Can a beneficiary split retirement accounts without cashing out and incurring taxes?

Full question:

My brother died and in his will listed his heirs as two sisters and a brother. On a 401k and two other retirement accounts (408 and Simple IRA) he named just one sister (the executrix) as the benefactor. She wants the money to be split evenly with the other siblings as we think it was just an oversight and our brother would have wanted an equal distribution. But because it is just in her name, does she have to cash out the accounts and get hit with federal taxes and then gift to the other siblings or is there a better way the shares can be divided into retirement accounts in each siblings names and not withdrawl anything?

Answer:

If the current account owner adds new owners to a retirement account without them contributing, it may be considered a gift for tax purposes. If the gift exceeds the annual exclusion limit, it must be reported to the IRS using Form 709.

It's important to note that you and your siblings cannot have a joint IRA account, as 'IRA' stands for Individual Retirement Account. Therefore, the current owner cannot simply add new owners.

One possible solution is for the heir to disclaim their interest in the account, allowing the assets to be divided differently than specified in the will. Disclaimers must typically be made within nine months of the transfer to the disclaiming party. The IRS has allowed disclaimers for transferring assets in retirement plans, where the new beneficiaries report the income instead of the person who made the disclaimer.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

If a beneficiary disclaims their interest in a retirement account, the assets can be redirected to other beneficiaries as specified by the original account owner. This must typically be done within nine months of the transfer to the disclaiming party. The new beneficiaries will then report any income from the account, potentially avoiding tax implications for the original beneficiary. It's essential to follow the proper legal process for disclaiming to ensure compliance with IRS rules.

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