Sibling inheritance of Traditional IRA - sharing with other siblings

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Barkingsparrow
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Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Thu Apr 30, 2020 5:15 pm

We have a situation where the family consists of 1 brother and 3 sisters. The brother died earlier this year w/o a will. He never married, did not ever have kids, and the parents are deceased. Among other things, he left a traditional IRA with the oldest sister as the beneficiary. She wants to share the proceeds from the IRA equally with her other two sisters. However, the understanding is that this would require the sisters to go through probate.

The IRA is not that substantial, very low 6 figures. If the oldest sister attempts to cash it all at once, of course, she'll bear the brunt of the taxes. As a sanity check, would appreciate some advice on our options, but really, I think we will just have her set up a stretch IRA situation subject to the SECURE Act 10-year restrictions.

mhalley
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by mhalley » Thu Apr 30, 2020 5:22 pm

Disclaiming part of the inheritance would involve probate etc, so just gifting the sisters their share each year over 10 years seems the simplest solution.

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CAsage
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by CAsage » Thu Apr 30, 2020 5:52 pm

Is probate so truly awful in your (brother's) state? The cleanest solution would be to "disclaim" 2/3 in favor of the other two sisters so they could go on their own way, pay their own taxes etc. The simplest solution might be to just gift them money each year, of course after paying taxes which I would calculate at the top of your marginal bracket. The downside to that, it will increase Oldest Sister's income which may have other bad fallout - limiting Roth Conversions due to bracket creep and taxes, possible IRMAA hits if anyone is within 10 years of Medicare, scholarship or dependent deduction losses if anyone has a student. I'd do it up front if at all possible, but I'm not a lawyer => talk to one in your state. The other option would be to give the other two sisters more of some other asset, but IRAs are such a tax bomb...
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by bsteiner » Thu Apr 30, 2020 5:53 pm

I would usually say that you probate the Will, not the assets. But in this case if there's no Will, you can't probate the Will.

Given the small amount involved, the simplest thing would be for the oldest sister to share each distribution she receives (net of income taxes) with the other two. That will avoid having a portion of the IRA becoming payable to the estate which would limit the stretch to 5 years instead of 10 years [edit: or the oldest sister's life expectancy during her lifetime and 10 years following her death if she dies before then if she's not more than 10 years younger than the deceased IRA owner].
Last edited by bsteiner on Fri May 01, 2020 11:25 am, edited 1 time in total.

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fire5soon
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by fire5soon » Thu Apr 30, 2020 6:08 pm

Depending on the state the brother lives in they can use a small estate affidavit. Some states have very low limits (like $10k) and some states have very high limits (six figures). If you don't qualify for an affidavit, and you don't want to probate, you may be able to obtain a court order to distribute the asset but not likely. Research the options/limits for his state.

I'm not an attorney or expert, but I do have some experience with estate distribution. Good luck and my condolences.
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Spirit Rider » Thu Apr 30, 2020 6:39 pm

bsteiner wrote:
Thu Apr 30, 2020 5:53 pm
Given the small amount involved, the simplest thing would be for the oldest sister to share each distribution she receives (net of income taxes) with the other two. That will avoid having a portion of the IRA becoming payable to the estate which would limit the stretch to 5 years instead of 10 years.
+1 This is the only smart way to do it. You generally want to preserve any tax deferral. There are no RMDs required, but it makes sense to take distributions out over the 10 years rather than waiting until the last year. You don't want it to all be taxed in one year.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Fri May 01, 2020 7:43 am

Spirit Rider wrote:
Thu Apr 30, 2020 6:39 pm
bsteiner wrote:
Thu Apr 30, 2020 5:53 pm
Given the small amount involved, the simplest thing would be for the oldest sister to share each distribution she receives (net of income taxes) with the other two. That will avoid having a portion of the IRA becoming payable to the estate which would limit the stretch to 5 years instead of 10 years.
+1 This is the only smart way to do it. You generally want to preserve any tax deferral. There are no RMDs required, but it makes sense to take distributions out over the 10 years rather than waiting until the last year. You don't want it to all be taxed in one year.
Appreciate the replies. This is the direction we plan to go - the older sister will see a tax accountant also as this situation does have an impact.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Swivelguy » Fri May 01, 2020 7:54 am

If any sibling wants their share faster, just have the account holder calculate and withhold the appropriate taxes from what they give to the other sibling.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Spirit Rider » Fri May 01, 2020 8:34 am

Wait a minute we may have been missing the forest for the trees.

If the beneficiary is not > 10 years younger than the decedent. The 10 year rule does not apply.

Lifetime RMDs can be taken if started by 12/31 of the year following the year of death. The divisor will be based on the beneficiary's age in that year.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by mhalley » Fri May 01, 2020 11:18 am

As we don’t know what the tax bracket is for the op, we don’t know how much will be lost to taxes over the 10 years. Paying the taxes and getting the estate distributed to the siblings over 10 years might be better to get the estate “settled” as opposed to dragging it out over 20 to 30 years if the 10 year RMD is not actually required. A lot depends on the financial situation of the siblings and their need for the money.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Fri May 01, 2020 11:29 am

mhalley wrote:
Fri May 01, 2020 11:18 am
As we don’t know what the tax bracket is for the op, we don’t know how much will be lost to taxes over the 10 years. Paying the taxes and getting the estate distributed to the siblings over 10 years might be better to get the estate “settled” as opposed to dragging it out over 20 to 30 years if the 10 year RMD is not actually required. A lot depends on the financial situation of the siblings and their need for the money.
The oldest sister is only about 2 or 3 years younger than the brother, who was the oldest in the family. My wife is the middle sister, then there's a younger sister. All married. The tax bracket for the two oldest sisters (filing joint) is 24%. I would say the youngest is at 12%. She has the most immediate need, not so much for us or the oldest sister.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by not4me » Fri May 01, 2020 11:41 am

It sounds as if the siblings largely get along & that is a big help. I hope it stays that way. In addition to what has been offered, I would suggest some written understanding of how this will work. The resulting distribution will be affected by how it is invested & when withdrawn. I would think it wise to establish now how those decisions will be reached. Also, don't forget to be sure the beneficiaries on the inherited IRA are set "appropriately".

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Gill » Fri May 01, 2020 11:44 am

I would follow bsteiner's suggestion of simply paying 2/3's of each distribution from the IRA net of taxes to the other two siblings as they are received. So if she receives $11,000 and her marginal tax rate consumes $2,000 of that she would send a check for $3,000 to each of her two sisters. If a sister predeceased her she could continue that with the surviving sister. No need to be absolutely precise as she is sharing something that she could have kept and is rightfully hers.
Gill
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Gill » Fri May 01, 2020 11:46 am

not4me wrote:
Fri May 01, 2020 11:41 am
It sounds as if the siblings largely get along & that is a big help. I hope it stays that way. In addition to what has been offered, I would suggest some written understanding of how this will work. The resulting distribution will be affected by how it is invested & when withdrawn. I would think it wise to establish now how those decisions will be reached. Also, don't forget to be sure the beneficiaries on the inherited IRA are set "appropriately".
I don't see where this is a problem. She is doing this out of the goodness of her heart, not because she has any obligation to share. She can do whatever she wishes with nothing in writing. They shouldn't look a gift horse...

Gill
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by not4me » Fri May 01, 2020 12:07 pm

Gill wrote:
Fri May 01, 2020 11:46 am
not4me wrote:
Fri May 01, 2020 11:41 am
It sounds as if the siblings largely get along & that is a big help. I hope it stays that way. In addition to what has been offered, I would suggest some written understanding of how this will work. The resulting distribution will be affected by how it is invested & when withdrawn. I would think it wise to establish now how those decisions will be reached. Also, don't forget to be sure the beneficiaries on the inherited IRA are set "appropriately".
I don't see where this is a problem. She is doing this out of the goodness of her heart, not because she has any obligation to share. She can do whatever she wishes with nothing in writing. They shouldn't look a gift horse...

Gill
Gill, I'm sure you & I are in agreement on this. I didn't say it was a problem & agree they "shouldn't " ...but...

This is getting more into family dynamics & the possibility something might not go as planned. I've heard that has occasionally happened. Only a suggestion from someone OP doesn't know & can take accordingly.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by HomeStretch » Fri May 01, 2020 12:18 pm

The cleanest way to calculate the net amount to be split is to have the tax accountant do two tax returns - with and without the IRA distribution. The tax liability delta between the two returns is the amount of taxes related to the distribution. The amount to be split = IRA gross distribution - federal/state tax liability delta - tax accountant fee for the extra return(s).

The gift to each sibling for the split doesn’t have to be to the penny nor am I suggesting the sister share the tax returns with her personal information. But at least she has something in her files to back up the amount split.

I wouldn’t put any of this in writing. It’s a gift.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by epargnant » Fri May 01, 2020 12:27 pm

Spirit Rider wrote:
Fri May 01, 2020 8:34 am
Wait a minute we may have been missing the forest for the trees.

If the beneficiary is not > 10 years younger than the decedent. The 10 year rule does not apply.

Lifetime RMDs can be taken if started by 12/31 of the year following the year of death. The divisor will be based on the beneficiary's age in that year.
Doesn’t the new SECURE Act change that as of 2020? No stretch IRAs for non-spouse (with some exceptions for minor/disabled children). But for siblings like in this case, it’s 10 years.

Edit: just realized this is SpiritRider who is very knowledgable so I must be wrong! I did not realize there was an exemption in the case of a beneficiary less than 10 years younger. Good to know.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Spirit Rider » Fri May 01, 2020 3:18 pm

epargnant wrote:
Fri May 01, 2020 12:27 pm
Spirit Rider wrote:
Fri May 01, 2020 8:34 am
Wait a minute we may have been missing the forest for the trees.

If the beneficiary is not > 10 years younger than the decedent. The 10 year rule does not apply.

Lifetime RMDs can be taken if started by 12/31 of the year following the year of death. The divisor will be based on the beneficiary's age in that year.
Doesn’t the new SECURE Act change that as of 2020? No stretch IRAs for non-spouse (with some exceptions for minor/disabled children). But for siblings like in this case, it’s 10 years.

Edit: just realized this is SpiritRider who is very knowledgeable so I must be wrong! I did not realize there was an exemption in the case of a beneficiary less than 10 years younger. Good to know.
Don't feel bad. I forgot through the majority of this thread and know better. This is one of the lessor known exceptions to the 10 year rule. From the SECURE Act Section 401(a)(2)(E)(ii) list of eligible designated beneficiaries.
  • (V) an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by celia » Fri May 01, 2020 3:38 pm

Instead of taking the "minimum" RMD each year, I would have the oldest sister withdraw $55-60K each year, pay the taxes and gift 2/3 of what remains. Since the annual gift exclusion amount is $15,000, she can give up to that amount to each sister without reporting the gift. And the sisters will get their money sooner. $15,000 now is worth more than $15,000 in the future. And all sisters will have the same spending power for that money as the taxes were already paid.

She should also want to distribute this quickly as any one of them could die and the "split" might then not be completed as intended or will get messy if a sister's children then get some money. She should also change the beneficiaries on the TIRA to be her sisters, which appears to be her intention here.
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celia
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by celia » Fri May 01, 2020 3:56 pm

Gill wrote:
Fri May 01, 2020 11:46 am
not4me wrote:
Fri May 01, 2020 11:41 am
It sounds as if the siblings largely get along & that is a big help. I hope it stays that way. In addition to what has been offered, I would suggest some written understanding of how this will work. The resulting distribution will be affected by how it is invested & when withdrawn. I would think it wise to establish now how those decisions will be reached. Also, don't forget to be sure the beneficiaries on the inherited IRA are set "appropriately".
I don't see where this is a problem. She is doing this out of the goodness of her heart, not because she has any obligation to share. She can do whatever she wishes with nothing in writing. They shouldn't look a gift horse...

Gill
Of course, the intent is honorable and would probably be shared if a different sister had been listed as beneficiary, but strange things can happen if one of the sisters dies before the account is emptied. If this isn't discussed and written down up front, what if the oldest sister dies and her husband inherits, then later re-marries,.....

We've all seen threads here where estates weren't handled like things were intended. Of course, this doesn't have to be shared, but it would be nice if the 3 sisters knew that they were going to get $xx,xxx each year around brother's birthday... or whatever works out for them. A signed statement of older sister's wishes to be followed after she dies should be written for her estate (and sisters) to know what is going on.

WAIT! If she dies, the account goes to the beneficiaries, unless she wants 1/3 to go to her immediate family.

See, how messy this can get? That's why the account should be distributed in a timely manner.
Last edited by celia on Fri May 01, 2020 4:03 pm, edited 1 time in total.
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Spirit Rider » Fri May 01, 2020 3:59 pm

celia wrote:
Fri May 01, 2020 3:38 pm
Instead of taking the "minimum" RMD each year, I would have the oldest sister withdraw $55-60K each year, pay the taxes and gift 2/3 of what remains. Since the annual gift exclusion amount is $15,000, she can give up to that amount to each sister without reporting the gift. And the sisters will get their money sooner. $15,000 now is worth more than $15,000 in the future. And all sisters will have the same spending power for that money as the taxes were already paid.
This may make sense if the excess distribution does not change tax brackets or the bracket change is small. However, if the excess distribution pushes the beneficiary from say the 24% tax bracket into the 32% tax bracket that should be a major consideration.
She should also want to distribute this quickly as any one of them could die and the "split" might then not be completed as intended or will get messy if a sister's children then get some money. She should also change the beneficiaries on the TIRA to be her sisters, which appears to be her intention here.
This paragraph to totally incongruent. The current beneficiary can name the siblings as future beneficiaries with a per stripes designation or not. Either way getting the exact desired result. Then the first sentence is irrelevant.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Fri May 01, 2020 5:08 pm

She talked to an accountant and he advised her to roll it over first to Vanguard. Can she even do that - or is she required to take the withdrawals from the existing IRA?

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Fri May 01, 2020 5:20 pm

Barkingsparrow wrote:
Fri May 01, 2020 5:08 pm
She talked to an accountant and he advised her to roll it over first to Vanguard. Can she even do that - or is she required to take the withdrawals from the existing IRA?
Gah. Never mind, yes, she will roll it over to an "Inherited IRA" at Vanguard and then go from there.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Spirit Rider » Fri May 01, 2020 5:33 pm

She can move it to an Inherited IRA at another financial institution, but it must be done as a direct trustee -> trustee transfer. Any attempt to do an indirect 60-day rollover with be treated as an irrevocable distribution subject to ordinary income taxes on the full amount.

Where is it now? There is no mythical status of Vanguard these days. It would be perfectly fine to leave it at E-Trade, Fidelity, Schwab or TD Ameritrade. A consideration may be where she has her other investment and retirement accounts.

You haven't indicated if she is not more than 10 years younger than the decedent. If she is not, she can elect to take RMDs, which can always been exceeded. However, if distributions to satisfy the payments to other siblings (grossed up for taxes) are >= the RMD amount. It is entirely optional for her to take distributions of her share.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Fri May 01, 2020 5:41 pm

Spirit Rider wrote:
Fri May 01, 2020 5:33 pm
She can move it to an Inherited IRA at another financial institution, but it must be done as a direct trustee -> trustee transfer. Any attempt to do an indirect 60-day rollover with be treated as an irrevocable distribution subject to ordinary income taxes on the full amount.

Where is it now? There is no mythical status of Vanguard these days. It would be perfectly fine to leave it at E-Trade, Fidelity, Schwab or TD Ameritrade. A consideration may be where she has her other investment and retirement accounts.

You haven't indicated if she is not more than 10 years younger than the decedent. If she is not, she can elect to take RMDs, which can always been exceeded. However, if distributions to satisfy the payments to other siblings (grossed up for taxes) are >= the RMD amount. It is entirely optional for her to take distributions of her share.
Thanks for this information. I feel like the accountant is just providing superficial advice. She is 3 years younger.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by celia » Fri May 01, 2020 5:53 pm

I wouldn’t move it anywhere until market volatility settled down (and got boring) unless she transfers it in-kind.
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by bsteiner » Fri May 01, 2020 5:53 pm

Barkingsparrow wrote:
Fri May 01, 2020 5:41 pm
Spirit Rider wrote:
Fri May 01, 2020 5:33 pm
She can move it to an Inherited IRA at another financial institution, but it must be done as a direct trustee -> trustee transfer. Any attempt to do an indirect 60-day rollover with be treated as an irrevocable distribution subject to ordinary income taxes on the full amount.

Where is it now? There is no mythical status of Vanguard these days. It would be perfectly fine to leave it at E-Trade, Fidelity, Schwab or TD Ameritrade. A consideration may be where she has her other investment and retirement accounts.

You haven't indicated if she is not more than 10 years younger than the decedent. If she is not, she can elect to take RMDs, which can always been exceeded. However, if distributions to satisfy the payments to other siblings (grossed up for taxes) are >= the RMD amount. It is entirely optional for her to take distributions of her share.
Thanks for this information. I feel like the accountant is just providing superficial advice. She is 3 years younger.
These issues may be more for the lawyer handling the estate than for the accountant.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Spirit Rider » Fri May 01, 2020 7:02 pm

bsteiner wrote:
Fri May 01, 2020 5:53 pm
These issues may be more for the lawyer handling the estate than for the accountant.
This is a retirement plan with a person as a named beneficiary. Why would the executor be involved except maybe for notification unless there are federal estate tax issues or state estate/inheritance tax issues. Present company excepted, most estate lawyers I have run across are not well informed of the intricacies of inherited retirement plan rules and issues.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by MarkNYC » Fri May 01, 2020 8:18 pm

Spirit Rider wrote:
Fri May 01, 2020 7:02 pm
bsteiner wrote:
Fri May 01, 2020 5:53 pm
These issues may be more for the lawyer handling the estate than for the accountant.
This is a retirement plan with a person as a named beneficiary. Why would the executor be involved except maybe for notification unless there are federal estate tax issues or state estate/inheritance tax issues. Present company excepted, most estate lawyers I have run across are not well informed of the intricacies of inherited retirement plan rules and issues.
Bruce,

I tend to agree with Spirit Rider. Not all attorneys who handle estates have your extensive IRA knowledge. In my experience, it's not unusual for the attorney handling an estate to be lacking in specific IRA knowledge. Not always. But the client should not assume that the estate attorney knows more about inherited IRA rules than the accountant.
Last edited by MarkNYC on Fri May 01, 2020 8:22 pm, edited 1 time in total.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Barkingsparrow » Fri May 01, 2020 8:21 pm

MarkNYC wrote:
Fri May 01, 2020 8:18 pm
Spirit Rider wrote:
Fri May 01, 2020 7:02 pm
bsteiner wrote:
Fri May 01, 2020 5:53 pm
These issues may be more for the lawyer handling the estate than for the accountant.
This is a retirement plan with a person as a named beneficiary. Why would the executor be involved except maybe for notification unless there are federal estate tax issues or state estate/inheritance tax issues. Present company excepted, most estate lawyers I have run across are not well informed of the intricacies of inherited retirement plan rules and issues.
Bruce,

I tend to agree with Spirit Rider. Not all attorneys who handle estates have your extensive IRA knowledge. In my experience, it's not unusual for the attorney handling an estate to be lacking in specific IRA knowledge. Not always. But the client should not assume that the estate attorney knows more about IRA rules than the accountant.
In this case, the estate attorney that was retained specifically recommended a tax accountant, as he did not know how to handle this IRA.

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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by 123 » Fri May 01, 2020 9:29 pm

With annual distributions you will not know the actual tax consequence until you do your taxes the following year. Of course you could defer distributing until you know the exact tax consequence (using the difference of alternative calculations). An alternative might be to use an tax estimate each year for the sharing and then apply the actual amount over/under to the tax estimate for sharing the following year.

While the general recommendation would be to take tax deferred distributions as late in the year as reasonable to preserve tax deferred growth it might be appropriate in this case to do distributions (and sharing) as early as possible in each year since the death or incapacity of any of the participants mucks up the plan.
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Re: Sibling inheritance of Traditional IRA - sharing with other siblings

Post by Katietsu » Fri May 01, 2020 10:55 pm

I would consider taking out enough each year to give sister B and sister C close to the $15,000 gift tax limit unless there would be a significant tax advantage to stretching it out further. It is just cleaner to get this over with. The tax brackets are pretty wide right now, especially if you look at the 22% and 24% brackets collectively. It seems like there might be a good chance that taking $10k out a year and taking $40k out a year might not be much different as far as the cumulative taxes due. Sister whose name is on it could leave her portion in the IRA if she chooses. I would really want to get this done over 2 or 3 years unless there was a big incentive to spread it out longer.

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