[Ann]

I need to know if I’m doing something correctly. I’m outlining the situation…
My dad died. I’m the successor trustee.

My dad did everything 1/3, 1/3, 1/3 with his 3 kids. EXCEPT…my dad had one Trad IRA account w/ $100k that for some odd reason he only put two of his kids on.

This was odd b/c my father did not have a falling out w/ the one kid he did not list as a beneficiary. Who knows? Oversight?

So, two of us siblings, who were listed as beneficiaries said, “Well, we’ll just give the 3rd sibling the money he would have inherited had the account listed all three kids.

So, I tell my sibling…”Well, I can’t give you the full amount. When I pull the money out of the Inherited Trad IRA, taxes have to be paid on the money.

I’ll give you the money after the taxes are paid.”

My sibling was fine with that explanation.

So what tax rate do I use? Do I use my effective tax rate (federal and state), or do I use my marginal tax rate????…the last bit of money pulled out of the Inherited Trad IRA is at a 22% tax rate and close to a 10% Calif tax rate.

But, of course, my effective tax rate is lower.

I want to be fair to my sibling. What is fair? Give my sibling what he should have inherited minus my effective tax rate or my marginal tax rate?

Thanks for your insight!

[Ken]

I would go with your current top marginal rate, since that’s what you have to pay on the distribution that you’re not keeping – otherwise, you’re ending up with less than a gross 33.33% since you’d be effectively paying your top-rate extra taxes on the distribution you’re not keeping.

However, if their marginal rate is lower than yours, I’d say it’s also fair to meet in the middle, since it sounds like the error could have impacted any one of you, the burden of correcting it should be evenly spread around.

[Jacquie]

Have you already taken possession? Can you disclaim a portion of it? Each sib disclaim 16.67%?

[Kim]

My feeling is the amounts should be divided equally… each sibling absorbing some of the tax. It was an oversight on your dad’s part.

You and your other sib are not getting more than the one left off are you?

The fairest way Is to have it all divided by 3 including taxes

[Alexandra]

Kudos to you and your family for agreeing to do the fair thing and not fighting!

[Heath]

I would prepare two returns for you or your other sibling (whichever does the withdrawal): one “actual” return and one “hypothetical” return without the withdrawal.

The difference between them is the tax attributable to the withdrawal.

The problem with using just your marginal or effective tax rate is that it doesn’t account for ancillary tax impacts such as phasing out of certain credits or deductions.

[Ron]

use your margin tax rate, the same rate every dollar of income is effectively taxed at after all deductions.

If your brother gets a small break in his taxes he would have paid, great!

If you charge him your highest effective rate, that is simply unfair and could cause family division. Not worth it.

[Jeremy]

Does your brother need the money? I wonder if you could make life easier by just having the funds sent directly to a charity of his choice.

[Author]

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