Receiving an inheritance, particularly when it involves the distribution of assets such as an IRA, can raise complex questions about fairness and financial implications.
In this scenario, imagine being named the sole beneficiary of your brother’s IRA, despite a living trust indicating a split between you and your sister.
In this article, we will explore the intricacies of dividing the inheritance equitably and delve into the potential tax consequences.
Reviewing Beneficiary Designations
It is crucial to start by scrutinizing beneficiary designations to ensure they align with your intended distribution of assets.
One beneficiary may honor trust terms, while another, as the primary beneficiary, may not be obligated to do so.
Splitting an IRA Inheritance
In the case of an IRA, equal distribution can be achieved by gifting a portion of the inherited funds to your sister.
However, this involves liquidating a portion of the IRA and addressing tax implications, especially if it is a traditional IRA.
Also read: Can an inherited IRA be split between siblings
Considerations for Asset Distribution
Exploring alternative approaches, such as allocating a greater share of other estate assets to your sister, could allow you to maintain the IRA intact and defer immediate tax payments.
1. Preserving the IRA: A Strategic Approach
Instead of liquidating portions of the IRA to facilitate equal distribution, one could strategically opt to preserve the integrity of the IRA by diverting a larger portion of non-IRA assets to the sibling.
This approach allows for the retention of the IRA’s value and defers immediate tax payments that may arise from liquidation.
2. Deferring Tax Liabilities
By directing a greater share of non-IRA assets to your sister, the need for immediate liquidation of the IRA diminishes, thereby deferring potential tax liabilities.
This can be a prudent financial move, particularly if the IRA constitutes a significant portion of the overall estate.
3. Balancing Asset Value and Tax Consequences
Balance estate assets’ value with IRA tax consequences for prudent decision-making.
This ensures an equitable distribution aligned with the living trust’s intentions and the beneficiaries’ financial well-being.
4. Professional Guidance in Asset Allocation
For complex asset-value and tax balancing, seek advice from financial planners or estate experts.
Their insights can provide a nuanced understanding of the tax landscape, ensuring that the chosen distribution strategy aligns with both your sister’s needs and the broader financial goals of the inheritance.
Gift Tax Implications
When contemplating sharing your inheritance with your sibling, it’s crucial to understand potential gift tax implications.
Any amount gifted above the $16,000 annual exclusion may necessitate filing a federal gift tax return.
Unified Tax Credit
The unified tax credit plays a pivotal role in mitigating gift and estate taxes.
Individuals can make lifetime gifts up to a specified dollar amount before facing estate or gift tax consequences.
In 2021, federal estate tax applies beyond $11.7 million, with a unified tax credit limit of $12.06 million.
Estate Tax Rates and Basis Considerations
The government establishes the federal estate tax rate at 40% of the inheritance amount, with the unified tax credit serving as a safeguard.
Even with the step-up in basis received, the value of the gifted share to your sister would determine its cost basis at the time of the gift.
Conclusion
Navigating the distribution of an inheritance, especially involving IRAs and potential tax obligations, requires careful consideration.
By understanding beneficiary designations, exploring distribution options, and being aware of gift tax implications, individuals can make informed decisions that align with their intentions and financial goals.
T Bag, J.D., LL.M. Professor of Law and Mediation Expert in Family and Siblings Property Disputes
Education:
- J.D., Conflict Resolution and Mediation, Harvard Law School
- LL.M., Estate Planning and Family Law, Yale Law School
Experience:
- Over 15 years of experience mediating complex family property disputes, including estate conflicts and business succession issues.
- Extensive background in facilitating negotiations between siblings and other family members to preserve relationships and family wealth.
- Recognized authority on the legal and psychological aspects of property disputes among family members.
Publications:
- “Mediating Family Property and Estate Conflicts: Keeping the Peace and Preserving Family Wealth” – A comprehensive guide on the advantages of mediation over litigation in family disputes.
- “Negotiating Principles of Entitlement in Sibling Property Disputes” – An analysis of entitlement principles applied in sibling conflicts over property.
Professional Affiliations:
- Member of the American Bar Association, Section of Dispute Resolution
- Fellow at the Center for the Study of Dispute Resolution, University of Missouri
Awards:
- Recipient of the Excellence in Mediation Award from the National Mediation Conference
- Honored with the Distinguished Mediator Award by the International Mediation Institute
Teaching:
- Professor of Law at the University of California, Berkeley, teaching courses on family law, estate planning, and conflict resolution.
- Guest lecturer at various law schools across the USA, sharing insights on mediating family property disputes.
Consulting:
- Provides expert consulting services to law firms and families on matters related to inheritance, property rights, and intergenerational wealth transfer.
- Advises on creating legal frameworks that minimize conflict and promote fair resolution in family property disputes.
Philosophy:
- Believes in the power of mediation to resolve conflicts while maintaining family harmony and protecting privacy.
- Advocates for creative and compassionate solutions that address the underlying emotional dynamics of family disputes.
Contact Information:
- Email: tbag@usamediationexpert.edu
- Office: Department of Law, University of California, Berkeley