My Mom passed away in June, and one of my brothers (I have four younger brothers) is the executor of her estate. Her estate, as such, isn’t all that much–about $60K total; approximately $45K of that was in what my brother says were retirement investments. That he was listed as the sole benficiary on. They must be paid out directly to the beneficiary and aren’t really considered a part of the estate.
So my main question is–how can he divide that between the remaining heirs and avoid tax liability on his part for that whole amount? Is that possible? Do these sorts of laws vary from state to state? I know absolutely nothing about estate taxes, or for that matter income tax; I file my little 1040A form every year and usually get a refund (don’t have enough deductions to file the 1040), so only know about the tax laws that relate to that. Would he be able to “gift” the money to each of the rest of us and avoid tax liability (for himself) on the entire amount?
Any assistance, especially in relation to tax laws/rules would be greatly appreciated. And no, I’m not being a “vulture” here, I’m just wondering plus it has really upset me that my Mom named only one of us as the beneficiary on these investments.
First things first, since your Mom’s estate was so small, there’s no estate tax involved at all (I think the current limit is something like $1 million - less than that, there’s no estate tax). So, the $15k that didn’t go to your brother outside of the estate can simply be divided up among the heirs however your Mom’s will specified. It’s not “income” for you, so you won’t have to pay income tax on it, either.
Second, the $45k that your brother got directly, outside of the estate, isn’t “income” for him AFAIK (someone correct me if I’m wrong on this part!), so he doesn’t have to pay income taxes on it, no matter whether he keeps it or gives it away.
If your brother wants to divvy up the $45k, even though he was the sole beneficiary of those funds, he can gift up to $11k a year to anyone he chooses without having to worry about gift taxes. So, let’s say there’s you and a sister, in addition to your brother, and he wants each of you to end up with $15k of that $45k. He can give $11k to each of you this year, and another $4k next year, and not have any tax considerations at all. And again, that money isn’t “income” on your tax return, either - it’s a gift.
Don’t take it personally that your Mom named only your brother as the beneficiary on those investments. Sometimes, it’s complicated to have multiple beneficiaries, so she may have been stuck with having to choose just one. She may well have been thinking that your brother would “play nice,” and divvy it up with the rest of you.
On all the retirement-plan/401k paperwork I’ve ever filled out, you’re required to name one primary beneficiary, and if you like one contingent beneficiary. While it’s possible to name your estate as your beneficiary, it’s usually advised against, for a number of reasons.
My guess is that your mother assumed your brother would be fair and distribute the $45K equitably, or left him personal instructions to do so, and, having to pick one of you, decided on him. Having made him executor as well suggests that she had some special arrangement with him to treat you all fairly.
Thanks Earlyout and Polycarp. I did not know about the beneficiary thing–that’s probably why he was named, plus he was going to be the executor, it was just simpler to make him the beneficiary (rather than naming all of us). He’s thinking that the extra $45K is going to push him into a higher tax bracket and that he’ll have to pay tax on it, so thank you for clarifying that as well. I knew about the gift option, but not that it had been raised to $11K/year. LOL Between all of us (we’re including my daughter, as she became Mom’s primary care giver the last two months of her life), the share will come to less than $10K each and can be “gifted” to each of us from my brother and we won’t have to pay taxes on it either, if I’m understanding it correctly. I hope.
I’m feeling a bit better now. Thank you, too, Earlyout for the sympathies–it’s been a very rough 2003; we all are, of course, still mourning our loss and emotions are fairly raw at times. Thanks again!
this part is not entirely true. Retirement income comes in many forms, and very often it’s taxable to the recipient. There may very well be income taxes on it. Think of it this way: if a retiree is receiving retirement benefits, some, all, or none of it may be taxable to the retiree (depending on what sort of retirement benefit it is). If the retiree dies and that benefit goes to another person, someone STILL has to pay any related income tax on it. (this is different than estate tax, which will not come into play here, as Early Out rightly pointed out). Consult a tax professional on how it is reported and what the tax consequence will be.
What drpepper says is true if, for example, a man dies and his widow continues to collect his pension; she must pay income taxes on those monthly pension checks. Similarly, if you inherit somebody’s retirement investment account, you’re responsible for paying income taxes on whatever income it generates (i.e., interest, dividends) after you inherit it, but not on the gross value of the account itself.
In this case, it’s pretty clear that the OP’s brother was named as the lump sum beneficiary on this account - whatever is in that account is paid out to him, and the retirement account is closed. The lump sum payout from an account like that is considered to be inherited money, and is not subject to any income tax whatsoever. Of course, if he then invests that money, and it starts earning interest, the interest in taxable income.
Given how small this estate is, consulting a tax professional is likely to be relatively expensive (relative to the size of the estate, that is). The IRS instructions on the Form 1040 are very clear that money that is inherited, received as a gift, or received as the proceeds of a life insurance policy are not to be reported at all. They don’t even want you to tell them how much you got, but then explain why it isn’t taxable - they simply don’t want the information in the first place.
I have some experience in these issues and want to be clear on one point. I don’t know what kind of account this money was held in. If it was a rollover IRA or a 401(k) type of plan it will be fully taxable as income to the recipient. In this case your brother. He can choose to spread the tax liability over several years, or take it in a single year. He would then gift the other siblings their after-tax portions of the account.
That being said please contact a tax advisor or lawyer to make sure it is done correctly.
As I understand it, the moneys in the retirement accounts are taxable as income to the accounts’ benificiaries, when the money is withdrawn. Assets in the estate proper are taxable to the estate as gifts, subject to the $1M exclusion.
I stand corrected. Mea culpa! If the money was in a retirement account that was tax-sheltered, like an IRA or a 401(k) plan, then the recipient, now the owner of the account, does have to pay income taxes on it, but not necessarily all at once. IRS Publication 590 lays out the rules for an IRA; I couldn’t find a similar statement of the rules for a 401(k) plan, but I’d wager it’s similar, if not exactly the same.
I second Scuba_Ben’s advice to call the IRS. This is something they must encounter all the time, and can give you the skinny on it.
Thank you all so much for the information, even though it has been (somewhat) conflicting.
I called the IRS and spoke with someone familiar with estate taxes. It does depend on what the “retirement investments” were (which I don’t know right now); if they were IRAs or 401(k), that means the principle was never taxed and tax will have to be paid on it. My brother can, when they are paid out to him, when he files his taxes do something called a “nominee designate,” which would mean that he’d divide the money equally between her children (and my daughter), providing each of us with a 1099 INT form, and then we’d each have to pay tax on our share. That would relieve him of the primary tax burden. Honestly, I was going to put the majority of my share into my own IRA. If the retirement investments were CDs, however, they are not taxable, only the interest on them are taxable.
Oh well, I suspect it is going to be well into 2004 before any of this gets settled, and I’m certainly willing to share the tax burden if this is indeed taxable income. Thanks again for the suggestions; it made a lot of sense to call the IRS about it.
