What Are the Biggest Mistakes People Make With Inheritances?
Last reviewed: July 2026
Inheritance mistakes are the avoidable financial errors people make when they receive money or property after a death, and the most common ones are acting too fast, ignoring the tax rules on inherited accounts, and overspending. An inheritance can take decades to build and a handful of bad decisions to unravel. According to a National Endowment for Financial Education analysis, a large share of recipients spend or lose their inherited wealth within a few years. The good news: nearly every costly mistake on this list is preventable with a short pause and the right help.
Key Takeaways
- The biggest inheritance mistake is acting too fast, so park funds and wait 60 to 90 days before any major decision.
- Most non-spouse beneficiaries must empty inherited retirement accounts within 10 years under the SECURE Act 10-year rule.
- Inherited taxable accounts and real estate get a stepped-up basis to the date-of-death value, often erasing capital gains.
- In 2026 the federal estate tax exemption rises to $15 million per person, so most families owe no federal estate tax.
- Keep the details private, diversify concentrated stock, and update your own estate plan after you inherit.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate inheritances and sudden money since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff has watched grieving clients write six-figure checks in the first month after a funeral, and almost all of them later wished they had waited. As Jeff puts it: "An inheritance is one of the only moments in a person's financial life where doing nothing for ninety days is genuinely the highest-value decision available — the urgency people feel is almost never real, and acting on it almost always costs them."
What Counts as an Inheritance Mistake?
An inheritance mistake is any decision that permanently reduces the value, tax efficiency, or longevity of money or property you receive after someone dies. These are different from ordinary investing slip-ups because they usually happen during grief, under time pressure, and with assets you have never managed before.
The pattern Jeff sees most often is not greed. It is overwhelm. A client inherits a brokerage account, an IRA, a house, and a stack of paperwork all at once, then feels pressure to "do something" immediately. That urgency is where the damage starts. Inherited assets rarely require a fast decision, and the few that do (like a retirement account distribution deadline) reward planning, not speed.
The mistakes below fall into three buckets: emotional timing errors, tax errors, and relationship errors. Avoiding all three is the difference between a windfall that funds your retirement and one that disappears.
Why Is Making Rushed Decisions the Single Biggest Mistake?
Acting too quickly is the most expensive inheritance mistake because it stacks emotional vulnerability on top of unfamiliar choices. You are grieving and suddenly responsible for decisions you have never faced. That combination creates ideal conditions for regret.
People feel pressure to invest it, spend it, give it away, or buy something major right now. Markets do not require that. The fix is simple but takes discipline: pause for 60 to 90 days before any major financial move. Park liquid cash in a high-yield savings or money market account. As of 2026, the FDIC insures up to $250,000 per depositor, per insured bank, per ownership category, so splitting large balances keeps everything protected while you think.
During that pause, do not buy the dream house, do not hire the advisor who called the week of the funeral, and do not write checks to relatives asking for help. Inherited assets took decades to accumulate. They deserve more than an impulse decision made in the first month of grief.
What should I do first after inheriting money or property?
How Do Taxes Trip Up Inheritance Recipients?
Ignoring tax rules is the costliest technical inheritance mistake, because different inherited assets are taxed in completely different ways. Treating them all the same can cost six figures.
Inherited retirement accounts (traditional IRAs, 401(k)s, 403(b)s) hold pre-tax money taxed as ordinary income when you withdraw. Under the SECURE Act, most non-spouse beneficiaries must empty an inherited retirement account within 10 years of the original owner's death. The IRS has confirmed that beneficiaries of an owner who had already started required minimum distributions must also take annual distributions during that window. Bunch all 10 years of withdrawals into one and you can shove yourself into a higher bracket and raise your Medicare premiums.
Inherited taxable brokerage accounts usually get a stepped-up cost basis equal to the fair market value on the date of death. Inherit stock your parent bought for $5,000 that is now worth $200,000, and your basis resets to $200,000. Sell right away and you owe little or no capital gains tax. Real estate gets the same step-up but adds questions about reassessment and whether to sell or rent.
On the estate side, most families owe nothing. According to the IRS, the federal estate tax exemption rises to $15 million per individual in 2026, meaning only the largest estates trigger federal estate tax. State rules vary, so confirm yours.
As the IRS states plainly, "The basis of property inherited from a decedent is generally the fair market value of the property on the date of the decedent's death." That single rule, used correctly, is one of the most powerful tax breaks an heir gets. Never sell an inherited asset before a CPA runs the numbers.
What should I do with money I inherited from a relative?
What Happens When People Spend or Concentrate Too Much?
Overspending and failing to diversify are twin mistakes that quietly drain inheritances. The "wealth effect" is real: when people suddenly have more, they spend more, often treating inherited money as "found money" that does not need discipline.
Some spending is reasonable: paying off high-interest debt, handling deferred home repairs, taking a modest trip to grieve. The trouble starts when luxury cars, lavish gifts, and "helping" relatives accelerate past those uses. Decide in advance what percentage, if any, goes to discretionary spending, and write down your real priorities, an emergency fund, retirement, education, debt. When temptation hits, read your own list.
Diversification is the other half. Many people inherit concentrated positions, a big slug of one company's stock or "the shares Dad bought." Emotional attachment is understandable, but holding most of your wealth in one stock is dangerous. The stepped-up basis means you can usually sell and diversify with little or no capital gains tax, an advantage that disappears if the stock keeps climbing in your hands. A spread of low-cost index funds across asset classes beats sentiment almost every time.
This is exactly where Chesapeake Financial Planners uses the R.U.D.D.E.R. Method™, Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. It turns "do something" panic into a sequence of deliberate decisions.
What should you do when you suddenly receive a large sum of money?
Who Should You Tell, and What Should You Update?
Telling too many people and neglecting your own plan are the relationship mistakes that follow inheritances. Money changes how people treat you. Relatives may feel entitled, friends may expect help, and scammers target anyone known to have come into money.
Keep the details private. You owe a full explanation to no one beyond your spouse and the professionals you have hired. "I'm working with my advisors to make thoughtful decisions" ends most conversations. Jeff often reminds clients that vague is your friend here, specifics invite expectations you cannot un-create.
Then update your own estate plan. Receiving an inheritance should immediately trigger a review of your will, trusts, and beneficiary designations. Beneficiary forms on retirement accounts and life insurance override your will, so an outdated form can send inherited wealth to the wrong person. Look for fee-based, fiduciary advisors legally required to act in your interest, not commission-driven salespeople. According to FINRA, confirming how an advisor is paid is one of the first questions every investor should ask.
How Can I Protect Inherited Money from Scams and Bad Decisions?
Frequently Asked Questions
What is the most common mistake people make with an inheritance?
The most common inheritance mistake is making major financial decisions too quickly while still grieving. Recipients feel pressure to invest, spend, or give the money away immediately. Pausing for 60 to 90 days and parking the funds in a high-yield savings account almost always produces a better outcome than rushing.
Do I have to pay taxes when I inherit money?
Most heirs owe no federal estate tax because the 2026 exemption is $15 million per person. However, inherited traditional retirement accounts are taxed as ordinary income when withdrawn, and inherited taxable accounts get a stepped-up basis that often erases capital gains. The tax outcome depends entirely on the type of asset you inherit.
How long do I have to withdraw an inherited IRA?
Under the SECURE Act, most non-spouse beneficiaries must fully empty an inherited IRA within 10 years of the original owner's death. If that owner had already begun required minimum distributions, you may also owe annual distributions during the 10-year window. Spreading withdrawals across years usually reduces the total tax you pay.
Should I sell inherited stock right away?
Selling inherited stock soon after death is often smart because the stepped-up basis resets the cost to the date-of-death value, eliminating most or all capital gains tax. This lets you diversify out of a concentrated position cheaply. Always confirm the basis and timing with a CPA before selling any inherited asset.
What should I do first after receiving an inheritance?
First, do nothing major for 60 to 90 days. Move liquid funds into an insured, interest-bearing account, gather every statement and document, and keep the inheritance private. Then assemble a fiduciary financial advisor, a CPA, and an estate attorney before you invest, spend, or distribute anything. Planning beats speed every time.
Closing
An inheritance is one of the few financial events where doing less, sooner, protects more later. If this overview helped, our guide on handling sudden money walks through the full step-by-step process, from the first 90 days to long-term planning. Download it at chesapeakefp.com and give your inheritance the care your loved one put into building it.
Want to go deeper? Our First 90 Days After a Windfall walks through this step by step.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
CFP Board owns the marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the U.S.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
