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I have a complex estate tax question. It's from my mom's…

I have a complex...

I have a complex estate tax question

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

It's from my mom's annuity which is currently pending litigation

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Customer reply replied 25 days ago
My mom had about $800,000 in annuity. She passed away. My brother and I are listed as 50/50 beneficiary. My sister is contesting the validity of the change of beneficiary. She contends that the previous beneficiary form should be declared vaild which listed her and I as 50/50.The case is currently pending trial. My 50% claim is vaild with either outcome in the case but my brother and I have agreed to split the proceeds 50/50 regards ***** ***** outcome.So my question is... If the court releases 50% of the annuity funds to me, how can I split that with my brother now, and then if we win, split the other 50% that would be released to him?
Answered in 40 minutes by:
3/28/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,692
Experience: Taxes, Immigration, Labor Relations
Verified

If distribution will be issued to you - and will be reported o 1099R under your name and your SSN - you will not be able to split tax liability.

What you may do - open an inherited IRA account - transfer funds into that account and spread distribution over several years - to reduce tax pressure.

You will be able to gift the money to your brother as you wish - but will not be able to shift to him your tax liability.

Questions?

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Customer reply replied 25 days ago
What if I kept say enough to cover the tax liability - say 37% extra and then split the remaining with him. Would I be able to gift the approx $200,000 to him tax free?

that will be between you how to divide proceeds and how to cover tax liability.

The gift is not taxable income for the recipient - so your brother will not need to claim that amount as income.

For you as a donor - the gift above $15,000 is reported on gift tax return.

However - you will NOT pay any gift tax as long as you have not reached your lifetime limit - that increased for 2018 to $11,200,000.

So - no tax liability but yes for gift tax return filing.

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Customer reply replied 25 days ago
Very good. Now since our sister has forced us into litigation to recover what was right fully me and my brothers inheritance, we have incurred large sums in attorney fees. Will we be able to deduct those attorney fees from our taxes?

Yes - as these are expenses related to taxable income.

According to the IRS -

You can deduct expenses you pay for the purposes

1. To produce or collect income that must be included in your gross income;
2. To manage, conserve, or maintain property held for producing such income; or
3. To determine, contest, pay, or claim a refund of any tax.

These include - Legal fees related to producing or collecting taxable income or getting tax advice.

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Customer reply replied 24 days ago
Is the income taxable? Does this not fall under inheritance tax?

Several issues

1. There is NO inheritance tax on the federal level - while some states do have state inheritance tax

2. For income tax purposes - inheritance is not taxable.

3. However income received AFTER assets were inherited - is classified as IRD - income in respect of the decedent - and such income is taxable as it would be received by the deceased if he/she were alive. Distribution from the annuity is an example of IRD. So annuity distributions are taxable for the beneficiaries.

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Customer reply replied 24 days ago
The pay on death counts as a taxable distribution? And if so, what is the income classified as?

If paid out of annuity - yes - that is taxable distribution.

If paid based on separate life insurance policy - that is not taxable.

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Customer reply replied 24 days ago
if my payout is $400,000 but I only receive $250,000 after attorney fees, I have to pay taxes on $400,000 but I can deduct the attorney fees?

You will include full taxable distribution into your gross income

and separately deduct attorney fees expenses as part of your itemized deduction.

Your tax liability will be determined on TAXABLE income (after deductions), filing status, etc .

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,692
Experience: Taxes, Immigration, Labor Relations
Verified
Lev and 87 other Tax Specialists are ready to help you
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Customer reply replied 22 days ago
Last question toward this... I've paid about $30k in attorney fees so far to collect this inheritance in 2017. Even though the court has not yet awarded the money to me, can I deduct those fees off my 2017 tax return?

You will need to keep receipts and will deduct legal expenses when taxable income is realized.

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Lev
Lev
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Category: Tax
Satisfied Customers: 32,692
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