Can you share the pension & the taxes?

June 16, 2008 9:25 AM

A father dies. There is a pension and 2 children. Only one person can be named beneficiary. How do you handle the taxes?

Here's the scenerio: (sorry for the length)
Brother and Sister's parents divorced when they were young and they grew up without the father. Much later in life they were told their father was very ill and they went to visit him. During this visit the father shared his pension information with them and went through the paperwork with them. Only one name could be listed as beneficiary and the father chose the eldest child making it clear the money was to be divided between the 2 children. Payments are just under $400 every month for 10 years after the fathers death. The father died less than 60 days later.

About 6 months after the fathers death the youngest child asked the sibling if they had started receiving payments yet. Yes. Older sibling explained the tax liabilities would all fall on the beneficiary even if it was shared. Older sibling expected to get a 1099 for the full amount. Younger sibling did not have any type of response to this and older sibling has now been receiving payments for almost 2 years.

How can this work out where nobody gets screwed? I know...lawyer, lawyer...accountant, accountant. Has anybody experienced anything like this? This is occuring over 3 states...father's employer, brother and sister each in a different state. Younger sibling does not want this to become an issue and will not allow family fights over money. Younger sibling is willing to just drop it, but could also really use the money.
I would appreciate any advice, thoughts or suggestions. You can email me at [e-mail]
Thanks!

posted by anonymous to work & money (7 comments total)

I know...lawyer, lawyer...accountant, accountant

Yep. You got a doozie and you'll need professional help.
posted by Ironmouth at 9:56 AM on June 16

If both siblings want to resolve this amicably, a reasonable estimate of the tax liability subtracted from the pension payments, divide the total in two and you're close enough. This requires good faith on both sides, though. An accountant might be helpful for that, if both siblings agree in principle. A lawyer is going to make it into an issue unless it's a decision both siblings come to together.
posted by jeather at 10:06 AM on June 16

Isn't this sometimes handled via a trust? That is, the pension is paid to a trust in which you and your sister have equal ownership?
posted by Houstonian at 10:28 AM on June 16 [1 favorite]

Older sibling explained the tax liabilities would all fall on the beneficiary even if it was shared. Older sibling expected to get a 1099 for the full amount.

If anonymous can answer questions, does this mean that

(1) Older sibling intended to share, or says that he intended to share
(2) Older sibling was waiting for payment of appropriate taxes, complete with 1099 form, from younger?

**IF** it is the case that both Older Sibling and Younger Sibling want to resolve this amicably, any trusted neutral third party should do. I might suggest a minister from any faith that requires some serious amount of book learnin' and that is either your religion but not your minister, or not your religion. That is, if you're both Catholic, a priest who is neither of your priests, or, say, a rabbi or Lutheran minister. Somebody who doesn't know either of you from Adam's housecat and is accustomed to and maybe trained in moral reasoning and counseling.

Note that Older Sibling can simply give (half of pension minus half of taxes) to Younger Sibling as a gift. No forms to file, no taxes to pay on either end.
posted by ROU_Xenophobe at 10:32 AM on June 16

I would actually be wary of getting a lawyer involved. Maybe tell the sibling that you really need the money, and would be ok with $150 a month from now on. That's a little less than they'll pay in taxes, and they still got $200 a month free and clear for a couple of years.
posted by sondrialiac at 11:28 AM on June 16

Yeah, not sure exactly what the problem is here, can you clarify? Is the older sibling saying "Because I have to pay taxes on the whole amount, I am not going to give you anything, and I will keep 100% of the after-tax money"? That seems pretty stubborn and greedy. If that's the case, and if the younger sibling doesn't want to fight over it, I guess you have to drop it. I don't see how finding some complicated way to have the younger sibling officially bear half the tax liability would actually help anything.

Otherwise, if the older sibling is not being greedy and does indeed want to share, then what everyone else is saying seems like the relatively simple and obvious solution; older sibling gives younger sibling half of (Pension minus Taxes.) Or, I guess, older sibling could give younger sibling their full half of the pension monthly, and then at tax time younger sibling pays older sibling half of the taxes.
posted by EmilyClimbs at 11:55 AM on June 16

Follow-up from the OP

Houstonian - no trust involved, just a check being sent to older sibling, made out to Older Sibling.

This matter has not been discussed between the siblings for quite some time. Yes, the older sibling at the time was willing to share, but did not want to give half because he/she would be the only one claiming the full amount come tax time...therefore paying taxes on the full amount and not just half.

From what I understand, Older Sibling is receiving a monthly check with no taxes withheld. Both older & younger sibling itemize taxes. How would you go about finding the estimated taxes? I agree it would be easy to share the "after tax" total, each child gets half. But how do you determine what that amount is?
Thanks for your help and suggestions!

posted by jessamyn at 12:40 PM on June 16