What Happens If Siblings Cannot Agree on Splitting an Inherited IRA?
Your parent or relative recently passed away, leaving behind a sizable individual retirement account (IRA). As a beneficiary, you expect to inherit part of the IRA assets. But there’s a complication – your siblings are also named beneficiaries. Uh oh.
Suddenly, what should be a relatively straightforward process gets complex. Do you split the IRA evenly between all siblings? What if you have different financial needs or ideas about what’s fair? And what are the tax implications? If you can’t reach an agreement, things could get messy.
This dilemma is all too common. With so much wealth at stake, conflict can easily arise when siblings inherit an IRA together. It often boils down to a lack of proper planning by the original account owner. However, there are strategies siblings can use to split an inherited IRA smoothly and fairly.
Navigating the Maze of Inherited IRA Rules
First, a quick primer on inherited IRAs. When you inherit an IRA, you typically have three options:
- Take a lump-sum distribution, paying income taxes on the amount.
- Transfer the funds into an inherited IRA in your own name. This allows you to stretch withdrawals over your lifetime.
- If you’re a spouse, you may have the option to roll the funds into your own IRA account.
The Secure Act changed some inherited IRA withdrawal rules starting in 2020. Now, most non-spouse beneficiaries must empty the account within ten years of the original owner’s death.
There are exceptions, however. Minor children, disabled beneficiaries, and chronically ill beneficiaries can take required minimum distributions (RMDs) based on their life expectancy. This stretches withdrawals and taxes over more years.
So, how do these rules apply when siblings inherit an IRA together? Let’s explore some options.
Even Steven: Splitting the Pie into Equal Slices
The “easiest” route is divvying up the inherited IRA into equal shares between siblings. This meets the IRS deadline to separate inherited IRAs by December 31st of the year following the account owner’s death.
But equal splits may be less simple than they seem. What if one sibling is in dire financial need and could really use a bigger share? Or did one sibling contribute way more to their parent’s caregiving needs? Understandably, conflicts arise.
As the attorney guiding you in developing an estate plan, I always recommend clients consider their loved ones’ circumstances and needs. Your intentions may be unclear if you simply name your children as equal beneficiaries. Better to specify percentages if you want an unequal split.
When a Sibling Says “No Thanks”
Sometimes, a beneficiary wants no part of an inheritance. This is called “disclaiming” your share. You must formally notify the IRA custodian within nine months of the death. Your share then goes to the other beneficiaries.
Why disclaim? Perhaps you have your own wealth and don’t need the money. Or you want to redirect your share to siblings in greater financial need. There may be tax motivations as well.
Disclaiming seems simple, right? But family dynamics are rarely so straightforward. Disclaiming your share may cause hurt feelings or distrust from siblings receiving a larger benefit.
Splits and Spats: When Siblings Don’t See Eye to Eye
Let’s say the deceased IRA owner named all the children as equal beneficiaries. But after the death, the siblings don’t agree on the split. These conflicts arise all too often.
Maybe the IRA represents a large portion of the potential inheritance. So the stakes feel high. Old rivalries or resentments between siblings may also surface.
“My brother was always Mom’s favorite. He doesn’t deserve an equal share!”
In Florida, if the will or beneficiary designation doesn’t specify unequal percentages, it’s tough to argue for a different split. The beneficiaries have to agree unanimously on an alternative division.
As a mediator helping families resolve inheritance conflicts, I always aim for open communication. Share your intentions and concerns early and honestly. With patience and compromise, siblings can often reach an amicable solution.
But when tensions run high, it may help to involve professional mediators or elder law attorneys. They can objectively evaluate options under the law and facilitate negotiations.
Considering the Tax Bite
There are important tax considerations when siblings divide up an inherited IRA. Withdrawals from your inherited share will be subject to ordinary income taxes.
If you receive a large IRA distribution as a lump sum or are required to empty the account within ten years, that could push you into a higher tax bracket. For siblings in the same tax situation, an even split may be fairest.
But what if one sibling has a lower income and would pay less tax? Or wants to transfer the inherited funds into their own Roth IRA to enjoy future tax-free growth? In this case, an uneven split may make more sense.
As your estate planning advisor, I can help coordinate with your CPA to project the tax impacts of different IRA inheritance scenarios. Forewarned is forearmed when it comes to avoiding a sudden tax surprise.
Strategies to Split IRAs Harmoniously
When parents or relatives name multiple children as beneficiaries, tensions often arise. Here are some strategies I recommend to clients that can keep the peace:
- Communicate early and often. Air out your concerns and goals for the inheritance. And, of course, listen to your siblings’ needs.
- Consider trusts or separate shares. The IRA owner can name a trust as the beneficiary or designate separate shares for each child. These options allow more control in dividing the assets.
- Seek professional advice. Turn to help from attorneys, mediators, and financial advisors. An objective, neutral party can guide you through the technicalities and emotional dynamics.
- Think long-term. However, you decide to split the IRA and maintain relationships looking forward. You’ll still be siblings long after the inheritance is settled.
Don’t Forget the Tax Forms
There’s one more critical task that beneficiaries must handle when inheriting an IRA – paperwork. Within nine months after the original account owner’s death, the IRA custodian must provide beneficiaries with a Form 5498 showing the fair market value of the account on the date of death.
For non-spouse beneficiaries, like siblings, the custodian will also issue Form 1099-R for any distributions taken from the inherited IRA. This is important for reporting withdrawals correctly on your income taxes.
In addition, non-spouse beneficiaries must begin taking annual required minimum distributions (RMDs) from the inherited IRA. The deadline is December 31st of the year following the death. To calculate your RMD amount, the IRA custodian will provide a Factor Table based on your single life expectancy. You divide the prior year-end balance by this life expectancy factor to determine that year’s RMD.
Failure to take timely RMDs results in a 50% penalty on the amount you should have withdrawn but didn’t! So, it’s critical that multiple siblings coordinate to receive proper tax reporting and take RMDs on inherited IRAs.
Splitting an Inherited IRA Doesn’t Have to Be a Mess
Navigating an inherited IRA with siblings can certainly get complicated. But with forethought, communication, and smart planning, families can avoid destructive conflict.
As estate attorneys here in Florida, our team at Stivers Law helped many families through this journey. I’m always open to an initial consultation to explore your options and provide guidance. We all want to honor our loved ones’ legacies by inheriting their IRAs in a respectful manner.
To discuss your specific situation in more detail, please contact our office today. Proper planning can help ensure an inherited IRA remains a blessing rather than a burden.