What to Do When You Inherit $1M–$5M

The first thing to understand: not all inherited assets are taxed the same

Most inheritors receive a mix of assets — a brokerage account, maybe a retirement account, life insurance, sometimes real estate. The tax treatment of each category is completely different, and getting it wrong costs real money.

The stepped-up basis — IRC § 1014

The most valuable thing you may have inherited isn't the assets themselves — it's the tax treatment attached to them. Under IRC § 1014, when you inherit non-retirement assets, your cost basis is reset to the fair market value at the decedent's date of death.²

What this means in practice: your parent may have bought $200,000 worth of Apple stock in 1995 that grew to $3.2M before they died. If they had sold it themselves, they would have owed approximately $703,000 in federal capital gains and NIIT taxes (23.8% × $3M gain). You inherit that stock with a $3.2M basis. You can sell the day after probate closes with zero federal capital gain tax on that $3M in appreciation.

Documentation is critical

The step-up only applies to the FMV at the date of death. For publicly traded securities, that date-of-death value is easy to document. For closely held business interests, real estate, or collectibles, you need a qualified appraisal within 6 months of death (a 6-month alternate valuation date election is available in some circumstances). If you can't document FMV, you can't prove your basis — and the IRS will assume a much lower number. Get appraisals done before you file anything.

Inherited IRAs: the exception that changes everything

Inherited retirement accounts — traditional IRAs, 401(k)s, SEP-IRAs — are "Income in Respect of a Decedent" (IRD). They get no step-up in basis. Every dollar distributed from a traditional inherited IRA is taxed as ordinary income in the year you receive it, at your marginal rate (32%–37% for most people in this wealth range).³

Since 2020, non-spouse beneficiaries must exhaust an inherited IRA within 10 years. And under T.D. 10001 (finalized 2024), if the original owner had already passed their Required Beginning Date, you also owe annual RMDs in years 1–9 — not just a lump sum at year 10. The penalty for missing a required distribution is 25% of the amount you should have withdrawn.

For detailed mechanics and distribution planning, see our Inherited IRA: 10-Year Rule and Distribution Planner. The strategic takeaway here: an inherited traditional IRA is a pre-tax liability embedded in your inheritance. A $1M inherited IRA is really worth $630,000–$680,000 after federal tax (at 32%–37%), and how you distribute it over the 10-year window significantly affects the outcome.

Life insurance: the cleanest asset to inherit

Under IRC § 101(a), life insurance death benefits paid to a named beneficiary are excluded from gross income.¹ You receive them with no income tax, no capital gains tax, no estate tax (if structured correctly). A $2M life insurance policy pays $2M to the beneficiary — not $1.3M after taxes.

There's one exception: if the policy was transferred to you for valuable consideration (the "transfer for value" rule), some of the proceeds may become taxable. This applies in business buy-sell contexts and is uncommon for ordinary family inheritances. Confirm with your estate attorney if you're not certain of the policy's history.

The 90-day action plan

The most important rule in the first 90 days is: don't make irreversible decisions under emotional pressure. The step-up in basis means you have time — you don't need to sell inherited assets immediately to avoid tax. The tax window is actually most favorable at the moment of inheritance and gets worse as assets appreciate.

Week 1–2: inventory everything

• Gather all account statements, insurance policies, property deeds, and any business interests as of the date of death
• Get date-of-death valuations for all non-publicly-traded assets (real estate, private company interests, collectibles, precious metals) — don't skip this even if you're not planning to sell
• Identify all inherited IRA accounts and their custodians — you'll need to re-title them as "Inherited IRA" within the first year
• Note whether any inherited IRA owner was past their Required Beginning Date (age 73+ for those born 1951–1959; age 75+ for born 1960+)

Month 1–3: tax and legal

• Work with an estate attorney to confirm the estate tax filing obligation (federal: over $15M gross estate per OBBBA; many states have lower thresholds — see state-specific rules)
• Order a Form 706 estate tax return if needed — due 9 months from date of death, with a 6-month extension available
• Establish your inherited IRA accounts at a custodian and calculate whether year-1 RMDs apply
• Decide whether to disclaim any assets — you have 9 months from date of death to execute a qualified disclaimer and redirect assets to other beneficiaries⁴

Month 3–6: plan the portfolio

• Model what the full inheritance looks like as part of your existing portfolio — asset allocation, concentration risk, tax efficiency
• Decide on inherited stock positions: hold (basis is stepped up, no urgency), sell for diversification (low/zero current tax, may make sense), or donate appreciated growth post-inheritance to a DAF
• Map out the inherited IRA distribution schedule — spreading distributions over 10 years rather than taking a lump sum in year 10 typically saves $100,000+ for a $1M account

Portfolio integration at the $2M–$20M level

An inheritance that doubles your net worth changes your entire financial picture. If you were previously at $1.5M and inherit $2M, you're now at $3.5M — suddenly in a bracket where estate planning, asset protection, and tax-efficient withdrawal strategies all apply in ways they didn't before.

Asset allocation reset

Inherited taxable accounts often arrive as concentrated stock (the decedent's individual holdings), older bond portfolios, or cash from a sold home. Your job is to integrate this into a coherent whole — not just add it to what you already have. A sudden $2M in a single stock (say, you inherited your parent's employer stock) creates a concentrated position requiring a deliberate plan. See our concentrated stock position guide for strategies: phased sales (stepping up your own basis over time), exchange funds, covered calls, or charitable vehicles.

Tax account mix matters now

If the inheritance includes both taxable and tax-deferred accounts, your asset location strategy changes. Bonds, REITs, and high-dividend assets belong in the inherited IRA (where interest/dividends aren't annually taxed). Growth stocks and equity ETFs belong in the taxable brokerage, where qualified dividends are taxed at preferential rates and step-up eliminates embedded gain at death. See our asset location optimizer.

State income taxes and residency

Several states have their own estate taxes with exemptions well below $15M (Massachusetts: $2M; Oregon: $1M; Maryland: $5M). If the decedent lived in one of these states, the estate may owe state estate tax even when no federal tax is due. Separately, inherited IRA distributions you take will be subject to your state's income tax — a consideration for high-tax state residents thinking about relocation. See our state income tax relocation guide.

Interactive: Inheritance Tax Impact Calculator

Five mistakes wealthy inheritors make

1. Selling inherited assets immediately without understanding step-up

Brokers sometimes advise newly inherited clients to "consolidate" their accounts — which often means selling all inherited positions and buying a model portfolio. If the decedent held appreciated stocks for decades, the step-up in basis means there's no tax reason to hurry. Selling now vs. in two years carries no tax penalty on the original gain. But if you sell and repurchase into a managed account, you'll pay capital gains on any subsequent appreciation from a higher cost basis — not a lower inherited one. Take the time to understand your basis before you make any moves.

2. Taking inherited IRA distributions wrong

The two common errors are opposite: (a) taking the whole amount in year 10 — which often pushes a $600K–$1M distribution into 37% brackets — or (b) ignoring the annual RMD requirement when the original owner was past their Required Beginning Date (a 25% excise tax penalty). The optimal strategy is usually spreading distributions evenly across the 10 years, or front-loading if you expect your income to rise, or coordinating distributions with a Roth conversion window (ages 62–72 if you're older). See the inherited IRA guide for a full distribution planner.

3. Failing to document the date-of-death FMV

This seems procedural but costs real money. For publicly traded securities, brokers pull the date-of-death prices automatically. For real estate, collectibles, business interests, and restricted stock, you need a qualified appraisal. If the IRS later questions your basis and you have no documentation, they'll impute a much lower number. Get the appraisals done even for assets you intend to hold indefinitely — you'll need them eventually.

4. Concentrating in inherited positions too long

It's emotionally hard to sell inherited stock, especially a position your parent held for 30 years. But if a $2M single-stock concentration represents 60% of your net worth, that's a financial risk regardless of the story attached to it. The step-up in basis removes the tax barrier to diversification. Use it — or at least use a hedging strategy (collar, exchange fund) to reduce downside risk while you decide.

5. Ignoring state-level estate taxes

The federal estate tax exemption is $15M per person (permanently, under OBBBA). But over a dozen states have separate estate taxes with thresholds as low as $1M (Oregon) or $2M (Massachusetts, Rhode Island). If the decedent lived in one of those states, the estate may owe state estate tax that doesn't appear on the federal return. This is often a surprise to heirs expecting to receive a full amount. Confirm the decedent's state of domicile and any multi-state property exposure before distributions are made.

When a fee-only advisor adds the most value

The moment you inherit significant assets is one of the highest-leverage times to get professional financial advice — not because you need help "investing," but because a single decision about inherited IRA distribution timing, basis documentation, or concentrated stock positioning can affect your tax bill by six figures.

Specifically, a fee-only advisor who works with inheritors should help you:

• Model the after-tax value of each asset category and build an integrated picture
• Design an inherited IRA distribution schedule that minimizes total income tax over the 10-year window, coordinated with your other income sources
• Evaluate whether concentrated inherited stock positions should be held, hedged, or gradually liquidated — without a product commission influencing the recommendation
• Integrate the inheritance into your existing estate plan — updating beneficiary designations, trust structures, and gifting strategy to reflect your new net worth
• Review whether you've crossed thresholds that trigger new planning needs: asset protection (LLCs, umbrella, DAPTs), IRMAA exposure, AMT triggers, or the wisdom of establishing a donor-advised fund

Sources

1. IRS Topic 422: Life Insurance Proceeds — IRC § 101(a) excludes life insurance death benefits paid to a named beneficiary from gross income. Interest earned on delayed benefit payment is taxable; the principal death benefit is not.
2. IRS Topic 703: Basis of Assets — IRC § 1014 stepped-up basis at death: inherited property takes a fair market value basis equal to the date-of-death value, eliminating all unrealized capital gain and § 1250 recapture liability. For alternate valuation date elections, see IRC § 2032.
3. IRS Publication 559: Survivors, Executors, and Administrators — Income in Respect of a Decedent (IRD): inherited retirement accounts (traditional IRAs, 401(k)s, SEP-IRAs) are IRD items; distributions are taxable as ordinary income to the beneficiary in the year received. No step-up in basis applies.
4. IRS: Disclaimer of Inherited Property — IRC § 2518 qualified disclaimer: a beneficiary may disclaim inherited property within 9 months of the transfer, causing assets to pass as if the disclaimant had predeceased the original owner. Used to redirect assets to lower-bracket beneficiaries or to fund a bypass trust.

Tax rules verified as of May 2026. IRC § 1014 step-up: IRS Topic 703. Life insurance exclusion: IRC § 101(a), IRS Topic 422. Inherited IRA rules: IRS Pub. 559, T.D. 10001 (finalized July 2024), SECURE 2.0 § 107. State estate tax exemptions: state revenue department publications (verify current year — thresholds change). OBBBA federal estate exemption $15M: enacted July 2025. Consult a qualified tax attorney and CPA for your specific situation.