Sister inherited 401k to be split with siblings

[KJ Judd]

New client named sole beneficiary on her brother's 401k plan inherited when brother died earlier this year. His will says everything should be split equally. Attorney handling estate says beneficiary overrules the will.

So my client has $85k of income to report as the 401k company distributed it all to her in December. She is planning on splitting the net of tax proceeds with siblings to keep family harmony and since this really was brother's intent.

Dropping $85k of additional income into her return does nasty things to her taxes. I told her I'd investigate, but since paid out already to named beneficiary I think she's stuck. Any way she can divide the $85k inherited amount so it's taxed on the siblings tax returns?

[thomtax]

Tax on 401K

I don't know about the legal aspects, but it might be possible that she could contact the others sharing in the distribution, explain the situation to them and tell them that she was going to deduct the additional taxes from what she sent them that were caused by her having to pay for the entire amount. It is probably what you would call a "Quick and Dirty" way to handle it.

Reasonable people should not object, but then we all know what happens to reason when inheritance money is involved.:-)

And of course with the usual caveat "I reserve the right to be wrong."

LT

[JoshinNC]

I agree with the attorney, beneficiary overrules will.

This is why we need to discuss these kinds of issues with our clients from time to time. Even better, for those of us who handle our clients investments, we get to talk about this on a regular basis. I do agree with talking to the other siblings about holding back enough to pay the taxes. Most family members would agree to this, I think. It may be worth all of the family's time to pay you or the attorney for a couple hours to truly understand the tax aspects (and may be a chance to earn some new business), so that they fully understand where this all is coming from.

[veritas]

here's how

I would look at it.

If the benificiaries had been properly setup (note to everyone check out beneficiaries) and they had chosen to take the distribuition the siblings would have paid tax. So tell your client to report the income pay the tax and give the siblings the net amount after tax.

[jainen]

tell the siblings

>>give the siblings the net amount after tax<<

And tell the siblings that if they don't like the arrangements they don't have to accept the gift, because that's all it is, a gift--she doesn't owe them a dime.

[OldJack]

Don't know how much money we are talking about, but if she makes each a gift for more than the annual exclusion she would have to file a gift tax return with those gifts coming back into her estate "gross valuation" on death.

[KJ Judd]

She is going to split the amount net of the additional tax she owes. I'm going to calculate what her refund would have been without the inheritance & then what she owes with the inheritance.

Unfortunately this is someone who always did her taxes herself and now comes to me with this issue hoping I can give her tax advice on how to minimize taxes after the distribution has been made.

We looked at the gift tax issue and we're okay. There are 5 siblings total. And client is married so they could elect gift splitting if necessary.

Thanks for your input. I just wanted to make sure I wasn't missing anything. Brother died of cancer and barely got his will signed a week before he died. "Was concerned about taxes taking a lot of it, but never did anything about it" to quote the client.

[JoshinNC]

Well, that changes everything.

Sue the attorney who wrote the will. He/she should have advised client that beneficiary forms override will, and should have reviewed forms to determine if will and beneficiary designations were consistent.