[USER]

I’m looking into insights about a peculiar situation. I am conceptually supposed to inherit a mutual fund in a qualified retirement account, splitting it 50/50 with my sibling.

My parents (both deceased) and brother (living) are all listed as co-owners. I am not.

There are no listed beneficiaries. I am trying to figure what is possible for distributing the assets between us and what will be most tax efficient.

I’m also concerned about any penalties. I am younger than 59.5 and my sibling is older.

Thank you!!

[Amy]

Are you sure it’s a qualified retirement account? Qualified retirement accounts are owned by individuals, so there’s no way for both your parents and your brother to all be listed as ‘owners’.

If it is a qualified retirement account: If the parent originally owning the account passed first, and named the surviving parent as the beneficiary, then the surviving parent became the owner, either as their own qualified retirement account, or as a beneficiary of the deceased parent’s account.

In either case, if the intention was for you to inherit half of the account, when they inherited, the surviving parent should have named both you and your brother as beneficiaries on the account. But you say that there were no named beneficiaries.

Since that parent has now passed, if there are no named beneficiaries, then the ownership of the account passes to the estate of the most recent parent to pass, and should be distributed as a part of the estate.

If, instead, your brother was named as the only beneficiary, there is a way for all 3 of them to be named on the title of on an inherited retirement account, which might be why you think all 3 are co-owners.

The titling of the account could look something like this, where FBO stands for “For Benefit Of”:
Parent 1’s Retirement account (deceased), FBO Parent 2 (deceased), FBO Brother

If that’s the case, then your brother was the only named beneficiary and he is now the owner of the inherited retirement account.

If it’s not a qualified retirement account, and your parents and brother were all listed as joint (co) owners, then it’s also now your brother’s account.

In either of these cases, you are dependent on the kindness of your brother to share in some of the money.

Since he’s the owner of the account, all of the taxes will be paid by him.

Presumably, he will account for those taxes before giving you some of the money.

Also, on inherited qualified retirement accounts, there are no early distribution penalties for being younger than 59 1/2.

[Jamie]

It sounds like it is your sibling’s money legally. Something similar happened to me and I ended up gifting my brother half because that was what I thought was fair.

Legally, the beneficiaries are how it gets distributed.

Double check what is meant by being a co-owner though because that doesn’t make sense.

[Tristan]

Hmmm this isn’t making sense. It’s a retirement account? Those are owned by one person, so both parents and brother wouldn’t be co owners.

I’d double check that for starters

[Scott]

Your sibling owns it all, so they would need to gift 50%. You and he may need to discuss how to effectively do that in a tax efficient manner especially if it is a blend of taxable account and IRA.

They cannot be a co owner of a IRA so that part of the estate seems to be taxable.

It is possible on the IRA he can disclaim 50%, but that needs to be done in some period of time.

If he was the sole beneficiary and it is too late to disclaim, he can’t really transfer/gift the IRA to you. So, you and he will need to figure out how to tax equalize.

If there are truly no beneficiaries…likely you need to probate so he and you need to see a lawyer.

You also need to look at the step up basis carefully. Ideally you would have received a full step up in basis on anything in the taxable account when the 2d parent passed however with your sibling as co owner it might not be there, it’s something to check with an accountant.

It is possible having your brother as co owner was less efficient, but see what it is. As with the tIRA he may be able to disclaim some.

There is enough complexity here to talk to an estate lawyer and a CPA.

It’s not likely all that uncommon a situation but however you proceed be sure the i’s are dotted and t’s are crossed.

[Author]

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