Unlawful wealth is a broad term. It can apply to three different types of wealth:
1. That which is unlawful in and of itself: A person may possess an item that is prohibited in Islam, like pork, wine, or narcotics.
2. That which belongs rightfully to someone else: A person may be in possession of wealth unlawfully, since it belongs rightfully to another party. Stolen wealth falls under this category.
3. That which is earned through unlawful means. A person may possess wealth that he or she earned as interest from a loan, or as compensation for the sale of unlawful goods (like selling pork), or as income from unlawful work (like working as a bartender).
When it comes to inheritance, scholars agree that no one may inherit unlawful wealth that falls into the first two categories. Such wealth should not be counted as part of the estate of the deceased. As for the first category, it is sinful to use or sell pork, wine, and narcotics. Such things should be disposed of. A Muslim should not inherit such things. Regarding the second category, wealth that really belongs to someone else should be returned to its rightful owner, not inherited by the family of the thief!
Scholars disagree regarding the third category of unlawful wealth (wealth that is unlawfully earned). There are three opinions on the matter:
1. Unlawfully earned wealth cannot be inherited.
2. Unlawfully earned wealth can be inherited from the estate of the deceased, but should not be accepted as a gift from the living.
3. Unlawfully earned wealth can be inherited from the estate of the deceased, and accepted as a gift from the living. It is only unlawful to the person who actually earned it through unlawful means.
The final opinion is the strongest one, for the following reasons:
1. There is no evidence in the Qur'ân or the Sunnah that accepting such wealth as a gift or as inheritance is unlawful. Had it been unlawful to do so, the Prophet (peace be upon him) would have declared it so. His followers would have been in need of that information, since many of his Companions had such wealth in their possession at the time they embraced Islam. Furthermore, many of them had parents and close relatives who were non-Muslims and who earned their wealth through means that Islam deems as unlawful; like interest earnings and the sale of wine. They also had dealings with some Jews who made their money through interest dealings, though such earnings are prohibited by the Jewish faith. Allah says: "They consumed interest, though they had been forbidden to do so." [Sûrah al-Nisâ': 161]
The Muslims ate at the homes of these people and exchanged gifts with them as was customary among members of the same family and among neighbors. Therefore, had it been unlawful to partake of the wealth of those who earned their wealth through unlawful means, it would have been imperative for the Prophet (peace be upon him) to inform his Companions of this, since a prophet cannot delay communicating religious knowledge to the people at the time when they need it.
2. The Prophet (peace be upon him) entered a house while meat was cooking in a pot. They served him bread and broth. The Prophet (peace be upon him) asked: "What about the meat I see in the pot?"
They said: "Yes. That meat was originally given in charity to Burayrah and you do not eat from charity."
The Prophet (peace be upon him) replied: "It is charity for him, but for us it is a gift." [Sahîh al-Bukhârî and Sahîh Muslim]
It was unlawful for Prophet Muhammad (peace be upon him) to partake of charity. However, when the wealth that was given as charity to Burayrah was then transferred by other means to the Prophet (peace be upon him), it no longer took the ruling of charity wealth, so became lawful for him to partake of.
Likewise, money that someone earns unlawfully – for example, as interest or as wages for working in a bar – is unlawful for that person. If that person gives that money to somebody else in a lawful manner, it becomes lawful for the recipient. It is lawful to accept gifts and to receive one's rightful share of inheritance.
3. The Prophet (peace be upon him) accepted gifts from non-Muslims and ate at their homes. He did not inquire from them as to how they earned the wealth by which they purchased the food and gifts. He was well aware that those people engaged in unlawful commercial dealings, especially dealings in interest. Nevertheless, he interacted with them normally without inquiring into the details of how much of their wealth was earned through unlawful means. Had he made such inquiries, it would have been something significant that the Companions would certainly have related to us.
To conclude, wealth that a person earns through unlawful means is unlawful for that person. When that wealth passes into other hands through lawful means, it is lawful for that new recipient. This applies to money that is acquired as a gift as well as money that is acquired as inheritance. I can see no clear reason to distinguish between the two, since in both cases, the final recipient acquired the wealth through a lawful channel. Of course, if the recipient of a gift believes that by rejecting a gift offered someone whose earnings are unlawful might influence that person to give up dealing in unlawful things, then the recipient may certainly decline the gift for that reason. However, the recipient is not legally obliged to turn down the gift.
And Allah knows best.