Are inheritance advances taxable?

Are inheritance advances taxable?

The grieving process is always challenging. But for many families, the slow legal process of distributing an inheritance compounds emotional pain with financial uncertainty. When pressing needs for money arise long before the estate is settled, an inheritance advance can be a lifeline.

If you are considering an inheritance advance, it’s important to understand the tax implications. This guide from Inheritance Funding explains inheritance advances and the federal and state tax laws so you can make an informed decision.

How Does the Inheritance Process Work?

When a person passes away, their assets — including property, investments and cash — are counted as their estate. A court process called probate oversees the distribution of assets from this estate to the beneficiaries in the form of inheritance. Probate involves:

• Authenticating the deceased person’s will, if they have one.
• Appointing an executor or administrator to manage the estate.
• Identifying and counting all assets.
• Notifying creditors and paying off the deceased person’s debts and taxes.
• Resolving any disputes or challenges to the will.
• Distributing the remaining assets to the rightful heirs.

This process takes anywhere between six months and three years before heirs receive their money. Whether probate takes a few months or a few years depends on potential delays like court backlogs, complex assets that are difficult to value or legal disputes between beneficiaries. Inheritance advances relieve the financial pressure that often results from the long process of probate.

What Is an Inheritance Advance?

An inheritance advance is a financial service that provides an heir with a portion of their expected inheritance right away. Getting an inheritance advance lets you access your money now, rather than waiting months or years for probate to end.

Is an Inheritance Advance a Loan?

An inheritance advance isn’t a loan. It’s an asset purchase. If you get an inheritance advance, you are selling a portion of your asset — the inheritance you’re entitled to that’s currently tied up in probate — to the financial service provider in exchange for a lump sum of cash today.

When you sign your agreement with the inheritance advance company, you’ll agree to a fixed fee up front, which the estate will pay to the company directly after probate, along with their assigned portion of your inheritance, which reimburses them for the advance amount. You don’t have to make any payment yourself. At this point, you’ll also receive the remainder of your inheritance.

The fixed fee buys you instant access to a portion of your inheritance and compensates the advance provider for waiting until probate ends to get their money back. Most reputable inheritance advance providers only charge this fixed fee. This means the duration of probate and the final amount of inheritance you get won’t result in you paying any extra costs. If your final inheritance is less than expected or fails to pay out, you keep the advance and owe nothing more, while the company takes the loss.

An inheritance advance differs from a loan because:

• You don’t have to repay the advance.
• There is no interest rate applied to your fee.
• You don’t need to pass a credit check to qualify.
• The transaction doesn’t affect your credit score.
• There is no collateral.

Are Inheritance Advances Taxable in the US?

An inheritance advance isn’t considered taxable income in the United States. There are two basic reasons for this. Firstly, the IRS doesn’t tax inheritances as income. Secondly, your inheritance advance is just an early portion of your inheritance, so the IRS doesn’t tax the advance either. The transaction between you and the advance company doesn’t affect your money’s tax status as an inheritance.

The tax implications of receiving an inheritance, or an advance on your inheritance, fall under four areas of tax law — federal income tax, federal estate tax, state inheritance and estate taxes, and capital gains tax.

1. Federal Income Tax

According to Internal Revenue Code (IRC) Section 102, “Gifts and Inheritances,” the value of inherited property isn’t included in gross income. No matter how much you receive, you don’t report it as income on your federal tax return.

Since an inheritance advance is an early portion of this nontaxable inheritance rather than a separate tax event, the advance itself is not considered taxable income either. You are receiving your own nontaxable money sooner, not earning new income.

2. Federal Estate Tax

While heirs don’t pay income tax on inheritance received, the estate itself might owe a tax before any money is distributed. This is called estate tax.

The federal estate tax is governed by IRC Sections 2001 through 2210 and is based on the total value of the deceased person’s assets at the time of death. There is a combined exemption based on estate value and lifetime gifting, which is set at $13.99 million per individual for 2025 and projected to be $15 million for 2026.

This means that if someone’s combined lifetime gifting and estate value is less than $13.99 million when they passed away in 2025, their estate is exempt from federal estate tax. Above the combined exemption threshold, the estate tax of up to 40% will affect the total amount available for distribution to heirs.

The advance company will factor this into its calculations, so it may affect the amount you could receive as an advance. But once you’re approved for an inheritance advance, you won’t be responsible for paying any taxes on it or on your share of the inheritance that pays out after probate.

3. State Estate and Inheritance Taxes

State inheritance tax laws vary, but some states collect their own taxes that affect inheritance. These taxes fall into two categories.

• Estate tax: States may apply their own estate tax on top of the federal estate tax. Like the federal tax, the estate pays this tax before distribution, so it affects the total amount available to distribute between heirs. As of 2025, Connecticut, the District of Columbia, Hawai’i, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington have an estate tax.
• Inheritance tax: A few states require heirs to pay an inheritance tax after receiving their distribution. The tax rate often depends on your relationship to the person who passed away — spouses are typically exempt, while more distant relatives pay a higher rate. As of 2025, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have state inheritance taxes.

States levy these taxes on the estate or the final inheritance, not on the advance. If your state has an estate or inheritance tax, a reputable advance company will check the tax rates and exemptions and factor them into the calculation of your net inheritance to find what advance amount you’re eligible for. Then, if approved, you can receive your inheritance advance tax-free, and only if you are liable for inheritance tax in your state, pay the tax from the remaining inheritance you receive after probate.

4. Capital Gains Tax and the Stepped-Up Basis

Capital gains tax applies only if you sell an inherited asset, like real estate or stocks. According to IRC Section 1014, inherited assets receive a stepped-up basis. This means the asset’s cost basis for tax purposes is reset to its fair market value on the date of the original owner’s death, which can minimize or even eliminate capital gains tax.

Let’s say you just inherited stock from your mom that cost $20,000 when she bought it and is now worth $100,000. If you sell it immediately for $100,000, you would have no taxable capital gains, because gains are measured against the stepped-up basis of $100,000, not against the original $20,000.

If you wait a year and sell the stock for $110,000, this stepped-up basis means capital gains tax only applies to the $10,000 growth that happened after you inherited, not the full $90,000 growth since your mom’s original purchase.

Since you receive your inheritance advance in the form of cash based on the value of assets you inherit, rather than receiving assets in advance that you could sell, capital gains tax won’t apply to your advance lump sum.

That said, the advance company will factor the stepped-up basis into its calculations to check how much your inheritance will be worth after tax. This can help you qualify for a larger advance and reduce your capital gains tax liability from any remaining assets you receive after probate and choose to sell.

Are Gains From Investing Your Advance Taxable?

Yes. While the advance itself isn’t taxable income, the money is yours once you receive it. This means any new income or profit you make with that money is a new taxable event, separate from the inheritance. This includes interest from putting the advance into a savings account, dividends or capital gains from using it to buy stocks, rent or capital gains if you invest in real estate and profit if you use the advance to start a business.

Why Get an Inheritance Advance?

While probate lags, life continues, and so do financial needs. Reasons to choose an inheritance advance include the following.

• Covering urgent expenses: After losing a loved one, you may need to cover urgent costs, including funeral expenses, outstanding medical bills or travel costs for family members.
• Managing debt: An inheritance advance can help pay off credit card balances, personal loans or other debts that would otherwise accumulate interest while you wait for probate to end.
• Housing security: You can use an inheritance advance to make a down payment on a new home or keep up with mortgage or rent payments.
• Daily living expenses: If you need help covering day-to-day costs like groceries, utilities and car payments, an inheritance advance could be a smart alternative to draining savings or going into debt.
• Seizing opportunities: An inheritance advance can let you invest in a business, make home renovations or pay for further education, instead of putting your financial goals on hold for probate.

All these reasons point to the core benefit of getting an inheritance advance — the freedom to use your money for what matters most to you, right now.

Who Can Get an Inheritance Advance?

Any confirmed beneficiary of an estate in probate can apply for an inheritance advance. A confirmed beneficiary could be someone named as a beneficiary in the deceased person’s will or, if there is no will, someone who is an heir based on state intestacy law. This is often, but not always, a spouse or child.

The inheritance advance company may decide whether to approve the application based on details like the advance amount requested, the estate’s verified inventory of assets and any debts or disputes affecting the estate. The most important factors for your application’s success are the amount you are requesting and whether the details of the estate indicate you are likely to receive that amount or more. Your own financial standing, including your credit score, rarely affects whether you can get an inheritance advance.

How to Get an Inheritance Advance

Reputable inheritance advance companies make the application and approval process straightforward. While exact steps may vary between companies, the typical inheritance advance process looks like this:

1. Free consultation and application: You start by contacting a reputable inheritance advance company for a free, no-obligation consultation. You provide basic information about yourself and your inheritance, including the name of the deceased, the estimated value of your share and the amount you’d like as an advance.
2. Verification: The company’s team will then verify the details of the estate. This typically involves reviewing the will, confirming the estate’s assets and communicating with the attorney or executor handling the probate case. This doesn’t cost you anything.
3. Review and approval: After verifying the inheritance, the company may approve you for an advance and present you with a clear agreement. This document will outline the exact amount of cash you receive, the fee you pay on the advance and the amount you assign to the company from your inheritance at the time of distribution to cover reimbursement for the advance.
4. Receive your cash: After you sign the agreement, the company transfers the advance money to your bank account. You may even receive it on the same day.

Having received your cash, you have no further obligations. The company will collect its assigned share when probate concludes and the estate will pay you your remaining inheritance money.

Should I Get an Inheritance Advance?

Probate is often a long process that can put financial strain on heirs with pressing needs. If you stand to inherit from an estate that is now in probate, an inheritance advance lets you access cash now to cover costs or take immediate steps toward your financial goals.

While the federal and state taxes discussed in this guide may affect the total value of your inheritance, an inheritance advance isn’t taxable income and doesn’t introduce any new tax burdens. Understanding this can help you make a confident decision about whether to apply for an advance based on your financial priorities.

This story was produced by Inheritance Funding and reviewed and distributed by Stacker.