Splitting an inheritance with a sibling after the death of a loved one can be complicated.
Your family is close.
All siblings are equally responsible and none has any marital strife (of which you are aware).
In short, your family has few liabilities but has ample love and respect for each other.
Your parents explained they would be distributing assets equally among their children.
When they executor administered the estate, you all were quite shocked to find only you were listed as a beneficiary of the IRA.
According to a recent nj.com article titled “Can I give my brother half of my inheritance?,” those who want to share inherited retirement funds with their siblings could face complications.
Rather than the money being treated as an inheritance for your siblings, it will be treated as a gift when it comes from you.
To make this gift, you will need to liquidate part of the IRA account.
For a traditional IRA, you will owe income taxes on the amount withdrawn.
Because you will be gifting to your siblings, you will likely need to file a gift tax return if the portion of the inheritance you provide is greater than the annual exclusion limit.
How much is the annual exclusion amount?
The exclusion is currently set at $16,000.
If you gift in excess of the exclusion amount, it will be deducted from your lifetime gift and estate tax exclusion.
This is currently set at $12.06 million (but is set to “sunset” to about $6 million on January 1, 2026).
In short, by gifting above the annual exclusion amount, you would be reducing your estate and gift tax exemption amount for your estate when you die.
If your estate is valued at more than federal exemption threshold following your death, then the amount over the threshold will be taxed.
The federal estate tax rate in 2021 was 40 percent.
To avoid triggering gift taxes, it may make sense to keep your gifting within the annual exclusion limits.
For example, say you are married as is your sister.
You and your spouse can each gift $16,000 to your sister and her husband.
Consequently, you can transfer up to $64,000 to them without gift taxes.
Remember: this “gift” exclusion limit includes any other gifts to your sister and her husband within a calendar year, to include birthday and Christmas.
Also, any amount you gift to your siblings will be an “after-tax” gift from you.
Accordingly, you may want to “run the numbers” to make sure you and your siblings are treated equally (as your parents intended) regarding the overall inheritance.
Your CPA can help with calculating this “adjustment” to the distributions you make.
The best way to bypass these inheritance complications is to be proactive and work with an experienced estate planning attorney when planning your own estate.
Reference: nj.com (Feb. 23, 2022) “Can I give my brother half of my inheritance?”