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My grandmother passed away a couple of weeks ago, and my father is now going through the process of distributing her assets, with the help of a local attorney. (My grandfater passed away years ago.) My dad has 1 brother & 1 sister, and the three of them are the beneficiaries to the trust worth about $1.5M.

I got a phone call from my dad today saying that he went to get some information on a small IRA that my grandma had, and was surprised to find out that the trust wasn't the beneficiary, and instead myself, my sister, and 1 cousin are co-beneficiaries. We are 3 out of 5 grandchildren, with the 2 unnamed grandchildren both guys. We have no idea why they were excluded from this or why the trust wasn't named, but we don't think it's right to split the benefit between the 3 of us and instead we want to split it between all of the grandkids.

I'm waiting to here back from my contact at the bank to find out the balance and how to close it out, etc. However, I don't know the tax implications for us receiving this money and how us splitting it 5 ways instead of 3 plays into the taxes. The amount in the IRA is probably in the neighborhood of $40k, so this isn't that large of an amount. I don't know if it matters, but all of the grandkids will also be receiving $5k out of the trust once that is settled.

Please let me know what I should be asking to the bank, as well as any comments you have to make sure that we do this how we are supposed to.

Thanks,

Cali_Ali
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I doubt there is any way you can have the IRA split between the 5 of you when she only named 3 as beneficiaries. However, once you each receive your share, you could gift a portion to the other two. It appears the gift amount from each of you to each of them will be well within the amount that can be given each year without triggering a gift tax.
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Sorry for your loss.

We have no idea why they were excluded from this or why the trust wasn't named, but we don't think it's right to split the benefit between the 3 of us and instead we want to split it between all of the grandkids.

The trust probably wasn't named because the taxes that the trust would pay are usually more than individuals will pay on inherited retirement accounts.

And it doesn't really matter what you think is right - it's what your grandmother wrote down on the list of beneficiaries, as far as who will get the money from the trustee.

You could all 3 refuse to take the money, in which case, it would go into her estate and be distributed by the executor according to the terms of her will, probably after paying taxes at a higher rate than any of you would pay. (I am assuming that she had a will in addition to the trust.)

Or you could each take your 1/3, cash the IRAs out (paying federal and state income taxes at your marginal rate), and give 1/5 of what you have left after taxes to each of the other two grandkids. The amounts are low enough that you shouldn't trigger gift tax issues, unless you are very generous with your cousins during the rest of the year.

Or you could just take your 1/3 and be satisfied that this is what your Grandmother wanted. Even if she didn't share the reason with you, there may have been a specific reason that she wanted you 3 to have that money.

AJ
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My condolences on the loss of your grandmother. You wrote:

I'm waiting to here back from my contact at the bank to find out the balance and how to close it out, etc.

One thing I can tell you for sure--don't rush.

The first question to resolve is whether or not there will be an estate tax liability. The value of the IRA is part of the taxable estate even if it doesn't flow through the trust. It is also taxable income to the beneficiaries when distributed. This could result in some special concerns on the beneficiaries' returns.

As a beneficiary you can roll your portion into an "inherited IRA" and take distributions over your actuarial lifetime. You must begin minimum distributions this year and are free to take any amount you want as long as you take at least that much each year. Because you inherited this IRA distributions are subject only to income tax. (I'm assuming here that there were no after-tax funds in the IRA.)

The question of whether, let alone how, you can transfer a portion of the IRA without taking taxable (to you) distributions to the "stiffed" cousins is beyond my pay grade. You could certainly take two-fifths of your share, figure out the effect on your income tax, and then send half the net to each of them as gifts.

Your vanilla inheritance distribution from the trust will not be taxable income to you.

Phil
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Whom did your grandmother name as contingent beneficiaries? If all the primary beneficiaries are dead or decline, the IRA goes to the contingent beneficiaries.

We have no idea why they were excluded from this or why the trust wasn't named,

I have no idea why they were excluded from this either, but apparently that was your grandmother's wish. This can't easily be changed other than you three giving some cash to the other two (and that still doesn't make it an IRA for them).

It's typically not beneficial to list the trust as the IRA beneficiary.

I believe what should happen first is that the IRA should be split into three, and titled something along the lines of "Grandma_Ali IRA (deceased January 1, 2007) F/B/O Cali_Ali, beneficiary.". Don't quote me on that though. After that, each of you can decide whether you want to transfer the money elsewhere.

See
http://www.bankrate.com/brm/news/ira/20041006a1.asp

and
http://www.montana.edu/wwwpb/pubs/mt200310.html

and maybe
http://www.inherited-ira.info/
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I think that we are going to take the distribution and then gift a portion to our other 2 cousins because it seems like the appropriate thing to do. After talking to the family, it seems like they may have set this up to continue to help with college costs, and the other two weren't in college any longer. While all of us have graduated now, it seems like this fell through the cracks and was never revised.

When we cash out the IRA, will they take out taxes? Is there a chance that we could owe more taxes than what they withhold? All of us agree that while we want to give a benefit to our other cousins, we don't want to be holding the bill when tax time comes around.

Thanks for your help!

Cali_Ali
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Whom did your grandmother name as contingent beneficiaries? If all the primary beneficiaries are dead or decline, the IRA goes to the contingent beneficiaries

I'm sorry I wasn't more clear - we were the contingent beneficiaries. My grandfather was the primary, but he passed away a few years ago.

We've decided to cash out the IRA so we can give part of it (after taxes) to our other cousins. None of us would even want an IRA through this bank since it is a local bank where none of us live, so this makes sense to us. We also found out the amount is ~$32K, so the amount isn't significant enough for us to want to take distributions over time.

We're not going to rush this, but unless there is a good reason not to do this, this will be our plan.

Thanks for the help!

Cali_Ali
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When we cash out the IRA, will they take out taxes?

It is not required. But you can request it.

Is there a chance that we could owe more taxes than what they withhold?

It is almost certain that the taxes withheld will not exactly equal your tax liability for the IRA withdrawal. It might be too much. It might be too little. It may be close, or it may be way off.

All of us agree that while we want to give a benefit to our other cousins, we don't want to be holding the bill when tax time comes around.

Then there's the difficulty of deciding exactly what IS your tax liability for the IRA withdrawal. The tax code taxes your total income, not the bits and pieces. Any one item can have a ripple effect throughout your whole tax return.

Perhaps the two of the more reasonable methods are: determine your marginal tax bracket (including your state taxes) and apply that tax bracket to the income and come up with a tax amount. Or redo your return without the added income from the IRA withdrawal (and whatever other implications it had around your tax return). Compare the total tax bill with and without that income to determine your tax on that income.

In any case, you are left with an estimate of your tax bill for that income. Not an exact calculation (since that is not possible), but an estimate based on reasonable assumptions.

And if each of you shared the IRA distribution with your two cousins on an after-tax basis, that would be about as fair an arrangement as one could come up with.

--Peter
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We have no idea why they were excluded from this or why the trust wasn't named,

I have no idea why they were excluded from this either, but apparently that was your grandmother's wish.


I'll bet that was the maximum number of names they would allow her to put on the form.

Vickifool -- cynical about financial institutions today.
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Phil

Seems to me she could give gifts to the two stiffed cousins from her mandatory withdrawals as she gets them. Certainly looks like these gifts will be small enough to not involve extra tax obligations.

brucedoe
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