What to Do With a Million Dollar Inheritance?

A million-dollar inheritance sits in an awkward zone: large enough to change your financial life, small enough that a few bad decisions in the first months can quietly erase a big share of it. Deciding what to do with a million-dollar inheritance starts with protecting the cash, understanding which taxes actually apply to you, and getting professional help before you spend, invest, or give any of it away. Federal estate tax almost certainly is not your problem — the 2026 exemption is $15 million¹ — but deposit insurance limits, state inheritance taxes, inherited retirement account rules, and means-tested benefit thresholds all can be.

Park the Money Somewhere Safe and Fully Insured

Before you invest a dollar, get the money into liquid accounts where it earns something and cannot disappear. High-yield savings and money market accounts pay meaningfully more than checking while staying accessible.

The trap here is deposit insurance. FDIC coverage stops at $250,000 per depositor, per insured bank, for each account ownership category.² Drop a million dollars into one account and $750,000 of it is uninsured if the bank fails. Credit unions carry the same $250,000 cap through the NCUA.³

Two practical ways to get full coverage on a million dollars:

Open accounts at four separate FDIC-insured banks that don’t share a parent company, keeping each balance under $250,000.²
Use a brokerage sweep program that spreads cash across a network of partner banks. Each bank in the network insures up to $250,000, so a five-bank network covers the full million from one account.⁴

You can also stack coverage at a single bank by using different ownership categories. An individual account and a joint account at the same bank are insured separately, each up to $250,000, and a revocable trust account adds another separately insured category.²

Figure Out What You Actually Owe in Taxes

Most heirs owe no federal estate tax on a million dollars. Estate tax is paid by the estate itself, not by you, and 2026 estates below $15 million owe nothing.⁵¹ Several other tax rules can still apply.

State Estate and Inheritance Tax

About a dozen states and the District of Columbia impose their own estate taxes, some with exemptions as low as $1 million or $2 million. The estate pays this, but it reduces what reaches you.

A separate handful of states impose an inheritance tax, paid by you as the recipient. Rates depend on your relationship to the deceased. Spouses are usually exempt. Children and close relatives face lower rates. Distant relatives and unrelated beneficiaries can pay up to 16%. If the person you inherited from lived in one of these states, a local tax professional needs to look at your specific situation.

The Step-Up in Basis on Inherited Property

If you inherited stocks, real estate, or other appreciated assets, the cost basis resets to fair market value on the date of the owner’s death.⁶ If a parent bought a home for $200,000 and it was worth $900,000 the day they died, your basis is $900,000. Sell it for $900,000 and you owe no capital gains tax. Hold and sell later, and you only pay on appreciation above the stepped-up value.

Inherited Retirement Accounts

A traditional IRA or 401(k) is a different animal from cash or real estate. Withdrawals are ordinary income, taxed at your current rate.

If you’re not the surviving spouse, you generally have to withdraw the entire balance within ten years of the account owner’s death.⁷ There’s a wrinkle: if the original owner had already started required minimum distributions, you may need annual withdrawals during those ten years, not just a single drawdown at the end. Missing a required withdrawal triggers a 25% penalty on the shortfall, dropping to 10% if you correct it within two years.⁸

Taking a full million-dollar inherited IRA in a single year would push you into the top tax bracket. Spread across ten years, the same withdrawals may stay in lower brackets and save tens of thousands. This is where a CPA earns their fee.

Surviving spouses have more options: roll the account into their own IRA, delay distributions until the deceased would have reached age 72, or take distributions based on their own life expectancy.⁷ Certain other beneficiaries — minor children of the account owner, disabled or chronically ill people, and heirs no more than ten years younger than the original owner — also qualify for extended timelines.

If the Inheritance Came From Abroad

If you received more than $100,000 from a foreign estate or a nonresident alien, you file IRS Form 3520 by your normal tax filing deadline.⁹ It’s a reporting requirement, not a tax. The penalty for missing it is the greater of $10,000 or 35% of the reportable amount, with $10,000 more for every 30 days of continued noncompliance after an IRS warning.¹⁰

Income Passed Through From the Estate

If the estate itself earned income before distribution, the executor files Form 1041 for the estate.¹¹ You don’t file that return, but any income passed through to you shows up on a Schedule K-1 and goes on your personal return.

Stop Before the Money Lands if You Receive Means-Tested Benefits

This is urgent for anyone on SSI, Medicaid, or similar programs. SSI limits countable resources to $2,000 for an individual and $3,000 for a couple.¹² A million dollars deposited in your account ends your eligibility instantly. Giving the money away or selling assets below market to get back under the limit triggers an ineligibility penalty of up to 36 months. Medicaid long-term care programs impose similar asset caps and a five-year look-back on transfers.

The tool for this situation is a special needs trust. Trusts set up under specific provisions of the Social Security Act aren’t counted as resources for SSI purposes and can pay for medical equipment, education, and personal care without ending eligibility.¹³ You need an attorney experienced in public benefits law, and you generally need the trust in place before you take possession of the inheritance. Talk to that attorney first.

Build a Professional Team Before You Spend

A million dollars justifies professional help and is small enough that bad advice hurts. Three people cover the picture.

A Fee-Only Fiduciary Financial Advisor

An investment adviser registered under federal law owes you a fiduciary duty — a legal obligation to act in your best interest.¹⁴ Look for a fee-only advisor, meaning one paid only by you, with no commissions from selling products. Fee-only advisors commonly charge around 1% of assets per year on a million-dollar portfolio, though flat-fee arrangements exist. Before hiring anyone, search the SEC’s Investment Adviser Public Disclosure database, which shows registration status, employment history, and any disciplinary actions for both firms and individuals.¹⁵

A CPA

A CPA calculates the stepped-up basis on inherited property, models withdrawal schedules on inherited retirement accounts, handles any foreign-inheritance filings, and reconciles Schedule K-1 income from the estate. Ask for a fee estimate before engaging.

An Estate Attorney

An estate attorney reviews the inheritance documents, confirms that legal title is properly transferred into your name, and drafts your own estate plan. Ask for the fee structure — hourly, flat, or a mix — in writing before signing an engagement letter.

Clear High-Interest Debt and Set Aside an Emergency Fund

Before investing, deal with your liabilities. Paying off a credit card balance charging 20%-plus interest is equivalent to earning a guaranteed, tax-free return at that rate. No investment reliably matches that.

Low-interest secured debt is a judgment call. If your mortgage rate is well below what you could reasonably earn investing, the math favors keeping the loan. If being debt-free matters more to you than the last dollar of return, paying it off isn’t wrong. To pay off a mortgage, request a payoff statement from the lender showing the exact balance with accrued interest and fees, and follow their payment instructions.

After debt, set aside six to twelve months of living expenses in a liquid account. On $5,000 a month of expenses, that’s $30,000 to $60,000, kept separate from your long-term investment portfolio so a market drop doesn’t force you to sell at a loss to cover a car repair.

Protect the Inheritance From Lawsuits and Divorce

Umbrella Liability Insurance

A seven-figure net worth makes you a more attractive lawsuit target. A personal umbrella policy sits on top of your auto and homeowners liability limits, commonly starting at $1 million of coverage for a few hundred dollars a year. Most insurers require underlying auto liability of $250,000 to $500,000 and homeowners liability of $300,000 or more before they’ll write an umbrella. Without one, a serious accident judgment can reach directly into the inheritance.

Keeping Inherited Money Separate From Marital Property

Inheritance received by one spouse is generally separate property, even during marriage. That protection disappears through commingling: depositing the inheritance into a joint account, using it to pay joint expenses, or retitling inherited property in both names can convert some or all of it to marital property subject to division in divorce.

To keep the separate character intact, hold inherited assets in accounts titled only in your name. If any of it goes toward a joint purpose, like a down payment on a marital home, document the transaction so its separate-property origin can be traced later. State rules vary significantly, and a family law or estate attorney can spell out yours.

Write Your Own Estate Plan

Receiving a large inheritance is the clearest signal that you need an estate plan of your own. Without one, your state’s default rules decide who inherits, and a court decides who manages your affairs if you’re incapacitated.

A Will and, in Many Cases, a Revocable Living Trust

A will specifies who receives your assets. A revocable living trust goes further by letting your estate skip probate, the court-supervised process that validates a will and distributes assets. Probate is public, can run months or longer, and typically costs several percent of the estate’s total value in legal and administrative fees.

You fund a revocable trust by retitling assets — bank accounts, real estate, investment accounts — into the trust’s name. You stay in full control as trustee during your lifetime and can change or revoke it any time. A successor trustee steps in if you’re incapacitated or die. Professional trustees commonly charge 1% to 2% of trust assets per year, so many people name a trusted family member and hold a professional trustee in reserve as backup.

Durable Power of Attorney and Healthcare Directive

A durable power of attorney lets someone handle your financial affairs if you can’t. A healthcare directive names a decision-maker for medical care and records your preferences. Without these, your family may have to petition a court for authority to act on your behalf, which is slow and expensive.

Deadlines Worth Keeping on Your Calendar

Some obligations from a million-dollar inheritance stretch out over years:

Inherited IRA withdrawals: if you inherited from a non-spouse, the entire balance must be out by the end of the tenth year after death. Annual distributions may also be required, depending on whether the original owner had reached their required beginning date.⁷
Foreign inheritance reporting: Form 3520 is due by your tax filing deadline if you received more than $100,000 from a foreign estate or nonresident alien.⁹
Estate income passed through to you: watch for a Schedule K-1 from the executor and report it on your personal return.¹¹
State inheritance tax: if the deceased lived in a state with one, watch for a separate state filing and payment deadline.
Beneficiary designations: update the beneficiaries on your own retirement accounts, life insurance, and any new accounts. These designations override your will.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Federal Deposit Insurance Corporation. Understanding Deposit Insurance
3
eCFR. 12 CFR Part 745 – Share Insurance and Appendix
4
Federal Deposit Insurance Corporation. Pass-Through Deposit Insurance Coverage
5
eCFR. 26 CFR Part 20 – Estate Tax; Estates of Decedents Dying After August 16, 1954
6
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
7
Internal Revenue Service. Retirement Topics – Beneficiary
8
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
9
Internal Revenue Service. Instructions for Form 3520
10
Internal Revenue Service. Failure to File Form 3520/3520-A Penalties
11
Internal Revenue Service. Instructions for Form 1041
12
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
13
Social Security Administration. SSI Spotlight on Trusts
14
Federal Register. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
15
Investor.gov. Investment Adviser Public Disclosure (IAPD)