There really is no way to give the money to your daughter without first paying the taxes that would be due on the withdrawal of this money.
You can "disclaim" an inheritance, but in that case, it would not be up to you who the alternate beneficiary was. So you run the risk that the money would not end up going to who you or your husband intended. You cannot just disclaim a portion of the asset. You would have to disclaim the entire interest you have. The entire amount may likely than go to the daughter, but then you have the reverse situation where she is the one who would have to pay all of the taxes.
Even if you could accomplish the split without paying taxes on her share, she would end up paying taxes anyway on her share of these funds. So the only thing you can really do here is to go ahead and pay the taxes that will be due on the withdrawal of this money and then give your stepdaughter the net proceeds after deducting those tax amounts. She would have had to pay tax anyway on this money, so it's not like she would really be getting cheated on the money she is to receive. The only drawback to this situation is that you may be in a higher tax bracket than your stepdaughter, so you may end up paying more taxes than she would have on her own, but there is really nothing else you can do in this situation.
I am sorry I could not give you a more favorable answer here, but unfortunately if you are the only named beneficiary, this is the only thing you can do other than disclaim your entire right to this money.
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Thank you sandra
Edited by Merlo on 7/1/2010 at 2:25 PM EST