receiving an ira - how does this work ?

[TrustUser]

if my sister dies, and her son also dies before her - the credit union told me that it would be best to have a contingent beneficiary, to pay the taxes. it needs to be a person.
is the tax on an ira acct, based upon the recipient's tax structure ? 3 of us siblings would probably inherit it. so i am wondering if i should make all 3 of us as co-contingent beneficiaries, if that is even possible ?
and if just one of us, should we make it the sibling who earns the least, thereby probably paying less tax on the lump sum ?

 

[adjusterjack]

There is no tax on inherited IRAs. There is, however, tax on distributions taken from IRAs.

Study IRS Publication 590-B which addresses inherited IRAs.

2021 Publication 590-B (irs.gov)

Get the beneficiary form from your CU and read it. You can arrange your beneficiaries by percentage if you like.

if my sister dies, and her son also dies before her

I don't understand your question. If your sister dies before you do, you are still alive to update the beneficiaries on your IRA, right?

If her son dies before her, she is still alive to update her beneficiaries and you are still alive to update yours, right?

@Taxing Matters is a tax attorney who participates here. He may be along shortly to shed more light on the subject.

 

[TrustUser]

sorry, i wasnt as clear as i should have been. it is my sister's ira. it goes to her son. but there is a chance that he will die before her, and she unable to make any changes. as i am the person who is gonna have to handle this, i do not want to go thru probate.

it is not a large amount, and will most likely be shared by me and my other 2 sisters. i just want this easy and already taken care of, in the event that this should occur.

since you already told me that i could have more than one beneficiary (assuming it is okay with the credit union), i guess my main question is how are taxes paid ? can we save any money by either distributing equally, and each of us pay our own tax ? or by distributing to the one with the least tax, and they pay the other two, after they have paid the tax

the credit union already told me it has to be a person, not a bank account - because of tax requirements.

i am already trustee of her bank acct - this is more about convenience for me, since i will be forced to take care of it.

if the amount of tax that will be paid on the distribution has nothing to do with the tax rate of the recipient, then it makes better sense for me to be the sole contingent beneficiary. but since i am likely to be in a higher tax bracket than either of my other sisters, it might make better sense to have one or both of them as the contingent beneficiary, if the tax rate of the recipient has anything to do with the total amount of tax paid

i want to keep everything legal, but i dont want to give the state any more than is necessary !!

 

[adjusterjack]

Did you read the IRS booklet, the parts that address inherited IRS.

If you didn't, please do and then we can more intelligently discuss it.

See pages 6, 9 and 13 (multiple beneficiaries).

It would help to know the ages of all involved: you, the sister who owns the IRA, her son, your other sisters.

There appear to be limitations on who can be a beneficiary based on age.

 

[davew9128]

Not asking the right questions. Why don't she name WHO SHE WANTS as contingent beneficiary???

 

[TrustUser]

i did read those 3 pages. i am not gonna go thru a bunch of rigamarole of claiming so much in every year, etc. i want this to be very simple. i will make myself the contingent beneficiary, pay all the taxes as a 1-time lump sum distribution, and then split it with my other 2 sisters.

then i will be through and done with it, in one fell swoop ? it isnt a lot of money, and i am not gonna spend a whole bunch of time on it. thanks for all the help from those who responded. it helped me ascertain a course of action, should the situation arise.

i mainly do not want to go thru probate and all that nonsense.

 

[davew9128]

i will make myself the contingent beneficiary, pay all the taxes as a 1-time lump sum distribution, and then split it with my other 2 sisters.

No you won't. The choice is up to your sister and her alone. And by the way, splitting it with your siblings leaves you with the income tax hit AND a taxable gift.

 

[TrustUser]

i did change my mind about something. if my sister does not have anyone else she wants to give it to, then i think it will work best if all 3 of us are co-contingent beneficiaries. and then each of us report whatever we receive on our own income tax return. that should be the least involved. thanks again.

 

[Taxing Matters]

i did change my mind about something. if my sister does not have anyone else she wants to give it to, then i think it will work best if all 3 of us are co-contingent beneficiaries. and then each of us report whatever we receive on our own income tax return. that should be the least involved. thanks again.

The first question I have is whether your sister is competent to decide who she wants as contingent beneficiaries in the event her son predeceases her. If she is then it's up to her to decide how much each person should get. If she lacks that power, has she specifically granted it that power to you? If not, then it's not your decision to make either: state law would control who gets what. That's very likely to be an equal split of the IRA into pieces, with each surviving sibling getting an equal share of the IRA.

The trustee would split the IRA into separate accounts for each of them, and each would be subject to tax when he/she gets distributions from the IRA he/she has received. If you try to game this too much by giving it all to the person with the lowest tax bracket with a pre set plan that that person will then split the proceeds with the others, you are setting yourself up for a potentially expensive battle with the IRS. Instead, it's simply best to give the IRA to the person(s) she wants to have it (if she's competent to do that) and otherwise have it split per state law and ensure the trustee knows how it's going to be split. In the absence of specific instructions from your sister, the trustee likely has specific provisions as to whom the IRA goes. The trustee takes care of the rest, with the only thing you you have to do is report your share of the IRA when you get distributions.

It's not going to wind up in probate unless there are no specific individuals who would take the IRA either under the beneficiary designations your sisterr made, or under the state intestate succession law/trustee agreement. So long as she has reasonably close surviving relatives to take the IRA you'll not have to deal with probate. So don't make things more complex than necessary. It is not always the best thing to try to save every last penny in tax. Other considerations can be more important than that.

 

[TrustUser]

yea, that is why i decided to do it the way that i did. my sister is in a rest home. i think she is still competent, so i wanted to take care of it, while that is true.
i dont think she has anyone else to give it to, so i wanted to figure out the best way to do this. (son has no wife or children)
i am the trustee of her bank account, but i dont think that will have anything to do with anything. i suspect that the funds will come directly from the credit union to the beneficiary. i may tell her to exclude me, and just to give it to our 2 sisters.
thanks for your input.

 

[LdiJ]

if my sister dies, and her son also dies before her - the credit union told me that it would be best to have a contingent beneficiary, to pay the taxes. it needs to be a person.
is the tax on an ira acct, based upon the recipient's tax structure ? 3 of us siblings would probably inherit it. so i am wondering if i should make all 3 of us as co-contingent beneficiaries, if that is even possible ?
and if just one of us, should we make it the sibling who earns the least, thereby probably paying less tax on the lump sum ?

If you want all three of you to inherit the IRA then all three of you need to be named as beneficiaries (whether contingent or not). If just one of you is named as the beneficiary the money will belong to just that person when inherited. It is a very bad idea to hope that just one person will do the right thing and share with the others.

Yes, any taxability of money received as a beneficiary of an IRA will be taxed to that person, based on that person's overall tax situation.

 

[Zigner]

If you want all three of you to inherit the IRA then all three of you need to be named as beneficiaries (whether contingent or not).

Careful. There can be multiple beneficiaries, but if they are contingent beneficiaries, then they don't see any of the $ so long as the primary beneficiary(ies) remain in the picture. If the desire is to have the proceeds evenly split between the beneficiaries, then "contingent" beneficiaries is not the way to structure it.

 

[TrustUser]

hi gang, her son is definitely the primary beneficiary. but he is not taking care of himself. so it is at least somewhat likely that he will die, while she is still alive, and possibly no longer able to tell us what she wants done. so i am trying to take care of that situation, in case it should happen.
her ira is in the same place as her bank account, so i will take care of making sure that all contingent beneficiaries are placed on the contingent beneficiary form at the credit union.

 

[LdiJ]

Careful. There can be multiple beneficiaries, but if they are contingent beneficiaries, then they don't see any of the $ so long as the primary beneficiary(ies) remain in the picture. If the desire is to have the proceeds evenly split between the beneficiaries, then "contingent" beneficiaries is not the way to structure it.

I may have worded that poorly. Whether the beneficiaries are contingent beneficiaries or normal beneficiaries whoever inherits pays tax on what they inherit (if anything at all if they are contingent) and is the legal owner of what they inherit. They don't have to share with non-beneficiaries and they do have to pay taxes based on their personal tax situation.

 

[TrustUser]

yes, thank you. there will be no sharing. whoever inherits, pays their taxes, and keeps the rest