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Level 2

Inheritance question

I have a complicated estate question:  My brother and I are the heirs to my mother's estate, she died in June of 2017.  The estate value is mostly in land: her home, plus a chunk of vacation property, along with some cash.  The most equitable way to divide the estate has come to this basic concept:  he receives  her home, plus the cash (an investment account), and I receive the vacation property.  However, to make the values equal, I need to pay him a sum of cash-a little under $100K.  The estate is not large enough to require the payment of inheritance or estate taxes.  My intention is to do a 401K withdrawal to raise the cash (I am over 59 1/2), and transfer the cash to him.  I understand that I will need to pay the 20% income tax on the 401K withdrawal.  Will he be liable for any taxes on the cash he receives?  Will it count as a gift, or as something else?  How will each of us report that money transfer next year?


For the financial planners: I have spent many hours running different scenarios on how to raise this money, whether it would be better to (for example) take out a mortgage on the property to raise the money, or withdraw directly--and each difference scenario points to this being the marginally better choice based on current and projected future circumstances--so I don't need advice along those lines.

1 Comment
Catalyst V

Inheritance question

YOu really need to get with a probate attorney in your jurisdiction. You may find the cost (read that "consequences") of a probate attorney is significantly cheaper that the fines, penalties, late fees, back taxes and other fees you will incur for doing it wrong. Additionally, all legal fees can be (and should be) paid by the estate, and not a penny should come out of the pocket of any heir to that estate.

The legally correct way to do this and be equitable, is that the heirs to the estate receive all the assets of the estate in the names of the heirs. Then the heirs sell the non-cash parts of the estate (land, house, personal belongings, etc) and divide the cash.

The primary reason for doing this is because of the real estate. If the estate sells the real estate then the cost basis of that real estate is what was originally paid for it. That can leave quite a sizable taxable gain. WHereas if if the heirs inherit the property first and then the heirs sell it, the cost basis of the property is it's FMV on the date your mom passed. That can and will significantly reduce any taxable gains, if you sell it for more than the FMV on the date of her passing.

Now my above could be totally wrong and way off base. It depends on the laws of your specific state. If your state taxes personal income then you can double any fines, penalties and back taxes that wold be assessed if you did this wrong. So for the sake of your mom's memory as well as her final wishes being met, please seek the services of a probate attorney in your local jurisdiction and let the estate pay that attorney as it should.