Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

September 5, 2013
Can overlooked heir receive IRA proceeds without tax consequences?

Q: My 94-year-old widowed mother recently died. Her will divides her estate equally among 3 adult children. However, she had various IRA accounts. On one rather large account, she only listed my sister and me as beneficiaries, inadvertently excluding my brother. Since these IRAs need to be rolled over to prevent huge tax consequences for us, is there any way to give my overlooked brother his share (about $100K) without incurring tax liability? He wants to get the money this year rather than $14K per year over time, the maximum gift allowance. Thank you.

Sacramento, CA

A: I am not aware of any way to change IRA account beneficiary designations in the circumstances that you describe after the death of the account owner.

Unless you can prove to the satisfaction of the IRA account custodian - and the IRS - that there was an error leading to the omission of your brother as a beneficiary, you and your sister will have to pay the income tax on the IRA proceeds when they are paid out. In short, there is no way to shift the income tax burden from the withdrawal of IRA funds to your brother, since he was not designated as a beneficiary.

That means that in order to give your brother a portion of the IRA, you and your sister will have to withdraw the money, pay the income tax, then make a gift of the net amount to him. If you give more than $14,000 to your brother in a calendar year, you will have to file a gift tax return reporting the gift and calculating the gift tax. You have a credit against the gift and estate tax equaling $5,250,000 in value, under current law. So you would use part of that credit assuming no other gifts. Your sister would have to follow a similar course.

You may want to consider splitting up the withdrawals over two tax years. For example, you and your sister could roll your mother's IRA account into inherited IRA accounts for your benefit and for your sister's benefit. Each of you could then withdraw $25,000 each in December 2013 and another $25,000 each in January 2014. You and your sister would then make a gift of the 2013 withdrawal net of the related income tax to your brother in December 2013. Do the same thing with the 2014 withdrawals. Be sure to calculate the income taxes and subtract them from the $25,000 so that the amount that you are giving your brother is net of the income taxes.

This way you and your sister will be splitting the withdrawals over two tax years, which may help reduce the income taxes. Also, you would each be able to use two years' annual gift tax exclusions. Your brother would receive the money by early 2014. Only the amount in excess of $56,000 (two $14,000 annual gift tax exclusions for 2013 plus two for 2014) would be taxable for gift tax purposes.

In order to eliminate having to file gift tax returns for 2013 and 2014, give only $14,000 each to your brother in 2013 so that you don't go over the exclusion. Increase the 2014 gift if the 2013 net withdrawal is more than $14,000.

If you or your sister are married, you may be able to use your spouse's $14,000 annual gift tax exclusion by electing to "split" the gift with him. It may be possible to avoid making a taxable gift entirely through the use of annual exclusions.

Unless you anticipate having an estate in excess of $5,250,000, you may not have to actually pay any gift or, upon your passing, estate tax because of the credit. So, aside from the income taxes, you many not have any tax cost to giving your brother his portion of the IRA account early.

Your question points out why it is important to periodically check the beneficiary designations on IRA accounts, 401(k) accounts and life insurance contracts. Beneficiary designations can be easily changed by an account owner during his/her lifetime. Once the account owner passes, the die is cast.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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