-A.
(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.)
Thank You for your question!
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?
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 ,500 in 2023.
Get practical advice for your money challenges from Robin Hartill, a Certified Financial Planner and the voice of Dear Penny.
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 — ,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 — .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.
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.
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.
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. Got a Burning Money Question?
Dear A.,
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Robin Harthill
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.
While we can’t publish every question we receive, we appreciate you sharing your question with us.
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 ,000 in taxes, you’d give her half the amount you receive minus ,000. Your willingness to share your story might help others facing similar challenges.
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