Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

plan account itself is a right-to-receive IRD. (Even without § 691(a)(2) , the transfer of a retirement plan by gift or pledge would normally be a taxable event anyway; see ¶ 2.1.04 (C).)

Here are examples of how a transfer of the right-to-receive IRD could occur:

A.

Gift of right-to-receive IRD.

Stokely Example: Stokely is named as beneficiary of his father’s IRA. After taking distributions for several years after his father’s death (and including such distributions in his income as IRD), Stokely decides he does not need this money and wants his sister to have it. He gives the inherited IRA to his sister. His gift is a transfer of the right-to-receive IRD, and the full value of the IRA becomes immediately taxable to Stokely under § 691(a)(2) . B. Transfer from estate or trust to beneficiary . Although the Stokely Example is unrealistic, there is one type of transfer of the right-to-receive IRD that is very common, and that is the transfer of an inherited retirement plan by an estate or trust to the individual beneficiary(ies) of the estate or trust. See ¶ 6.1.05 . This type of transfer may or may not be taxable; see ¶ 6.5.07 – ¶ 6.5.08 . C. Transfer to a 100 percent grantor trust. Rev. Rul. 85-13, 1985-1 CB 184, established the principle that transactions between an individual and trust all of whose assets are deemed owned by such individual under the “grantor trust rules” ( ¶ 6.3.10 ) are not considered taxable transactions under the income tax Code, because “A transaction cannot be recognized as a sale for federal income tax purposes if the same person is treated as owning the purported consideration both before and after the transaction.” If a beneficiary transfers an inherited IRA to a trust of which he is considered the sole owner under § 678 (one of the “grantor trust rules”), the transfer, being a nonevent for income tax purposes, should not trigger deemed income under § 691(a)(2) , provided that (under the terms of the transferee trust) the benefits cannot be distributed to anyone other than that beneficiary during his lifetime. Two PLRs confirm this conclusion. In PLR 2006-20025, an IRA that had been left to the participant’s disabled child outright as beneficiary was transferred to a “special needs trust” (“(d)(4)(A)” type, since the child was establishing it for his own benefit) established by the child’s guardian on his behalf, with probate court approval. In PLR 2008-26008, an IRA left outright to the participant’s minor child as beneficiary was transferred to a trust for the minor’s benefit established by the child’s guardian on his behalf, with probate court approval. In both cases the trusts were irrevocable. The IRS ruled the transfers were nontaxable. The federal estate tax paid on IRD is deductible for federal income tax purposes by the recipient of the IRD. § 691(c) . State estate taxes are not deductible. To determine the amount of the deduction, first determine the estate tax due on the entire estate. Next, determine the net value of all items of IRD that were includible in the estate (for definition see § 691(c)(2)(B) ). The estate tax attributable to the IRD is the difference between the actual federal estate tax due on the estate and the federal estate tax that would have been due had the net value of the IRD had been excluded from the estate. Income tax deduction for estate tax paid on IRD