401K Distribution Split

[neilbrink]

Client was beneficiary of her Aunt's 401k plan. The 401k administrator has already moved her portion into a separate account under my client's name. Just before her death, my client's Aunt asked my client to split her proceeds equally with 2 other cousins. How can we show this on my client's 1040? Report the total on her return, and then reduce that portion going to her cousins from her return? Would we issue 1099Rs to the cousins then? All thoughts are appreciated.

 

[Catherine]

There are two aspects here:  legal and tax.  Once the legal aspects have been/are being dealt with through disclaiming or whatever, and the amounts are appropriately distributed (note: I am not a lawyer and don't even play one on TV so none of this is legal advice), you are left with tax aspects.

Your client will get a 1099-R for full amount. She should send 1099-R's to the two cousins showing their portions.  Details will hinge on how the transfers actually happen.  Online vendors like eFileMyForms and others can handle the form printing and e-filing for you for very small money (on the order of less than $4 per form).  On your client's 1040 put in the entire 1099-R amount and a second 1099-R for the (negative) amount of distributions, annotated as "Nominee Distributions" or something similar.  Specifically how to make those entries varies by software.  If your software does not allow a negative 1099-R, then put in the amount your client got and attach the disclosure form (8275?  I forget the number) to hopefully stave off the mis-match letter.

[neilbrink]

It seems simple if my client chooses to take a complete distribution.  What if she decides to rollover and retain her portion in an Inherited IRA?  Or what if the cousins choose to rollover their portion to inherited IRAs?  Will she need to send disclosure forms to her cousins, similar to the disclosure forms that the 401k administrator sent to her?

[Catherine]

This is why lawyers need to get involved.  In my understanding, the only way the cousins can retain the IRA nature is if your client disclaims a portion of her inheritance in their favor.  In that instance, the IRA custodian would handle the transfers directly and your client has no 1099's to send.  Else your client would be taking a distribution to hand out money to cousins and the 1099's would be needed so that they, and not your client, get hit with the taxes.

Your mileage may vary; get a good estate attorney involved.  

[easytax]

Agree with the part about getting a "good" attorney involved.   Given the statement "Aunt asked my client to split her proceeds equally with 2 other cousins" is probably not (I also am NOT an attorney, etc.. -- so get one for certification) binding as a will. If the will states, then it may work as suggested. If will is different, then should the recipient cousin get the money, she would be "gifting" the other cousins -- (????).

Devil (and taxes) are in the WRITTEN details.  Nice of the first cousin to be willing to do what the aunt asked, but legally -- even if she disclaims a portion of the inheritance --- it is NOT specified that that disclaiming would be to the other cousins -- that is (probably, maybe) in the will as the residual, etc. estate, etc.

Will dictates (in writing, etc.) -- wishes (verbal, etc.) mean nothing (legally) only muddy things.

[Pacun]

Let's see the materiality of the issue. How much money are we talking about?

$200 bucks (one hundred each) or how much?

[neilbrink]

$64000 total split 3 ways, client and 2 cousins.

 

[BulldogTom]

OP says Client was the Beneficiary.  If that is the case, cousins don't get a 1099R, nor do they get to roll any amount into any IRA if they get a gift from the Client.  The IRA beneficiary designation form is the only thing that the 401K administrator is going to look at.  They will not honor a will or trust document if the beneficiary designation has been made by the decedent.

There is the human side to this.  The client wants to honor the Aunt's wishes, but that wish cannot trump what is a pretty cut and dry situation from a tax law standpoint.

Tom
Newark, CA

[Pacun]

Do the taxes correctly. Nail your client with the tax for the distribution and also nail him/her with gift tax if she gives money to the cousins and the amount is more than $14K.

Or negotiate with the cousins to get $14K each tax free and let your client pay the taxes on the $64K.

[jklcpa]

1 hour ago, Pacun said:

Do the taxes correctly. Nail your client with the tax for the distribution and also nail him/her with gift tax if she gives money to the cousins and the amount is more than $14K.

Or negotiate with the cousins to get $14K each tax free and let your client pay the taxes on the $64K.

 

If the client is married and spouse is willing to split the gifts, the total of their exclusions would more than cover the amount each cousin would receive.  Either way though, unless the client has already used up her unified credit, the gift would be reported but no gift tax would be due because the available credit would take care of that.  No negotiating should be necessary to avoid gift tax. Client may, however, want to negotiate and give the 1/3 based on the net after considering the personal income tax that she will incur on the full $64K.

[Pacun]

Let's say that each cousin gets $14K, that will $28K.

That's an amount that could be very close to the actual amount after taxes.

Let's say that the TP is on the 33% bracket. 33% of $64K is about $22K.

$64K minus $22K (taxes) = $42K minus 28K (given to the cousins) = $14K (the share for the TP).

I haven't forgotten State taxes, but maybe the tax payer is on a lower bracket or lives in a state that doesn't pay state taxes.

Without having the tax return(s) in front of you, you will not know exactly the effects but I would never give more than $14K, because $64K (or $44K if correctly split by aunt) could affect many items, such as "Obama care tax", child credit, EIC, standard deduction, AMT, scholarship for children, you name it....

[DANRVAN]

On ‎08‎/‎12‎/‎2016 at 9:30 AM, Catherine said:

.  Else your client would be taking a distribution to hand out money to cousins and the 1099's would be needed so that they, and not your client, get hit with the taxes.

I believe in that situation, the income would be taxable to the client under the assignment of income doctrine. The client cannot change the fact the income belongs to her by issuing a 1099 to a third party.

The disclaimer may not resolve the issue either.  The heir can disclaim the inheritance but can not dictate who it will go to, that is determined by the will or by law.  Also, it appears the funds were accepted by her since they have already been transferred to an account under her name, so the window for disclaimer might already be closed.

As others have posted, the client can voluntarily gift a portion to her cousins in order to comply with her aunts request if she wishes.  It would be her choice to make the gift after taxes, whether she takes it as a lump sum or by RMD over time.  She is under no obligation to disclose how much the taxes are or what tax bracket she is in.