Inheriting Assets 101

Main Idea: Planning an inheritance early can help ensure a smooth transition of wealth and values to your heirs. Whether you're passing down assets or receiving them, understanding the tax implications and timing can prevent costly mistakes and preserve your legacy.

This week, a client in their 40s asked me about planning an inheritance for their kids she and her spouse pass. God willing, that’s decades away—but it got me thinking about the importance of planning early.

Now, inheritances can come in many forms: houses, IRAs, taxable accounts, etc. and things can get confusing.

Dealing with an inheritance often happens during an already difficult time. Grief can make it hard to muster the extra energy and focus needed to handle these matters.

Planning decades ahead ensures a seamless handoff and aligns your legacy with the nest egg you’ve spent years building.

Even if you haven’t received an inheritance yet, chances are you will at some point in your life.

Some of the most common assets to be passed on are:

• Cash or Liquid Assets
• Real Estate (houses, properties)
• Retirement Accounts (401k, IRA, SEP IRA, Solo k)
• Investment Accounts (brokerage account)
• Business Interests

Today, I’ll first discuss some thoughts on the most efficient ways for you, as a parent, to pass on an inheritance to your child with minimal hassle after you’re gone.

Then, I’ll switch perspectives and cover some key points to consider when you’re the one receiving an inheritance.

This can get very confusing, very quickly, so remember you don't have to be a master of these topics nor do you have to fully even understand them.

Lean on your tax, financial, and legal experts when needed.

Per usual, these are not recommendations but merely an educational piece to help you think through these things when the time comes. I hope it's helpful.

Efficiently Passing Down Wealth

Whether it’s $10,000 or $10 million, you want it done right. Your wealth is a final gift to those you love—but taxes and timing can complicate things.

When people near the end of their life, their assets they leave to their children and loved ones serve as a way to bless those near them and that they care about.

The problem is...this can get tricky from a tax and timing standpoint.

A) Passing Your Wealth in a Tax-Friendly Way

While there are a lot of moving parts to passing wealth down, the first question I'd like to consider are "what are the tax consequences"?

The reason is nearly everyone I speak with always wants to pay as LITTLE in taxes to the gov't as possible, so this will be nearly common across the board.

Here are a few ways to factor taxes into your planning:

• Passing Down a Pre-Tax Account: Pre-tax 401(k)s and IRAs are tougher to pass down than say a Roth. Heirs must drain them in 10 years, hiking their taxable income during a time where they may be in their highest earning years.
• Charity Idea: Some clients skip the tax mess by leaving IRAs (or at least a portion) and other qualified accounts to charity—tax-free for them, smarter for heirs. Like always, this only makes sense when you were already planning on making this gift beforehand.
• Roth Advantage: I love Roth's—tax-free growth, tax-free withdrawals, and tax-free for heirs when done right, even with the 10-year rule in which your beneficiary is more than likely going to have a decade to empty your assets from this account, but it won't be added to their taxable income. (More on this later)
• Step-up in basis: Houses, regular brokerage accounts, and other "non-qualified"* accounts get a step-up in basis at death, potentially slashing capital gains taxes. If Uncle Sam’s already taxed it, you’re often in the clear—though retirement accounts can be tricky if they have any pre-tax dollars in them.

*Unfortunately many annuities do not receive this treatment even if they are non-qualified. One of their many disadvantages in 2025.

B) Passing Your Wealth Down Along with Your Values

Charlie Munger once said, “All I want to know is where I'm going to die so I'll never go there”

Brilliant, right?

I’m not suggesting you need to time your earthly exit for your heirs’ perfect payday, but the when of them receiving your assets can shape their lives in big ways.

You’ve heard the old saying “shirt sleeves to shirt sleeves in three generations”—it’s a thing because too often kids inherit massive wealth before they’re ready to handle it.

Picture a 21-year-old with $3 million and a house. Great for Instagram, maybe, or TikTok if that's their thing. But a recipe for trouble without the right grounding.

Our clients often tell us their top goal isn’t just leaving money—it’s passing down values like hard work and responsibility.

I’d bet that’s on your mind too.

So how do you avoid handing over a fortune to someone who’s not there yet? Here are a few ideas. Again ideas, not recommendations.

• Set up a trust with guardrails: You decide when and how much your heirs get, keeping things gradual and deliberate. I've seen trusts where every 10 years a child gets a % of their inheritance total.
• Tie it to incentives: A trust can reward milestones—like earning a degree, matching funds with their own income, or even doing something bold like starting a business. All of this of course is to reinforce work ethic.
• Start talking now: Share your vision early. Let them know why these assets matter and how you hope they’ll use them.

There’s this moment in the Bible where a guy asks Jesus to make his brother split their inheritance. Jesus fires back, “Man, who made me a judge or arbitrator over you?”

If even He’s stepping back from settling inheritance squabbles, I’m not here to preach what’s right or wrong about passing down your legacy, I’m just saying: think hard about how you want it to play out—and make sure your plan reflects that.

Efficiently Receiving Wealth

If you skipped ahead to this part, don’t worry—you don’t need to master tax laws during a tough time. That’s what advisors and CPAs are for.

Here are three things to think about if you’re inheriting.

1. Preparing for the Windfall

• What to Expect: Most people don’t know the tax rules or timelines (like the 10-year withdrawal window for pre-tax assets like IRAs or 401(k)'s) until it’s go-time. You'll want to prepare for this ahead of time from an income and tax standpoint with your CPA and advisor.
• Emotional Readiness: Inheriting isn’t just numbers; it’s a mix of grief and overwhelming pain at times. Money doesn’t come with a manual, but life sure tests you on it.
• Early Conversations: Speaking to your parents before this time comes can be helpful, but I know not all parents welcome this conversation. Either way, getting ahead of almost anything financially is a good idea across the board.

2. Timing and Taxes

• The 10-Year Clock: Simply put, this forces withdrawals and spikes taxes if not careful when planning. If you are handed a large 401(k), IRA, or other pre-tax asset that starts with a 10-year clock, spreading it out to avoid a huge income bump in one year might be your best option.

If you as the beneficiary are a spouse, a minor child of the account owner, disabled, chronically ill, or within 10 years age of you, you might be exempt from the 10-year rule. Instead, you can stretch distributions over your life expectancy, taking required minimum distributions (RMDs) each year based on IRS life expectancy tables. Minor children lose this privilege when turning 21.

See the image below for more. This group is known as "eligible designated beneficiaries" and applies to any

• Step-Up Leverage: You can use what's known as "non-qualified assets" like a brokerage account or house a little differently than the above pre-tax assets. For example, you can sell a house or stock right away if you don’t want it, which will allow you to dodge capital gains and maybe even save on taxes.
• Roth Perks: If you received a Roth account, right on. These are great to receive from an inheritance standpoint, but odds are you'll still have to empty them within 10 years. See my visual below for more on who must withdraw an account within that 10-year period.

3. Handling It Wisely

• Avoid the “Shirt Sleeves” Trap: Earlier I mentioned shirt sleeves to shirt sleeves in three generations. This is a common fact that about 70% of wealthy families lose it by the second generation. You, don't be that person.
• Practical Moves: While it sounds self-serving, and is, receiving a large inheritance can be the right time to find a financial advisor. On a more general rule of thumb basis, paying off high-interest debt, making sure your rainy day fund is filled, and stocking up your annual retirement contributions are easy places to consider starting with large heaps of money.
• Values in Action: A lot of parents care deeply about something by the time they get to the end of their life whether that's their grandchildren or a non-profit. I love seeing children continue their parents' values by continuing donations, helping their own kids with a down payment on a house, or some other caring act like they one they received.

CONCLUSION

Look, you don’t need to master every detail here.

That’s why financial advisors, CPAs, and estate attorneys exist—they live this stuff daily.

What matters is this: the earlier you start planning, the more (and usually better) options you’ll have.

And for those receiving an inheritance? They’ll need to navigate some tricky moves to make it work.

If you’re looking for help in this space, feel free to reach out. I’d be happy to connect you with the right person or resource to get you sorted.

Follow Up to Read or Watch:

• Lorne Book has some great content on estate planning which will capture a lot when it comes to the topic of inheritances.
• I recommend Ed Slott for almost anything IRA or tax-related.
• Dave Ramsey always does a great job covering inheritance scenarios. Here's a video about a 22 year old inheriting 1.5 mil.

Some more of statistics here.

Action Item: Plan early! Death is not a fun topic to discuss, but these are important conversations to consider having with your children or parents, depending on what side you're on.

My name is Jordan McFarland and I'm a CERTIFIED FINANCIAL PLANNER? at SageSpring Wealth Partners in Dallas, TX.

My goal with these brief articles is not to make you an expert, but get you thinking about ways you can optimize your finances and get ahead for tomorrow.

If any questions or thoughts come up during your reading, you can email me at [email protected].

Unfortunately, I must keep these articles rather vanilla and short in order that I do not trip any compliance wires. I'd be happy to meet with you to hear about your specific goals when the time comes.

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