My grandfather worked hard his entire life and eventually became a fairly wealthy man. When he wrote his will, I was just a baby and my little sister had not yet been born. Half of his estate (minus personal property) goes to our mother, and half goes to me. Our mother has told us our whole lives that when the time comes, I am to split my half with my sister.
Unfortunately, the time has come and it appears that the will was written to say my half is actually to go into a trust, which the lawyer will set up once my grandfather’s properties have been sold. Once funded, there will be hundreds of thousands of dollars in it and I will be the sole beneficiary. My mother is to be the trustee.
(This in itself is an issue since we are estranged and she has proved herself to be untrustworthy time and time again when it comes to money. This is not why I am writing you, although I am curious what, if any, rights I have as a beneficiary to ensure she does not just take the money out of the trust for herself.)
I know that I am not legally obligated to share my half with my sister, but how can I? If my mother elects to just disburse the funds all at once (highly unlikely but I suppose is a possibility), how can I give half of my share to my sister?
Lastly, do you have any advice on what to do with the money itself? My sister and I both have worked to become fairly well established and debt-free so we are both mostly looking at putting most of the money toward our retirement. I don’t think inheritance can be put in a 401(k), though. What other options are there?
-A.
Dear A.,
It’s always refreshing when someone wants to do the right thing, even though they’re not legally obligated to do so. Sharing your inheritance with your sister falls into that category.
As the trustee, your mother has a fiduciary role, which means she’s required to put the interests of the beneficiary (you) ahead of her own. As the beneficiary, you’re entitled to regular financial statements. If your mother fails to provide the requested statements, you can send her a letter of demand. If she still refuses or you suspect she’s stealing or mismanaging funds, you could petition the court to have her removed as trustee. You could also sue her personally for breaching her fiduciary duty.
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Whether your mother disburses the funds all at once or in increments, there’s no reason you can’t just gift your sister half. For any gift that exceeds the annual exclusion amount — $17,000 in 2023 — you need to fill out IRS Form 709. But as long as you don’t gift more than your lifetime exclusion amount — $12.92 million in 2023 — you won’t have to pay taxes on the gifted amount. You’d just need to tell the IRS about it.
Here’s where it gets complicated, though: You’ll pay income taxes on the portion of trust distributions attributable to interest and investment gains, but not the principal. Also, while inheritances aren’t taxable at the federal level, six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) have an inheritance tax.
You’ll be on the hook for the tax bill since you’re the trust’s beneficiary. But since your sister is receiving half of the money, make sure you subtract half the taxes from her share. For instance, if your distribution triggers an extra $10,000 in taxes, you’d give her half the amount you receive minus $5,000.
You’re correct that you wouldn’t be able to put hundreds of thousands of dollars in your 401(k) at once. Your 401(k) is funded through payroll deductions, and the limit on contributions for anyone younger than 50 is $22,500 in 2023.
But there’s no limit on the amount you can put in a taxable account. You could hang onto that money and use it to max out all tax-advantaged accounts, including 401(k)s and IRAs, each year. Or you could keep the money in the taxable account, knowing you can access it penalty-free at any time. If you hold your investments for over a year, you’d be taxed at long-term capital gains rates, which are just 15% for most Americans.
Since this is a significant amount of money, it’s worth hiring a financial planner to discuss the best ways to invest this money based on your personal goals and risk tolerance. Look for a planner who’s a fiduciary and uses a fee-only model so that they’re compensated based on the services they provide, not what they sell you.
If you keep a close eye on your trust’s financial statements, I think you’ll use this money in a way that would make your grandfather proud. Your letter illustrates the importance of keeping estate documents up to date, though. Fortunately, you’re following your grandfather’s wishes by sharing your inheritance with your sister. But anyone who assumes their beneficiary will do what’s right could leave a lasting family feud as their legacy.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].
