inheritance of 401K

New York

I an in the process of inheriting a Lump sum from my brother 's 401K , which was of his company's stock .....and of which I am the benefactor ( less than 100K ) ... I am morally obligated to share this lump sum with my siblings , but was wondering if we (actually I ) would be penalized for taking the lump sum upon my brother's death , and what the tax implications were for me , as the sole benefactor of this money .... thanks ...

[Snipes5]

If you inherit the money, in this case since it would have been taxable to your brother, you are responsible for the tax on it when it is withdrawn, which it will have to be within a certain time limit.

If you share it with your siblings, you are still responsible for the tax. If you give any one of them more than $11,000 each in any given year, you will have to file a gift tax return.

If your brother wanted it to be shared, he could have designated more than one beneficiary, which would have been the more tax-wise thing to do.

If you take a lump sum, you're going to get killed on the taxes. I suggest you take it as lifetime periodic payments, and if you must, share with your siblings a little at a time, because again, you stil have to pay the tax no matter how you do it. Tax will be less if you do it as lifetime periodic payments.

Snipes

[abezon]

You might talk to the plan administrator and a financial advisor about splitting the 401k into multiple IRAs & distributing the individual IRAs. This will pass the income to the various beneficiaries instead of making you pay taxes on everything. Another possibility would be to form a trust, put the 401k into the trust & have the trust cash it & distribute the income to the beneficiaries. Talk to a tax pro and attorney with trust experience to see if there's a way to do this.

In any scenario, you'll probably have gift tax obligations (you report the gifts but don't pay any actual taxes until you've given away over $1M).

This is an extremely hairy issue, which I have requested information about in a later thread. If there are no contingent beneficiaries on the account, then I foresee many potential tax complications. The IRS as your adversary may treat this as income to you, and your distributions to your relatives as gifts.

The ideal thing would be to pass the entire account to the estate, but that would force it through probate.

Obviously, all of the things we are wondering about doing have already been done by others, and so the question is: what have the federal and state tax courts decided on the various non-standard ways of distributing the assets of a retirement account?