Inheritance: Who Gets What and Why

What Is Inheritance?

Inheritance refers to the assets, money, property, investments, personal belongings, business interests, that pass from a deceased person to their survivors. The rules governing who receives these assets, and how, come from two sources: the deceased's own instructions (through a will, trust, or beneficiary designations) and state law, which fills in the gaps when instructions are missing or incomplete.

The word "inheritance" is commonly used when assets come from a family member, but legally anyone can inherit from anyone. A person can leave assets to a friend, a charity, a neighbor, or even a pet trust. The law places almost no restrictions on who can be named as a beneficiary in a will or trust.

Inheritance is one of the primary ways wealth passes between generations in the United States. According to Federal Reserve research, inheritances account for a substantial share of household wealth. Getting inheritance right, both for the person leaving assets and for the heirs receiving them, has real financial consequences. If you have recently experienced a loss, our first steps after a death guide covers the immediate practical actions heirs and family members should take.

How Inheritance Is Determined: Three Channels

1. A Valid Will

A will is a written document in which a person (the testator) states how they want their assets distributed after death. When someone dies with a valid will, known as dying "testate," the will governs the distribution of probate assets. The executor named in the will gathers assets, pays debts and taxes, and distributes the remainder to the named beneficiaries. The will must be submitted to probate court, which confirms its authenticity and authorizes the executor to act.

2. Intestate Succession Laws

When someone dies without a valid will, dying "intestate," their probate estate is distributed according to the state's intestate succession statute. These laws create a priority order of heirs, starting with the spouse and children, then moving outward to parents, siblings, and more distant relatives. The specific shares vary by state. For a detailed breakdown, see our intestate succession guide.

3. Beneficiary Designations and Trusts

Many assets transfer entirely outside of a will or intestate succession through beneficiary designations or trust ownership. Retirement accounts, life insurance policies, bank accounts with payable-on-death designations, and investment accounts with transfer-on-death designations pass directly to the named beneficiaries, regardless of what the will says. This surprises many heirs: if a beneficiary designation names a former spouse, that former spouse inherits, even if the will says otherwise. Read more about how probate fits into the overall estate settlement process.

Probate Assets vs. Non-Probate Assets

Let's break it down. Understanding the difference between probate and non-probate assets is the key to understanding how inheritance actually works.

Probate assets are assets owned solely by the deceased that have no automatic mechanism to pass to someone else. These include: real estate owned in the deceased's name alone, bank accounts without a POD designation, investment accounts without a TOD designation, personal property (furniture, jewelry, vehicles), and any other solely-owned property. Probate assets must go through the court-supervised probate process before they can be distributed to heirs.

Non-probate assets pass automatically to beneficiaries without court involvement. These include: retirement accounts (IRAs, 401ks, 403bs) with a named beneficiary; life insurance proceeds with a named beneficiary; bank and investment accounts with POD or TOD designations; property held in joint tenancy with right of survivorship; assets held in a living trust; and in states that allow them, real estate transferred by a transfer-on-death deed. Non-probate assets typically transfer within weeks of providing a death certificate and claim forms.

In many modern estates, non-probate assets make up the majority of the estate's value, especially when retirement accounts and life insurance are large. This is why keeping beneficiary designations current matters so much. See our inheritance calculator to estimate what an heir might actually receive after taxes and expenses.

What Heirs Must Do: Claiming an Inheritance

Inheritance does not always land automatically in your bank account. Heirs typically must take active steps to claim assets. Here is what to do next, depending on the type of asset.

Obtaining Letters Testamentary or Letters of Administration. For probate assets, the executor (or administrator, if there is no will) must be formally appointed by the probate court. The court issues "letters testamentary" (if there is a will) or "letters of administration" (if there is no will). These letters authorize the executor to act on behalf of the estate. Our executor checklist walks through every task involved in opening and managing the estate, from opening estate bank accounts and accessing financial records to selling property and ultimately distributing assets to heirs.

Claiming financial accounts. For non-probate assets like retirement accounts and life insurance, the beneficiary contacts the financial institution or insurance company directly. They provide a certified death certificate and complete the institution's claim forms. The institution then distributes funds directly to the beneficiary. No court involvement required. To understand how these designations work in detail, see our guide to beneficiary designations.

Transferring real estate. Real estate held in the deceased's sole name must go through probate before it can be transferred. Once the executor has court authority, they can deed the property to the heirs or sell it and distribute the proceeds. Real estate held in a living trust transfers by trustee deed without probate. Real estate with a recorded transfer-on-death deed transfers upon recording an affidavit of death.

In practice, heirs dealing with a deceased person's estate should gather all financial documents, notify relevant government agencies, and work with the estate executor or administrator to understand what they stand to receive and when.

Inheritance Taxes: What Heirs Actually Owe

The tax treatment of inheritance is widely misunderstood. Here is what you actually need to know.

Federal estate tax. The federal estate tax is a tax on the right to transfer property at death. The estate pays it before any distribution to heirs, not the heirs themselves. As of 2026, the federal basic exclusion amount is $15 million per person ($30 million for a married couple with proper planning). The vast majority of estates fall well below this threshold and owe no federal estate tax. See our estate tax calculator to estimate whether an estate owes federal estate tax.

State inheritance tax. Six states impose a separate inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Unlike the federal estate tax, the state inheritance tax is paid by the heir on what they receive. The rate depends on the heir's relationship to the deceased and the amount inherited. Spouses are typically exempt. Children may be exempt or taxed at a low rate. More distant relatives and non-relatives face higher rates, sometimes up to 16 to 18%.

Income tax on inherited assets. Most inherited assets are not subject to income tax. Inherited retirement accounts (IRAs, 401ks) are subject to income tax when distributions are taken, because the original contributions were made pre-tax. Inherited annuities also carry income tax on the gain portion. For inherited investment accounts and real estate, the step-up in basis rule typically wipes out capital gains tax on appreciation that occurred during the deceased's lifetime. See our guide on step-up in basis for a full explanation.

The IRS addresses the tax treatment of inheritances in its FAQ section, confirming that most inherited property is not included in the heir's gross income.

Capital Gains on Inherited Property: The Step-Up in Basis

One of the most useful tax benefits available to heirs is the step-up in cost basis. When you inherit an asset, a stock portfolio, real estate, or business interests, your cost basis for capital gains purposes is "stepped up" to the fair market value of the asset on the date of death.

Here is a simple example: your parent bought a house for $150,000 in 1985. When they died in 2025, it was worth $800,000. If you inherit the house, your basis is $800,000, not $150,000. If you sell it the next day for $800,000, you owe zero capital gains tax. The $650,000 of appreciation that occurred during your parent's lifetime is permanently untaxed for you as the heir.

This step-up benefit applies to most inherited capital assets but does NOT apply to retirement accounts or annuities, which are subject to ordinary income tax on distributions regardless of when the account was opened or how much it has grown. For a complete explanation, see our dedicated step-up in basis guide.

Common Inheritance Disputes

Inheritance can stir up real family conflict. Common sources of disputes include:

• Will contests: A beneficiary challenges the validity of the will, claiming the testator lacked mental capacity, was subject to undue influence, or that the will was improperly executed.
• Beneficiary designation conflicts: A will names one person, but an out-of-date beneficiary designation names someone else. The designation controls, which can lead to disputes when family members believe the designation does not reflect the deceased's true wishes.
• Claims against the estate: Creditors, former spouses, or disinherited children may assert claims against the estate that reduce what beneficiaries ultimately receive.
• Executor misconduct: An executor who fails to act impartially, delays distributions without reason, or uses estate assets for personal benefit can be removed and held personally liable.
• Ambiguous will language: Poorly drafted wills with unclear or contradictory language require court interpretation, adding time and cost to administration.

The CFPB's guide to managing someone else's money provides helpful information on the fiduciary duties of executors and trustees, which can help beneficiaries understand what they are entitled to expect.

Official sources worth reviewing

Inheritance questions often cross probate, tax, and beneficiary-designation rules. We rely on primary federal guidance and public-interest fiduciary materials when explaining those overlaps.

• IRS FAQ on gifts and inheritances
• IRS estate tax overview
• CFPB managing someone else’s money
• Social Security after a death

Frequently Asked Questions