Q. I am a FERS employee earning $118,000 per year. My sister is a dental assistant earning about $30,000 per year. (She’s also married and lives in a state with a much lower cost of living, while I’m single.) This question involves inheritance of our parents’ retirement accounts, and I offered our salaries because our tax obligations are vastly different. Our father has a TSP account worth approximately $110,000. Our mother has a 401(k) worth approximately $90,000. Both are retired, and both are very ill with terminal cancer. We’re wondering if our parents should each convert their retirement accounts to cash and pay the upfront taxes and then leave my sister and me as equal co-beneficiaries of the cash account. We can’t seem to figure out how to fairly inherit the retirement accounts, since my mother and father’s accounts aren’t equal, and I am in a higher tax bracket.
I understand if we inherit these accounts, we’d have to roll them into an “inherited IRA” and begin taking distributions based on our life expectancy, and these distributions would increase our respective annual tax obligation. While it would be nice to continue allowing the bulk of these accounts to grow tax-deferred, having two beneficiaries in two different tax brackets complicates future distributions. Right now, my parents are each other’s designated beneficiaries, which will be a nightmare if they die soon after one another. In an ideal world, we’d be allowed to combine these accounts and leave them to continue growing tax-deferred until my sister and I retire, at which time we could each take half the annuity. Is there any way to make this happen, or is there a better option we should be aware of?
A. This is beyond the scope of this forum and can’t be answered from the information provided, anyway. Please let her know that she should engage an estate planning attorney and a CPA if she really wants to work this problem.