Inheriting a million dollars or more can be a life-changing event and will come with its own set of stipulations. Whether you're already well-off or you find you've achieved millionaire status overnight, there will be some things you'll need to consider when receiving a large sum of money.
Here are the facts: Only 21% of millionaires received any inheritance at all. Just 16% inherited more than $100,000. And get this: Only 3% received an inheritance at or above $1 million!
A large inheritance is generally an amount that is significantly larger than your typical yearly income. It varies from person to person. Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals.
If you inherit $100,000, you have a lot of options. You can pay off your highest-interest debts, save money for emergencies, or give some to charity.
The average American has inherited about $58,000 as of 2022. But that's if you include the majority of us whose total lifetime inheritance sits at $0. If you look only at the lucky few who inherited anything, their average is $266,000. And if you look only at those in their 70s, it climbs to $344,000.
What Is the Average Inheritance? On average, American households inherit $46,200, according to the Federal Reserve data. But this figure is inflated by top-tier wealth and belies the fact that many households inherit no money at all. Of those that do receive a bequest, most receive a small fraction of the average.
There is no federal inheritance tax. In fact, only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — impose a tax on inherited assets as of 2024.
Among those who did receive one, the average was about $184,000 — a healthy sum, but not enough to retire. In other words, if you are lucky enough to receive an inheritance, you'll have to fold that money into your financial plan, which, depending on what form the inheritance takes, can be a lot of work.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
Deposit the money into a safe account
Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance.
Estate Tax Thresholds
You can inherit up to $12.92 million in 2023 without paying federal estate taxes due to the estate tax exemption. However, some states have their own inheritance taxes, so you may still owe taxes to your state. Any estate exceeding the above thresholds could be taxed up to 40%.
A good place to deposit a large cash inheritance, at least for the short term, would be a federally insured bank or credit union. Your money won't earn much in the way of interest, but as long as you stay under the legal limits, it will be safe until you decide what to do with it.
Millionaires Are Made, Not Born
While 1 in 5 millionaires (21%) received some inheritance, only 3% received an inheritance of $1 million or more. In fact, the majority of millionaires didn't even grow up around a lot of money.
Most of the wealth accumulated by new billionaires in 2023 came from inheritance, overtaking self-made wealth for the first time in the nine editions of a study by UBS. The report estimates that more than 1,000 billionaires are expected to pass on $5.2 trillion in wealth to heirs over the next 20 to 30 years.
If you have more than $1 million saved in retirement accounts, you are in the top 3% of retirees. According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
Keep your inheritance to yourself (for now) The first step financial advisors typically suggest, especially if you've come into a large sum of money: Keep quiet. That might go against your instincts to squeal about your new-found wealth, or even share that wealth. But there's time for that later.
$500,000 is a big inheritance. It could have a significant impact on a person's financial situation, depending on how it is managed and utilized. As you can see here, there are many complex, moving parts involving several financial disciplines.
Generally, the answer to “do I have to pay taxes on a gift?” is this: the person receiving a gift typically does not have to pay gift tax. The giver, however, will generally file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $16,000 per recipient for 2022.
Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.
According to the Fed's consumer finance survey the mean net worth of an American household, adjusted for inflation, was $1.06 million in 2022. In comparison, in 2019 the mean net worth of an average household was $868,000, marking a 23% jump.
After you leave the money to your children, how fast do you think that they're going to spend it? Though you might like to think of them spreading it out for years, really making use of what you've left behind, the reality is that people usually spend it in a year or less.
As estate values increased, so has the average age of people receiving inheritances. In 1989, the average age at inheritance was 41, but today it's closer to 51.