A financial advisor can help you put an estate plan together to protect your assets for your family. The best place to deposit the large cash inheritance is in a federally insured bank or credit union account.
Roth IRAs stand out as the best type of account to inherit due to their tax-free growth and distributions.
An account with a named beneficiary is a payable-on-death (POD) account. Your financial institution can give you a form for each account. The person you choose to inherit your account is a beneficiary. After your death, the account beneficiary can immediately claim ownership.
You can use the inheritance to cover expenses to allow you to funnel more into retirement. Put some aside for your down payment and a healthy emergency fund. HYSA are good place for both. With any leftovers, either keep some aside to help further fund retirement, or invest in a brokerage account, or 529 plan for kids.
Gifts and inheritance Personal income types
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
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. The maximum coverage for each FDIC-insured account is $250,000.
You could name the wrong beneficiary. You could fail to update a POD beneficiary who you wished to disinherit. You could leave too much money to one child who agrees to share it with their siblings but finds themselves confronted by unexpected estate or gift taxes.
While traditionally, beneficiaries are associated with life insurance policies, IRAs, annuities, etc., you actually can add a beneficiary to your bank account. Doing so makes the process of transferring money after you pass away easy and obvious for the person you want the money to go to.
In most cases, an inheritance isn't subject to income taxes. The assets passed on in an investment or bank account aren't considered taxable income, nor is life insurance. However, you could pay income taxes on the assets in pre-tax accounts.
Overall, putting the inheritance money into a retirement account is an efficient way to save the money for a solid future.
To safely deposit a large amount of cash, visit a brick-and-mortar branch operated by your financial institution. Contact your financial institution if you plan to make a sizable deposit, said Christopher Naghibi, executive vice president and chief operating officer at First Foundation Bank.
For the inheritance process to begin, a will must be submitted to probate. The probate court reviews the will, authorizes an executor and legally transfers assets to beneficiaries as outlined. Before the transfer, the executor will settle any of the deceased's remaining debts.
Banks, savings and loans, and credit unions all offer payable-on-death accounts. They don't charge any extra fees for keeping your money this way.
For a beneficiary to claim ownership of a POD account, they need to provide the bank with the owner's death certificate and their own ID. POD accounts, in some states, are subject to state inheritance, or death, taxes.
Designated beneficiaries receive the funds without having to wait for probate to conclude, which can take months. A POD or TOD account allows loved ones to get money almost immediately. Typically, all they need to provide is the death certificate and identification to the account-holding institution.
A Roth IRA is a retirement account which you fund with after-tax dollars. In exchange, your retirement withdrawals are income-tax-free, including your investment gains. The tax-free treatment continues when your heirs inherit the Roth IRA, making this another effective asset to leave behind.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
Small inheritance ($20,000)
Even if you receive a modest inheritance—you have many options. One idea is to fund an emergency savings account.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
Many states assess an inheritance tax. That means that you, as the beneficiary, will have to pay taxes when you receive an inheritance. How much you'll be assessed depends on the state you live in, the size of your inheritance, the types of assets included, and your relationship with the deceased.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.