Gift tax

[peace1]

What is the name of your state? Wisconsin

I was willed my sisters share of my parents IRA (to give to her after her divorce), thus I can only gift her $12,000 per year. Do you see aproblem with me giving her son $5,000 of her money as she wants him to have that much, and give her $12,000 all in one year? also, say I would give her $50,000 over and above the $12,000 in one year. Will it only come into play if my estate is over the $675,000 state limit when I die? so if I am not wealthy when I die, the $50,000 would never come into play?

[tranquility]

The rules can be complex regarding inherited IRA's. Early choices are required for how to receive distribution. Your other questions contain many issues and inaccuracies. You need to see a professional.

[LdiJ]

Originally Posted by peace1

What is the name of your state? Wisconsin

I was willed my sisters share of my parents IRA (to give to her after her divorce), thus I can only gift her $12,000 per year. Do you see aproblem with me giving her son $5,000 of her money as she wants him to have that much, and give her $12,000 all in one year? also, say I would give her $50,000 over and above the $12,000 in one year. Will it only come into play if my estate is over the $675,000 state limit when I die? so if I am not wealthy when I die, the $50,000 would never come into play?

I agree that you should also consult a local tax professional to make sure that all of the possible issues are covered. Do remember that you will need to pay taxes on the inherited IRA money, as it would have been taxable to your parents. Therefore your sister's share will be reduced by whatever amount of tax you have to pay on that share.

Normally inherited money isn't taxable but anything that would have been taxable to the deceased if withdrawn or sold, is also taxable to you.

As for your questions:

The 12,000 limit is PER PERSON. Therefore yes, you can gift 12k to your sister and 5k to your nephew in the same year.

The lifetime exclusion for gifting is at least 1 million. Therefore, if you gifted your sister the entire amount (after you reduced it for the tax that will have to be paid) all at once, you would have to file a gift tax return, but there would be no taxes due if you have not reached your 1 million exclusion, and its unlikely you ever will it may not be a problem to gift the entire amount sooner.

[abezon]

You might be able to just gift your sister 1/2 the IRA directly after she gets divorced. You'd create a new IRA & transfer 1/2 the assets to it, then gift her with authority over the account. then she would decide when to withdraw the money & she'd be responsible for the taxes.

Depending on when your parents died & how soon her divorce is complete, you may be able to disclaim the IRA, in which case it passes to the contingent beneficiary. This would probably be the residue of the estate, which you presumably are splitting with Sis. Then the executor of the estate would split the IRA & transfer 1/2 to each residuary beneficiary. You'd need to consult an estate lawyer about whether this is feasible. If you choose this option, DO NOT cash out the IRA & split the money. This will give you an income spike like you won't believe. It's much better to transfer the IRA directly & let the heirs take out the money gradually.

Current tax laws may have changed, but I believe the inheritors have 5 years to take out the money, & have the option of stretching the payments out over their lifetimes if they convert the IRA to an annuity. This gets very complicated, so consult a sharp financial pro for details before doing anything.