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Inherited annuties and ira

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    Inherited annuties and ira

    Father died, son was only one listed as beneficiary. there are also 2 sisters. there was an understanding that son would split everything with his 2 sisters, and he wants to do that. taxes are the issue- if he cashes in and reports all income in his name, tax bracket is high. Is there way to distribute this taxable income to his sisters by a 1099? will the ira people split and distribute to all 3 kids? what is the best way to handle? what questions do we ask ira people and annuity people?

    #2
    No. The custodian cannot split it among unnamed beneficiaries. It will all be paid to the son, and he will have to report on his tax return (if he gets it in one lump sum.) He can check into whether he has an option to take 1/2 in 2014, and 1/2 in January, 2015 which might be more tax-favorable. An IRA must be withdrawn in 5 years, but he can spread it out however he wishes. If he wants to give some to his sisters, he will have to calculate their portion less the tax he had to pay to be fair. It will not be taxable to them, as it is a gift.

    Comment


      #3
      That's what I told him. He is going to check with the IRA and ask them his options. I was hoping for something better, maybe something I did not know.
      The annuities would work the same way? Interest from checking and savings - can I send the sisters a 1099 for that from the son?

      Comment


        #4
        Can he REFUSE the inheritance? Thus causing it to go to all family members.
        This post is for discussion purposes only and should be verified with other sources before actual use.

        Many times I post additional info on the post, Click on "message board" for updated content.

        Comment


          #5
          Probably would go to probate and more expenses, i assume. We are finally getting more options.

          Comment


            #6
            Originally posted by Burke
            An IRA must be withdrawn in 5 years.
            That is NOT true. An inherited IRA can be distributed over the life expectancy of the beneficiary.

            The named bene can also refuse to accept the IRA inheritance, in which case it will pass to the next named beneficiary, if there is one ... i.e. a contingent bene. If he does this, and there are no other named benes, it will pass to the estate and be taxed to the estate on F-1041. If the IRA funds are distributed to the three siblings in the same year, however, the distributions deduction will zero-out the estate's taxable income and tax, and the IRA income will then be reported on the individual returns of the son and his two sisters ... on Schedule E, income from estates and trusts.

            The son might want to receive his portion of the inherited IRA over his remaining lifetime, whereas his sisters may prefer to receive their respective shares faster ... perhaps in a lump sum or over just a few years. In that case the son can choose to have the IRA distributed over his life expectancy, but then withdraw higher amounts than necessary in order to pay over to his sisters the amounts they want, less the F&S income taxes he incurs on the additional distributions he receives on their behalf. If he does this, he may wish to limit each sister's distribution to $14,000 per year in order to avoid gift tax reporting.

            Refusing an IRA inheritance is a tricky thing, and an IRA bene has nine months from the DOD to make the decision to do so. Also, spreading an inherited IRA's distributions over a bene's life expectancy requires that the IRA funds be segregated in an "Inherited IRA" account and not commingled with any other IRA funds he may have. You should urge your client to direct the IRA trustee to make NO distributions of that IRA until he (and his sisters) decide what to do. In the meantime, your client would be well-advised to consult with a qualified (i.e. competent) financial planner regarding his options.

            The subject line of the OP in this thread also refers to annuities, but the content of the OP does not. Nevertheless, I will add that if the decedent also left a non-IRA annuity to his son only, and that son wishes to split the proceeds with his sisters, same as the IRA, the rules may be entirely different. If there is a non-IRA annuity, the son should check with the issuing insurance company to see what options are available to him (and his sisters). Remember, too, that a non-IRA annuity will have a basis, so only a portion of the proceeds will be taxable.

            Added note: The OP in this thread should serve as a reminder to all reading it to remind our clients (and ourselves) of the importance of having up-to-date beneficiary forms on file with each trustee holding our IRA funds.
            Roland Slugg
            "I do what I can."

            Comment


              #7
              Bank Accounts

              Since the sister's names are not on the account the brother has to report 100% of the interest. Then he can give them whatever he wants. Clearly all this giving will require gift tax returns unless he is judicious in his giving.

              Comment


                #8
                Originally posted by Roland Slugg View Post
                That is NOT true. An inherited IRA can be distributed over the life expectancy of the beneficiary.

                The named bene can also refuse to accept the IRA inheritance, in which case it will pass to the next named beneficiary, if there is one ... i.e. a contingent bene. If he does this, and there are no other named benes, it will pass to the estate and be taxed to the estate on F-1041. If the IRA funds are distributed to the three siblings in the same year, however, the distributions deduction will zero-out the estate's taxable income and tax, and the IRA income will then be reported on the individual returns of the son and his two sisters ... on Schedule E, income from estates and trusts.

                The son might want to receive his portion of the inherited IRA over his remaining lifetime, whereas his sisters may prefer to receive their respective shares faster ... perhaps in a lump sum or over just a few years. In that case the son can choose to have the IRA distributed over his life expectancy, but then withdraw higher amounts than necessary in order to pay over to his sisters the amounts they want, less the F&S income taxes he incurs on the additional distributions he receives on their behalf. If he does this, he may wish to limit each sister's distribution to $14,000 per year in order to avoid gift tax reporting.

                Refusing an IRA inheritance is a tricky thing, and an IRA bene has nine months from the DOD to make the decision to do so. Also, spreading an inherited IRA's distributions over a bene's life expectancy requires that the IRA funds be segregated in an "Inherited IRA" account and not commingled with any other IRA funds he may have. You should urge your client to direct the IRA trustee to make NO distributions of that IRA until he (and his sisters) decide what to do. In the meantime, your client would be well-advised to consult with a qualified (i.e. competent) financial planner regarding his options.

                The subject line of the OP in this thread also refers to annuities, but the content of the OP does not. Nevertheless, I will add that if the decedent also left a non-IRA annuity to his son only, and that son wishes to split the proceeds with his sisters, same as the IRA, the rules may be entirely different. If there is a non-IRA annuity, the son should check with the issuing insurance company to see what options are available to him (and his sisters). Remember, too, that a non-IRA annuity will have a basis, so only a portion of the proceeds will be taxable.

                Added note: The OP in this thread should serve as a reminder to all reading it to remind our clients (and ourselves) of the importance of having up-to-date beneficiary forms on file with each trustee holding our IRA funds.
                While I agree with your post, it did not appear to me that the named bene in this case wished to take his distribution over his life expectancy, given the fact that he expected to divide it with his sisters. He certainly could do it that way, however. The total withdrawal within 5 years is one of his options. If he disclaims and it goes to the estate, the withdrawal options are not the same, nor as favorable, as for individual beneficiaries. It would be distributed per the will as an estate asset if not used to pay expenses. As far as a non-qualified annuity (it was not clear from the OP whether there was one or not), the procedure would be the same because no insurance company is going to distribute monies to bene's not named in the contract due to liability issues, not to mention the taxation aspects. If he disclaims, it would go to the estate and pass under the will.
                Last edited by Burke; 11-04-2014, 02:26 PM.

                Comment


                  #9
                  Originally posted by JenMO View Post
                  Interest from checking and savings - can I send the sisters a 1099 for that from the son?
                  Was his name on the checking and savings accounts? Is he the executor? If they were joint accounts in his name and his father's, the money legally goes to him. And no, he cannot give a 1099 to the sisters. (BTW, interest would only be taxable after the date of death.)
                  If his name was on the accounts for convenience sake only, and he treats it as an estate asset because there are no other funds, their share of income (including interest after the date of death) would go to them via a 1041 K-1 (to the extent of net income) if distributions are made to the sisters. Otherwise, the estate would report the income and pay the tax, if any.

                  It is amazing how trusting people are in that they fully believe that one family member will do the right thing when it is only verbalized. I have seen it done, however, and I have also seen it totally ignored. Only if the father put it in writing somewhere is there any legal standing.
                  Last edited by Burke; 11-04-2014, 02:54 PM.

                  Comment


                    #10
                    Five Year Rule

                    Withdrawal within five years where no withdrawals are required until the fifth year, when the entire account must be drained, is only available if the IRA owner passed before their RBD. The OP did not state whether death was before or on or after RBD (April 1 of the year after the year reaching age 701/2). If after RBD, the five year rule does not apply.

                    Ed C. EA

                    Comment


                      #11
                      He can report it all, deduct the tax and "gift" it to his sisters net of the tax.

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