Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

195

 In PLR 2004-40031, section 8.7(v) of the trust that was named as beneficiary of the participant’s plans gave the trustee discretion to pay the participant’s expenses of last illness, estate taxes, and probate costs. The estate was insolvent, so the trustee and an estate creditor sought a court order to pay some of the estate’s expenses from the trust. Though applicable state law exempted the retirement benefits from claims of the participant’s and beneficiary’s creditors, the court nevertheless ordered the trust to use the benefits to pay the estate’s liabilities “because no other assets existed” to defray these expenses. 4.3.03 Alternate valuation method (AVM) for retirement benefits Though normally assets are valued for federal estate tax purposes as of the date of death, § 2032(a) provides that, generally, if the estate so elects, “In the case of property distributed, sold, exchanged, or otherwise disposed of, within 6 months after the decedent’s death such property shall be valued as of the date of distribution, sale, exchange, or other disposition. In the case of property not distributed, sold, exchanged, or otherwise disposed of, within 6 months after the decedent’s death such property shall be valued as of the date 6 months after the decedent’s death.” Emphasis added. The executor must elect this “alternate valuation method” (AVM) for all assets of the estate or none, and can elect it only if the effect of the election is to decrease both the gross estate and the estate tax. § 2032(a) , (c) . There is no authority regarding how the AVM applies to IRAs. The question is, what events occurring within six months after the date of death would constitute a distribution, sale, exchange, or other disposition with respect to the IRA, that would “freeze” the alternate estate tax valuation as of the date of the event? See regarding sales of assets inside the IRA; see ¶ 4.3.04 regarding distributions and other events. Only self-directed individual-account plans (such as the typical custodial IRA) raise the question posed here regarding the application of § 2032 . Defined benefit plan ( ¶ 8.3.04 ) death benefits are typically payable in the form of a survivor annuity, which must be valued for estate tax purposes using the IRS’s tables for valuing life estates, annuities and terms-for-years (if it is not a commercial annuity) (Reg. § 20.2031-7(a) ) or based on the cost of comparable annuity contracts (if it is a commercial annuity contract) (Reg. § 20.2031-7(b) , § 20.2031-8(a)(1) ). The AVM rule for annuity contracts is in Reg. § 20.2032-1(f)(1) . Some retirement plans are neither self-directed individual account plans nor true annuities. For example, the decedent may have participated in a profit-sharing plan under which the investment decisions are made by the plan trustees rather than by the participant. This type of plan typically provides to participants and beneficiaries only annual or quarterly statements, showing the total account value, but not listing particular securities. Unless the decedent happened to die on a plan valuation date, the decedent’s interest in the plan must be valued by obtaining an interim valuation from the plan trustees (which they may or may not be willing or able to provide) or by interpolating the values as of the last plan valuation date before and the first plan valuation date after the date of death (adjusting these valuations as necessary to reflect plan contributions and distributions during the period). In the case of such “other plans” the executor will presumably use, for the alternate valuation, the same interpolation method used to value the benefit on the date of death. 4.3.04 AVM, cont.: Distributions, other IRA events as “disposition”

Made with