My dad recently passed away and had a life insurance policy from his work of $100,000. He listed my sister that was taking care of him as the sole beneficiary and she is instructed to then divide the policy between the rest of the children. She was the one who had power of attorney over his finances. So far, so good.

My question is that how does my sister go about disbursing this money? I told her it may not look kosher giving out checks for $25K and if she does, that we may have to pay taxes (or she may have to pay taxes) on the amount. My dad thought he was doing what would be easiest but did he inadvertently cause a problem?

If your sister gets the life insurance, there's no tax to her. It's then HER MONEY. She doesn't HAVE to disburse it - she can use it to spend for your food, clothing, shelter, taxes, etc.

HOWEVER. If she DOES decide to give each of you some money, SHE is then subject to "gift taxes". She will have to pay a huge chunk of money herself, to be able to GIVE you that money.

If dad wanted each kid to get 1/4, he should have done it that way. His "do it yourself" life insurance is probably going to mean no one gets $25,000 except the government - the rest of you will get less.

Sorry about your father, but unfortunately he should have had some professional advice before setting up such an arrangement.

a) Your sister is under NO obligation to give anyone any money.

b) If she's nice enough to choose to do so, she'll pay gift tax writing you a check for $25,000.

If she's married, then her and her husband should be able to give the money, but it's not as clean as just having the beneficiaries set up correctly in the first place.