Splitting Inheritance from Dad

Today TaxMama hears from Karen who tells us, “My husband is the co-beneficiary of his stepfather’s IRA. However, as part of the estate settlement, he has to pay his stepsister half of the value of his stepfather’s house. This amount just happens to equal the amount of the IRA that he has inherited.

Do we have to receive the IRA distribution, report it as taxable income and then pay his stepsister for her part of the house? Is there a way that this income can be given directly to her without passing through my husband?”

Hi Karen,

There is a way to decline an inheritance – I forget the wording right now (disclaim?). But he can file a formal document with the estate and let the next beneficiary in line, his step-sister, receive it directly.

If they get along and like each other, that would be a rotten thing to do to her.

Your husband gets the house, completely tax free and she gets that IRA and will pay ordinary taxes on it, at her highest tax rate…and that’s after the estate taxes are paid on it. (IRAs are not great things to have in taxable estates. I try to clear those out gradually, while my clients are still alive.)

I suggest you sit down with the estate attorney and see if there is an equitable way to split the IRA with her and then, pay her for her share of the value of the house by either refinancing or selling the house. This is a good time, of course, since the real estate market is still near its peak.

But watch out, homes are taking longer to sell.

Your husband and his sister can roll their shares of the IRA into their own IRA account.

They can minimize the income taxes by having them distribute the funds to them over a specific time frame based on the actuarial tables related to your husband’s age or his sister’s.

I think they use the age of the youngest heir as the factor. But don’t hold me to that.

Or if the IRA isn’t that high…I believe that you may draw out all the money in a lump sum anytime during the 5 years after his dad’s death. There won’t be any early withdrawal penalties – just the tax.

I’m fuzzy on the specifics. This is the kind of thing I have to look up carefully and research each time it comes up for a client. So, please, do be sure to work with a good tax pro on this. They’ll help you keep the taxes lowest.

And, remember, you’ll find answers to questions about estates and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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