and an opportunity.

The challenge is that large distributions can push Jessica and Ryan into higher tax brackets. The opportunity is that they have flexibility to manage when and how much they withdraw.

A few other things worth knowing:

• There is no early withdrawal penalty on inherited IRAs, even if the beneficiary is under age 59½.
• Required distributions generally begin after inheritance according to IRS rules.
• Spouses have additional flexibility and may be able to treat the inherited IRA as their own.

Planning Opportunity

The 10-year window for inherited IRA distributions is also a 10-year tax-planning window.

Taking larger distributions during lower-income years and smaller distributions during higher-income years can significantly reduce the total tax paid over time.

Inherited Roth IRAs: 

The Tax-Free Inheritance

Inheriting a Roth IRA is about as favorable as it gets from a tax standpoint.

Because John had held his Roth IRA for more than five years, Jessica and Ryan can withdraw the funds tax-free.

The 10-year rule still applies. They must empty the account within 10 years of John's death, but unlike a traditional IRA, qualified withdrawals generally create no income tax liability.

For beneficiaries who do not immediately need the money, allowing the account to continue growing tax-free for as long as possible within the 10-year window can be an effective strategy.

Inherited Real Estate: 

The Step-Up Applies Here Too

The Smith family home was appraised at $500,000 when John passed away.

John originally purchased the home for $250,000.

That $250,000 of appreciation would have created a taxable gain if John had sold the home during his lifetime.

Instead, the property's basis stepped up to $500,000 at death.

If Anne, Jessica, or Ryan sold the property immediately, there would be little or no capital gains tax because the sale price and basis would be roughly the same.

If they hold the property and later sell it for more than $500,000, they would owe taxes only on appreciation above the stepped-up value.

Life Insurance and Business Interests

Life Insurance Proceeds

Life insurance paid directly to a named beneficiary is generally received income-tax-free.

Jessica and Ryan would receive the death benefit without owing federal income tax on the proceeds.

Inherited Business Interests

If John owned shares in a family business or private company, those interests would also generally receive a step-up in basis.

If Jessica or Ryan later sold those shares, they would owe capital gains tax only on appreciation occurring after John's death.

What About Estate Taxes?

Estate taxes are a legitimate concern for high-net-worth families, but they apply to fewer people than most assume.

The federal estate tax exemption for 2025 is $13.99 million per individual. Estates below that threshold owe no federal estate tax.

New York has its own estate tax with a much lower exemption amount of $7.16 million in 2025.

New York's estate tax system also includes a "cliff" provision. If an estate exceeds the exemption by more than 5%, the entire estate may become subject to New York estate tax, not just the amount above the threshold.

For New York families with significant assets, understanding this rule can be an important part of estate planning.

Quick Reference

• Brokerage accounts: Receive a step-up in basis. No immediate tax. Capital gains apply only to appreciation above the stepped-up value.

• Traditional IRAs: Withdrawals are taxed as ordinary income. Most beneficiaries must empty the account within 10 years.

• Roth IRAs: Qualified withdrawals are generally tax-free. The account must typically be emptied within 10 years.

• Real estate: Receives a step-up in basis. Capital gains apply only to appreciation after inheritance.

• Life insurance: Death benefits are generally income-tax-free to beneficiaries.

• Estate taxes: Apply only to larger estates. New York's estate tax cliff makes planning especially important.

Frequently Asked Questions

Do I Have to Pay Taxes on an Inherited Brokerage Account?

Usually not. Most inherited brokerage accounts receive a step-up in basis, meaning beneficiaries generally do not pay taxes simply for inheriting the account.

Are Inherited Mutual Funds Taxable?

Inherited mutual funds are generally not immediately taxable. Taxes are usually owed only on gains that occur after inheritance.

What Is an Inherited Brokerage Account Tax?

There is no special inherited brokerage account tax. Tax consequences depend on whether investments are sold and whether gains occur after the inherited value is established.

What Is the Difference Between an Inherited Brokerage Account and an Inherited IRA?

Inherited brokerage accounts typically receive a step-up in basis. Inherited traditional IRAs do not; distributions are generally taxed as ordinary income.

Is There an Inheritance Tax in New York?

New York does not have an inheritance tax. It does, however, impose an estate tax on qualifying estates before assets are distributed to beneficiaries.

Final Thoughts

Inheriting assets comes with real tax considerations, but for most families the picture is more favorable than feared.

The step-up in basis alone can eliminate a lifetime of unrealized gains in taxable investment accounts. Roth IRAs can pass to beneficiaries tax-free. Even traditional IRAs, while taxable, provide flexibility through the 10-year distribution window.

The families who navigate this well are the ones who understand the rules before making major financial decisions.

If you're in the middle of receiving an inheritance, or simply want to ensure your own estate plan is structured thoughtfully, we'd be glad to help.

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Disclosures

The information provided is for educational and informational purposes only and does not constitute investment advice, and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation. Tax laws are subject to change. The information contained herein is based on current law as of the date of publication and may not reflect subsequent changes.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The Pitti Group Wealth Management, LLC is a registered investment advisor. Advisory services are only offered to clients or prospective clients where The Pitti Group and its representatives are properly licensed or exempt from licensure. For additional information, please visit thepittigroup.com.