Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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Suppose that, instead of cashing out the IRA, “Jill” keeps it alive until eventually its investments appreciate back to their original value. Presumably the unused IRD deduction can be fully applied to distributions from the re-appreciated account despite the fact that the value on which estate tax was paid was “lost” for some period of time (there is no authority on this point).

IRD deduction: Multiple beneficiaries or plans

If multiple beneficiaries inherit IRD items from the same decedent, the IRD deduction is apportioned among them in proportion to the amount of IRD each receives. § 691(c)(1)(A) . It is not clear whether the deduction must be apportioned among multiple plans inherited by a single beneficiary. Suppose a beneficiary inherits an IRA and a 403(b) plan, each worth $100,000, and she is entitled to a § 691(c) deduction of $80,000 for this $200,000 of IRD. The IRA experiences investment losses and becomes worthless, while the 403(b) plan doubles in value to $200,000. She cashes out the 403(b) plan. Can she use the entire § 691(c) deduction against the $200,000 403(b) distribution? Or is she required to apportion half the deduction to the now- vanished IRA, so she can never use it? On the bright side: Certain miscellaneous itemized deductions are deductible only to the extent the total of such deductions exceeds two percent of the individual’s adjusted gross income (AGI). § 67(a) . The § 691(c) deduction is not one of those, so it may be deducted without regard to the two percent floor. § 67(b)(7) . Because it is not subject to the two percent floor, this deduction is allowed in computing the alternative minimum tax (AMT). § 56(b)(1)(A)(i) . “On the negative side, the § 691(c) deduction is subject to § 68 , under which an individual’s itemized deductions are reduced by an amount equal to as much as three percent of the individual’s AGI in excess of an annually-adjusted threshold amount, or (if less) 80 percent of total itemized deductions. § 68(a) , (b) . Although this section (called the “Pease” limitation) was “repealed” for the years 2010–2012, it has been reinstated and applies for 2013 and later years. The § 68 reduction of itemized deductions does not apply to trusts or estates; see ¶ 6.5.04 .” IRD deduction on the income tax return Here are matters the advisor needs to review with a client who has inherited a retirement plan. If the client is the deceased participant’s surviving spouse, see also ¶ 3.1.02 , “Road Map: Advising the Surviving Spouse.”  Go through the post-mortem disclaimer checklist at ¶ 4.4.01 . If the benefits are not to be disclaimed, consider:  Other ways to “clean up” the estate plan after the participant’s death, if he named the “wrong” (or no) beneficiary for his retirement plan. ¶ 4.5 . If benefits are payable to the “right” beneficiary, move on to: 4.7 Road Map: Advising the Beneficiary

 How to correctly title an inherited IRA. ¶ 4.2.01 .