Beneficiaries usually pay no upfront federal taxes on inherited brokerage accounts, but they are responsible for capital gains tax on any appreciation if they sell the assets later. The assets receive a "step-up in basis," meaning the cost basis is adjusted to the market value on the date of death.
When you inherit a brokerage account, the cost basis of the assets is usually "stepped up" to the fair market value on the date of the deceased's death. If the account's value grows before you sell the assets, you'll be taxed on the capital gains.
Typically, beneficiaries are not directly responsible for paying taxes. Instead, the trust's income, including any dividends or capital gains from the stock, is generally subject to income tax. The tax treatment depends on the type of trust, the cost basis of the inherited stock, and the timing of the inheritance.
If your inheritance includes an IRA or other tax-deferred account, you generally have 10 years to withdraw the assets unless an exception applies. While, in many cases, you'll be subject to annual required minimum distributions (RMDs), “you have a lot of flexibility on how much to withdraw each year,” Curtin says.
The UTMA custodian serves as asset manager and financial recordkeeper, overseeing the assets inherited by or gifted to the child until the child turns 21 (18 in some states). He or she is authorized to manage, spend and invest these assets for the child's benefit and eventual use and file the relevant tax returns.
Liquidate the investments and withdraw the cash
There's always the option to liquidate inherited investments, and this might be a match for your goals if: You immediately need the money for other expenses.
What Assets are Exempt From Inheritance Tax?
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
Best of all, with most inheritances, you won't owe any taxes. You won't even have to report them to the IRS. There is one important exception, however: If you inherit an individual retirement account (IRA), any taxes on IRA distributions that would have been owed by the deceased will now be owed by you.
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.
To avoid capital gains tax on inheritance, sell inherited assets immediately at their stepped-up basis (value at death) to realize no gain, use it as your primary residence for the Section 121 exclusion, donate it to charity, or use a 1031 exchange for real estate; the key is leveraging the "stepped-up basis" to erase prior gains, as the cost basis resets to the value on the date of death, notes Gudorf Law and SmartAsset.com.
On a nonretirement account, designating a beneficiary or beneficiaries establishes a transfer on death (TOD) registration for the account. For an individual account, a TOD registration generally allows ownership of the account to be transferred to the designated beneficiary upon the account owner's death.
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
When shares are sold by a beneficiary, CGT applies. The cost base is determined according to whether the shares were acquired by the deceased pre- or post-CGT. Making the most of inherited shares often involves looking beyond the immediate tax, especially if those shares represent ownership in a family business.
When you inherit assets, like property or shares of stock in a brokerage account, you'll have to consider tax implications if you want to sell them for reinvestment or cash.
if you dispose of the inherited property within 2 years (or the within an extension period) of the deceased person's death. Note: The 2-year limit is extended if disposal of the property is delayed by exceptional circumstances outside your control.
Ways to reduce Inheritance Tax
If the account owner passed away in 2020 or later
Generally speaking, most non-spouse beneficiaries inheriting from an original owner will be required to withdraw the balance of their account over 10 years, unless you qualify to be treated as an eligible designated beneficiary.
What should you not do with inheritance money?
The 7-3-2 rule is a financial strategy for wealth building, suggesting it takes 7 years to save your first major financial goal (like a crore), then accelerating to achieve the next goal in 3 years, and the third goal in just 2 years, leveraging compounding and disciplined, increased investments (like a 10% annual SIP hike). It highlights how returns compound faster over time, drastically reducing the time needed for subsequent wealth targets, emphasizing patience and consistent, growing contributions.
The "7-year inheritance rule" (primarily a UK concept) means gifts you give away become exempt from Inheritance Tax (IHT) if you live for seven years or more after making the gift; if you die within that time, the gift may be taxed, often with a reduced rate (taper relief) applied if you die between years 3 and 7, but at the full 40% if you die within 3 years, helping people reduce their estate's taxable value by giving assets away earlier.
Ramsey believes investing should take up a good percentage of your cash inheritance so it can grow. Spend some of it. People who work hard also play hard. Spending some of your cash inheritance on something you've always wanted but couldn't afford is okay.