Should You Accept an Inheritance?
Receiving an inheritance is usually seen as a good thing. Someone you love has worked hard, saved money, and made the decision to leave something behind for you. It might be money, a home, investments, or a retirement account.
Most people assume the next step is simply to accept what they've been given.
As an estate planning and probate attorney, I want you to know something that might surprise you. Accepting an inheritance isn't always the best decision for you or your family.
Depending on what you're inheriting, there could be income tax consequences, financial responsibilities, or other implications you haven't considered. Sometimes, the better option may actually be to legally refuse the inheritance. This is called disclaiming an inheritance.
Before you accept anything, it's important to understand exactly what you're receiving, how it could affect your financial future, and what options are available to you.
What Happens When You Accept an Inheritance?
One of the biggest misconceptions I encounter with inheritance planning is the idea that receiving assets automatically makes someone financially better off.
While an inheritance can certainly provide financial security, different types of inherited assets come with different responsibilities.
For example, inheriting cash from a bank account is very different from inheriting a traditional individual retirement account. Inheriting a house can also create responsibilities that you may not be financially or emotionally prepared to manage.
Depending on your circumstances, an inheritance may involve:
Pennsylvania inheritance tax
Federal income tax on certain inherited assets
Required distributions from inherited retirement accounts
Property taxes, insurance, and maintenance expenses
Changes to eligibility for certain government benefits
Additional considerations involving your own estate plan
Not every inheritance creates these consequences, but understanding which ones apply to your situation is essential.
This is especially important when you're navigating the loss of a loved one. You're already dealing with grief, family responsibilities, and potentially unfamiliar legal paperwork.
The last thing I want for a family is to discover that a decision they made without understanding the consequences has created an avoidable problem.
If you're involved in settling someone's estate, understanding the Pennsylvania probate process can also help you recognize how assets are transferred and what responsibilities may exist before distributions occur.
Why Inherited Retirement Accounts Need Special Attention
If there's one type of inheritance I want people to pay especially close attention to, it's an inherited individual retirement account.
These accounts can create income tax and reporting consequences that beneficiaries may not expect.
Let's look at a hypothetical situation.
Imagine your mother passes away and leaves you a traditional individual retirement account worth $300,000.
You're grateful for the inheritance. You've worked hard, you're earning a good salary, and you see the money as an opportunity to strengthen your retirement savings.
What you might not realize is that the inherited account could create substantial taxable income as you withdraw money.
Unlike receiving certain other inherited assets, distributions from a traditional individual retirement account are generally included in your federal taxable income, subject to any applicable exceptions or after-tax basis.
If you're already earning a significant income, those additional distributions could affect your overall tax situation.
The Ten-Year Rule for Inherited Retirement Accounts
For many non-spouse beneficiaries who inherit retirement accounts from individuals who died after 2019, federal law generally requires the entire inherited account to be distributed by the end of the tenth year following the original owner's death.
This does not mean every beneficiary has ten years to withdraw money without any other requirements.
Depending on the original owner's age and the beneficiary's circumstances, annual required minimum distributions may also apply.
Certain beneficiaries, including surviving spouses and some individuals who qualify under special rules, may have different distribution options.
The Internal Revenue Service's guidance on inherited retirement accounts explains these distinctions.
Here's why this matters.
If you inherit a sizable traditional retirement account and take a large distribution in a single year, that withdrawal could increase your taxable income significantly.
A different distribution strategy might be more appropriate, but that requires understanding the rules and your individual financial circumstances.
The tax treatment may also differ if you're inheriting a Roth individual retirement account rather than a traditional account.
The key is knowing what you're inheriting before making decisions about distributions.
I strongly encourage beneficiaries to involve their accountant or certified public accountant when evaluating inherited retirement accounts.
As an estate planning attorney, I can help you understand the legal implications of an inheritance. Your tax professional can evaluate the financial consequences and help determine how different decisions may affect your taxes.
Those two perspectives need to work together.
What Does It Mean to Disclaim an Inheritance?
Here's something many people don't realize.
You generally aren't required to accept an inheritance simply because someone named you as a beneficiary.
Under Pennsylvania law, you may have the option to disclaim, or legally refuse, all or part of an inherited property interest.
A disclaimer is a formal legal action. It is not simply telling another family member that you don't want the money.
Pennsylvania's disclaimer laws under Title 20, Chapter 62 establish requirements for disclaiming inherited property interests.
When you properly disclaim an inheritance, you are legally refusing your right to receive the specified property.
That doesn't mean the asset disappears or becomes available for you to distribute however you'd like.
Instead, the inheritance passes according to the applicable will, trust, beneficiary designation, or inheritance laws.
Who Receives the Inheritance If You Disclaim It?
This is one of the most important questions to answer before signing anything.
Let's say your father leaves you an inheritance, but you're financially comfortable and would prefer the assets to benefit your children.
You might think you can simply disclaim your inheritance and have everything automatically pass to them.
That isn't necessarily how it works.
Who receives the disclaimed property depends on the estate planning documents and applicable law.
In certain circumstances, your children may be next in line. In others, the inheritance could pass to a different beneficiary or be distributed in a way you didn't anticipate.
Disclaiming an inheritance generally doesn't give you the right to choose who receives it next.
This is why reviewing the actual estate planning documents is so important.
I would never want someone to disclaim valuable property believing it would pass to their children, only to discover that the legal outcome was something entirely different.
When Might Disclaiming an Inheritance Make Sense?
There is no universal answer to whether someone should accept or refuse an inheritance.
The right decision depends on the beneficiary's financial situation, family circumstances, the type of property involved, and the legal documents governing the inheritance.
However, there are situations where discussing a disclaimer may be worthwhile.
When You Already Have Significant Assets
Perhaps you've spent decades building your retirement savings, paying off your home, and creating financial security for your family.
You may not need additional inherited assets to support your lifestyle.
In that situation, accepting an inheritance could introduce new tax or estate planning considerations.
You might prefer to explore whether allowing the inheritance to pass to another beneficiary would better align with your family's long-term goals.
However, disclaiming isn't automatically the most tax-efficient option. That determination requires reviewing your financial circumstances and the potential consequences for whoever would receive the assets instead.
When You Want to Consider the Next Generation
Sometimes, parents and grandparents want inherited wealth to benefit younger family members.
For example, you might inherit assets from your parents at a time when your own children are starting families, buying homes, or planning for their futures.
A disclaimer could potentially allow assets to pass to the next generation if the governing documents and applicable laws support that result.
However, there may be other planning options worth discussing.
This is one reason I encourage families to think about inheritance decisions as part of their broader estate planning strategy.
The goal isn't simply to transfer money. It's to create a plan that reflects your values, protects the people you love, and supports the future you want for your family.
When an Inheritance Could Affect Government Benefits
Another important consideration involves people who receive means-tested government benefits.
An inheritance may affect eligibility for certain programs, including Medicaid and Supplemental Security Income.
However, refusing an inheritance does not necessarily preserve those benefits.
In some situations, disclaiming assets may be treated as a transfer or disposal of resources for eligibility purposes, potentially creating additional complications.
If you or a loved one receives public benefits, it's important to speak with an attorney familiar with elder law and Medicaid planning before making any decisions.
There may be legal planning options available, but those strategies depend on the specific benefits, eligibility rules, and individual circumstances.
When the Inheritance Comes With Financial Responsibilities
Not every inheritance is money in the bank.
Imagine inheriting a house that needs substantial repairs.
Maybe the property is located in another state, has ongoing maintenance costs, or would require you and your siblings to make difficult decisions about ownership.
While the home may have considerable value, you also need to understand what accepting ownership could mean.
You may be responsible for property taxes, insurance, upkeep, and other expenses.
Before accepting or disclaiming real estate, it's important to evaluate both the potential benefits and the responsibilities involved.
How Long Do You Have to Disclaim an Inheritance?
Timing is another reason I encourage people to seek professional guidance before taking action.
Pennsylvania law generally permits a disclaimer before the beneficiary has accepted the property interest.
Acceptance may be express or inferred from certain actions, such as taking possession of the property, transferring it, or exercising ownership rights.
Federal tax law has additional requirements.
Under Section 2518 of the Internal Revenue Code, a disclaimer intended to qualify for federal gift and estate tax purposes generally must be:
Made in writing
Irrevocable and unqualified
Delivered to the appropriate person within the applicable nine-month period
Made before accepting the interest or its benefits
Structured so the property passes without direction from the person disclaiming it, subject to applicable statutory exceptions
The federal nine-month period is generally measured from the transfer creating the interest or the beneficiary's twenty-first birthday, whichever is later.
A disclaimer that is valid under Pennsylvania law does not necessarily satisfy the separate federal requirements.
The practical takeaway is simple: Don't assume you can accept an inheritance now and decide to disclaim it later.
Certain actions can affect your available options.
If you're considering a disclaimer, talk with an attorney before taking distributions, signing transfer documents, or otherwise exercising ownership rights.
Pennsylvania Inheritance Tax Is Different From Federal Income Tax
Another area that often creates confusion is the difference between Pennsylvania inheritance tax and federal income tax.
These are separate taxes with different rules.
Pennsylvania inheritance tax generally depends on your relationship to the person who passed away.
According to the Pennsylvania Department of Revenue, the general inheritance tax rates are:
Beneficiary | General Tax Rate |
Surviving spouse | 0% |
Children and other direct descendants | 4.5% |
Siblings | 12% |
Other taxable beneficiaries | 15% |
Certain exemptions and special rules may apply.
Federal income tax, meanwhile, depends on the type of asset and whether taxable income is generated.
For example, an inherited traditional retirement account may produce taxable income when distributions are taken.
Receiving inherited cash generally does not itself create federal income tax, although income subsequently earned on inherited assets may be taxable.
There can also be differences in how investments, real estate, and other property are valued and taxed.
This is why knowing the total dollar value of an inheritance isn't always enough.
You also need to understand the financial implications of receiving it.
Why I Recommend Speaking With Both an Attorney and a Tax Professional
One thing I emphasize when discussing inherited assets is that estate planning and tax planning need to work together.
An estate planning and probate attorney can help you understand your legal rights as a beneficiary, review the governing documents, explain disclaimer options, and determine what happens to property if you decline it.
A qualified accountant or certified public accountant can evaluate potential income tax consequences, inherited retirement account distributions, and reporting obligations.
These professionals look at different parts of the same decision.
For example, your accountant might identify a significant income tax concern involving an inherited retirement account.
That doesn't automatically mean disclaiming the account is the appropriate solution.
An attorney needs to determine whether you can legally disclaim it, whether the applicable deadlines have been satisfied, and where the property would go afterward.
The next beneficiary's circumstances also matter.
A strategy that appears beneficial for one person could create complications for another.
When I'm helping families navigate these decisions, my focus is on making sure they understand their options before taking steps that may be difficult or impossible to reverse.
For families also managing the responsibilities of settling a loved one's estate, our trust and estate administration services can help provide clarity throughout the legal process.
Questions to Ask Before Accepting an Inheritance
If you've recently learned that you're inheriting money or property, I encourage you to ask a few important questions before making decisions.
1. Do I have to accept an inheritance in Pennsylvania?
No. Pennsylvania law generally allows eligible beneficiaries to disclaim inherited property interests. However, legal requirements apply, and certain actions may prevent you from disclaiming an interest after acceptance.
2. Will I owe taxes on my inheritance?
That depends on the type of asset, your relationship to the deceased person, and the circumstances of the transfer. Pennsylvania inheritance tax and federal income tax are separate considerations, so it's important to evaluate both.
3. What happens if I inherit a traditional retirement account?
You may be required to withdraw funds according to federal beneficiary distribution rules. Those distributions may create taxable income. The deadlines and requirements depend on your relationship to the original owner and other account-specific factors.
4. Can I disclaim an inheritance so my children receive it?
Possibly, but it isn't guaranteed. The person who receives disclaimed property is determined by the applicable estate planning documents and law. You generally cannot direct the inheritance to a recipient of your choosing through a qualified disclaimer.
5. Can I accept part of an inheritance and refuse the rest?
Pennsylvania law generally allows beneficiaries to disclaim an eligible interest in whole or in part. However, previous acceptance and federal tax requirements can affect whether a partial disclaimer is valid or achieves the intended result.
6. Can disclaiming an inheritance affect Medicaid benefits?
Yes. Refusing an inheritance may have consequences under Medicaid and other means-tested benefit rules. Disclaiming assets is not automatically an effective benefits-protection strategy and should be evaluated by a qualified attorney.
7. Should I speak with an attorney before accepting an inheritance?
I strongly recommend it when the inheritance involves retirement accounts, real estate, significant assets, public benefits, or complicated family circumstances. An attorney can help explain the legal consequences while a tax professional evaluates potential tax obligations.
Make Sure Your Inheritance Works for Your Family
When someone leaves you an inheritance, it's often their way of continuing to care for you after they're gone.
That intention deserves thoughtful consideration.
I don't believe families should feel pressured to make legal or financial decisions without understanding their consequences.
Sometimes accepting an inheritance is absolutely the right choice. Other times, there may be reasons to explore a disclaimer or another planning strategy.
What matters is having the information you need to make a decision that fits your circumstances.
At Entrusted Legacy Law, our approach is centered on education, meaningful relationships, and helping families protect what matters most.
We work with families throughout Pittsburgh, Philadelphia, Erie, and surrounding Pennsylvania communities to navigate estate planning, probate, and inheritance-related decisions.
If you've inherited assets and aren't sure what to do next, we're here to help you understand your legal options.
Schedule an introductory call with Entrusted Legacy Law to start the conversation.
Disclaimer
This article is provided by Entrusted Legacy Law for general educational and informational purposes only. It is not intended to constitute legal, tax, or financial advice and should not be relied upon as a substitute for guidance from a qualified professional. Estate planning, inheritance, probate, and tax laws are complex and may change. The information discussed is primarily based on Pennsylvania law and applicable federal law, and its application depends on individual circumstances. Reading this article, visiting our website, or contacting our firm does not establish an attorney-client relationship. Before accepting or disclaiming an inheritance, making retirement account distributions, or taking other legal or financial action, consult a qualified estate planning attorney and tax professional regarding your specific situation.
