Estate settlement agreement

Question:

My sister and I are 50-50 beneficiaries of our mom’s will. Her assets include a house ($250K) and an IRA ($250K). My sister would like to live in the house. I realize the IRA will cost me taxes, which I don’t mind paying. But the IRA lists equal beneficiaries (my sister and I). Is there a legal way she can sign a document for my sister to forego her inheritance of the IRA?

If my sister’s portion goes to my mom’s estate, does it not show up as income taxable at the highest rate on the year of death? How does one split it up into five years’ distributions? An extra hassle is to keep estate open for five years, and file taxes, which would not be needed otherwise.

Response:

You are right, that it would be cumbersome to keep your mother’s estate open for five years. But that may not be necessary if your mother named you and your sister as beneficiaries of her IRA. Then it would pass directly to you and your sister rather than going through your mother’s estate. This would mean that it’s subject to the 10-year deadline for IRA withdrawals for inherited IRAs as opposed to the five-year rule for IRAs payable to estates, allowing you to stretch out your withdrawals over a longer period and potentially lowering the tax impact.

Either way, there are essentially two ways to redistribute your mother’s estate so that the house goes to your sister and the IRA to you. The first is through disclaimers. You and your sister can sign these, which provide that the interests you disclaim — your sister with respect to the IRA and you for the house — will pass as if you had each died before your mother. Assuming that her will or IRA beneficiary designation says that in that case her estate would pass to the surviving sister, this would work. (I don’t know whether your sister has children. If your mother’s will says that your sister’s share of her estate will go to your sister’s children rather than to you should your  sister die before your mother, then a disclaimer may not work. In that case, the best bet may be for your sister to simply withdraw her share of the the IRA and transfer the proceeds to you, less whatever taxes she incurs. You may want to do this over two or more years in order not to push your sister into a higher tax bracket.)

The second approach is an estate settlement agreement through which you and your sister agree to distribute your mother’s estate differently from how her will directs. If your mother’s house is passing under her will and her IRA according to beneficiary designations, a combination of an estate settlement agreement and a disclaimer may make the most sense.

Finally, if a disclaimer does make sense, you will have to look to your state’s laws to see how they are effected. Usually, the disclaimer must be executed and filed within nine months of the date of death. Since all this is complicated and with respect to the disclaimer depends on state law, I recommend that you consult with a local probate attorney.

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