Inheritance: Options, Taxes, and Checklist


Whether you have inherited money or received another kind of financial windfall, we offer comprehensive investment help and guidance that's right for you.

Let us help you manage an inheritance.

Although you may be thinking of how to spend your inheritance, you may want to consider how to invest your inheritance instead. You may get more from the inheritance in the long run if you apply it to your retirement savings, invest your inheritance, or pay off debts. A financial advisor can help you make a financial plan that will make the most of your inheritance.

Regardless of your plans, you don't have to decide what to do with your inheritance right away. It may be a good idea to put the money in a money market account or an FDIC-­insured account (such as a savings account or CD) while you take some time to decide.

If you would like some help figuring out what to do with an inheritance, Schwab is here for you. With a wide variety of investment options and a highly qualified team of Financial Consultants nationwide, we can provide comprehensive investment help and personalized guidance in a way that's right for you.

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Inheriting a retirement plan.

IRA and 401(k) inheritance rules differ depending on whether the beneficiary is a spouse of the original account holder. This is because a surviving spouse may take their deceased spouse's IRA as their own IRA or as an "inherited" IRA, while non-spouses must take the IRA as an "inherited" IRA. 

In addition, there are different rules for Inherited IRA withdrawals depending on whether the beneficiary is considered an Eligible Designated Beneficiary (spouse or minor child of the original account holder, or an individual that is disabled, chronically ill or no less than 10 years younger than the original account holder), Designated Beneficiary (most other individuals), or Non-Designated Beneficiary (trusts and organizations).

Regardless of the type of retirement plan you inherit and your relationship to the decedent, there are plenty of rules you will need to become acquainted with. Learn more about your options and the rules for withdrawing funds from inherited retirement accounts, or talk to a Schwab Financial Consultant to make a plan for your unique situation.

We recommend speaking to your tax and legal advisor before taking any steps that would lead to any financial or tax ramifications.

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Inheriting under a will or revocable living trust.

When someone passes away, their executor must administer their estate. A significant part of administering the estate is paying the decedent's debts, expenses, and taxes. Generally, once all debts, expenses, and taxes have been paid, the executor will then distribute the remaining assets to beneficiaries according to the terms of the will or the revocable trust.

If assets pass under a will, the assets will generally go through probate. Probate is specific to state law and can differ from state to state. Probate is the legal process for retitling the decedent's assets and may require an accounting to the court, which is a detailed report of all money that came into the probate estate and all money that went out of the probate estate.

There may not be much you can do to avoid going through probate once a loved one has passed away, but it's important to understand the probate process and the estate administration process as you work with an attorney or tax advisor.

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Understanding which assets pass through probate.

Assets that pass through probate are typically assets that are owned solely by the decedent in their individual name and without a beneficiary designation. These assets may include a deceased person's share of tenants in common property, deceased person’s ½ share of community property, and deceased person's separate property. In addition, naming your estate as a designated beneficiary may also cause assets to go through probate.

Generally, assets that avoid probate are assets owned as joint tenants with rights of survivorship, tenants by the entirety, and community property with rights of survivorship. Other assets that avoid probate are assets owned by a revocable trust at the death of the beneficiary and assets having a beneficiary designation. Examples include retirement accounts, life insurance proceeds, annuities, and transfer on death (TOD) or payable on death (POD) designations where the named beneficiary is an individual, a trust, or a charity.

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Checklist for inheriting money.

  • Consult with a tax professional regarding the tax treatment of inherited funds. If they are taxable, put aside the amount that you will have to pay in taxes.

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