Inherited Money: A Guide for California Heirs

Receiving an inheritance is rarely a simple financial event. It arrives alongside grief, family complexity, and decisions that carry financial consequences, often at a moment when you're least equipped to make choices clearly.

The financial industry tends to treat inheritances as opportunities. A windfall arrives; advisors want to discuss asset allocation. But the first and most important thing we tell clients is this: you don't have to decide anything right away. In fact, the strongest financial move you can make in the first few months is to slow down.

This guide walks through what to think about after you receive an inheritance: the tax rules you need to understand, the decisions that need to be made, and the places where a planning mistake is expensive and difficult to undo.

Start by Doing Less Than You Think You Should

The instinct to act quickly is understandable. You've inherited a meaningful amount of money and it feels irresponsible to let it sit. But most of the mistakes we see from inherited wealth happen in the first six to twelve months, and they stem not from inaction but from moving too quickly.

Before you pay off debt, invest, spend, or restructure anything, give yourself time to grieve and gain perspective. Inherited assets can sit in a brokerage account, a money market fund, or an inherited IRA while you figure out what you actually want to do with them. A rushed decision such as selling inherited accounts, taking a lump-sum distribution from an inherited IRA, or making an irrevocable charitable gift before understanding your tax situation can cost you significantly more.

Understand the Tax Picture Before You Touch Anything

The tax treatment of inherited assets varies dramatically depending on what you've received. Getting this wrong is one of the most common, and most preventable, sources of lost wealth.

Federal and State Estate Taxes

California has no state inheritance tax and no state estate tax. As a California heir, you don't pay a tax simply for receiving assets.

At the federal level, the estate tax applies only to very large estates. The One Big Beautiful Bill Act, signed in 2025, permanently raised the federal estate tax exemption to $15 million per individual ($30 million for a married couple). For the vast majority of families, federal estate tax is not a concern.

What you do need to pay attention to are the asset-specific taxes that follow.

The Step-Up in Cost Basis

When you inherit taxable investment assets (stocks, funds, a brokerage account, or real estate), you generally receive a stepped-up cost basis. This resets your cost basis to the fair market value of the assets on the date of the original owner's death, not what they originally paid.

Say your parent bought Apple stock for $20,000 ten years ago and it's now worth $100,000. If they had sold it, they would have owed capital gains taxes on $80,000 of appreciation. You inherit it with a $100,000 basis. If you sell shortly after inheriting, you may owe little or nothing.

This has two implications. First, if you plan to sell inherited assets anyway, doing so soon after inheriting is usually more tax-efficient than waiting for additional gains to accumulate on top of the existing position. Second, if you're sitting on inherited stock with a very low basis in the original owner's hands, the step-up effectively erases decades of embedded gains. It's one of the most powerful tax benefits in estate planning.

California Real Estate and Proposition 19

Inheriting a California home comes with an important deadline that many heirs miss.

Under Proposition 19 (effective 2021), the rules for inheriting a parent's low property tax assessment changed substantially. If you want to avoid a full property tax reassessment on an inherited home, you must move into it and establish it as your primary residence within one year of the transfer. Even then, the exclusion is capped: any market value above the parent's assessed value plus approximately $1 million may trigger a partial reassessment.

If you inherit a rental property, vacation home, or any property that wasn't the parent's primary residence, it will be fully reassessed to current market value. In San Diego, where property values have appreciated considerably over the past two decades, this can mean a significant jump in annual property taxes.

Inherited Retirement Accounts

This is where many mistakes happen, and where planning makes a difference.

The 10-Year Rule for Non-Spouse Beneficiaries

If you've inherited a Traditional IRA or 401(k) from someone other than a spouse, the SECURE Act changed your distribution requirements. Most non-spouse beneficiaries must empty the inherited account within 10 years after the original owner's death.

Every dollar you withdraw from an inherited Traditional IRA or 401(k) is taxed as ordinary income in the year you take it. A poorly timed distribution strategy can push you into higher federal and California income tax brackets, trigger IRMAA Medicare surcharges, and increase the taxable portion of your own Social Security income.

The 10-year window is not a deadline to ignore until year 10; it's a planning opportunity. Spreading distributions thoughtfully across the 10-year period, timing them to lower-income years, and coordinating them with your own Roth conversions or other income events can preserve tens of thousands of dollars that a single large distribution would cost you.

Surviving Spouses Have Different Rules

If you inherited the IRA from a spouse, you have more flexibility. A surviving spouse can roll the inherited account into their own IRA, treating it as their own. This delays required distributions until they reach their own RMD age and allows continued tax-deferred growth.

Inherited Roth IRAs

Inheriting a Roth IRA is the most favorable scenario. The 10-year rule still applies, but qualified distributions are entirely tax-free, provided the original account was at least five years old at the time of the owner's death. There are also no annual distribution requirements during the 10-year period. A common strategy is to let the inherited Roth continue growing tax-free through year 10, then take a single tax-free distribution at the end.

Retitling IRAs

Inherited IRAs must be retitled correctly as an Inherited IRA in your name, not rolled into your own IRA (with the exception of surviving spouses). The distribution clock begins the year after the owner's death regardless of when you complete the retitling, so you should contact the custodian and initiate the transfer within 60 to 90 days of the date of death.

If the 401(k) is with an employer plan, most non-spouse beneficiaries transfer to an Inherited IRA at a custodian of their choice. This gives you more control over timing and investment decisions within the 10-year window.

Keeping vs. Selling Inherited Assets

• Inherited real estate involves both financial and emotional decisions. Beyond the Proposition 19 property tax question, consider whether you have the bandwidth to manage a rental property, whether holding the home fits your own life situation, and whether the tax timing of a sale makes sense. Selling within the first year, when you have a stepped-up basis and gains are minimal, is often simpler than waiting.
• Inherited investment accounts (brokerage accounts holding stocks, funds, or ETFs) offer a useful opportunity. With the step-up in basis, you can rebalance or consolidate the portfolio without triggering capital gains taxes that would otherwise apply. If the account holds a concentrated position in a single stock, the step-up allows you to diversify in a way the original owner may not have been able to do without a large tax bill.
• Concentrated stock from a family business or a long-held single holding deserves particular care. The step-up erases the embedded gains.
• Annuities inherited from someone else do not generally receive a step-up in basis. Distributions are taxed as ordinary income on the portion representing investment gains. The rules vary based on whether the annuity is inside or outside an IRA and who the beneficiary is. Get specific guidance from a tax professional. 

Where Inherited Money Can Do the Most Good

After the tax picture is clear and any immediate obligations are addressed, inherited assets can serve several meaningful purposes.

• Retirement accounts you can still contribute to. If you're still earning income and haven't maxed your IRA or 401(k) contributions, an inheritance can free up cash flow to do that, or fund a Roth conversion if your situation supports it.
• Education savings. 529 plan contributions benefit from California's gift tax treatment, and an inheritance can fund a significant head start for children or grandchildren.
• Charitable giving. If the decedent cared about specific causes, directing a portion of the inheritance to those causes, perhaps through a donor-advised fund, can honor their legacy while providing a meaningful tax benefit. For retirees over 70½ with inherited funds that have been folded into their own IRAs, Qualified Charitable Distributions offer an especially efficient giving vehicle.
• Estate plan updates of your own. Receiving a meaningful inheritance is a signal to review your own beneficiary designations, trust structure, and estate plan. 

A Few Things to Do Right Now

If you've recently inherited assets and aren't sure where to start, here are important steps in the near term:

• Locate the original accounts and confirm how they're titled. For inherited retirement accounts, contact the custodian (i.e., Schwab, Fidelity, Vanguard) as soon as possible to begin the retitling process. The distribution clock starts regardless of whether you've completed the paperwork.
• Get a valuation. For real estate and concentrated stock positions, document the fair market value at or near the date of death. This establishes your stepped-up basis and helps protect you from a tax dispute later.
• File the right California forms. If you've inherited real estate in California, the PCOR is due at transfer. The BOE-19-B exclusion form generally has a three-year deadline. 
• Talk to your CPA about the tax year. Depending on timing, inherited income and distributions may affect your current-year tax situation. You may also have trust tax returns to complete. 
• Give yourself space. These decisions don't need to happen in a week. The ones that do have deadlines (account retitling, property tax filings, initial inherited IRA distributions) have been noted above. Everything else can wait until you're ready. 

An inheritance is a meaningful event, financially and personally. Handled thoughtfully, it can extend your retirement security, benefit your family, and honor what the person who left it cared about. Handled hastily, it can generate an avoidable tax bill, a penalty, or a decision you'll regret.

If you'd like to talk through how an inheritance affects your specific situation, we'd welcome the conversation.

‍Disclosure: Arcadia Private Wealth LLC is an Investment Adviser offering services in California and in other jurisdictions where exempt from registration. Registration doesn't imply a specific skill level or endorsement. Not legal/accounting/tax advice. Information is believed accurate but not guaranteed and isn't a complete analysis. All investments carry risk of profit or loss. Consult a professional before investing. Opinions reflect authors' views at time of posting and may change. Not responsible for third-party comments. Nothing here is an offer to buy/sell securities or personalized financial, legal, or tax advice. Consult an attorney or tax professional for your specific situation.