Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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nontaxable corporate reorganizations the IRS described as mere changes of form in Reg. § 20.2032-1(c)(1) . For another, the same individuals own the same securities in the same proportions and in the same format (inherited IRA) both before and after the division. If the taxable/nontaxable dichotomy is the bright line test, then this would be a “mere change in form.” However, when an inherited IRA is divided among multiple owners, the beneficiaries are not required to take proportionate shares of each asset in the account; they may elect to take different securities as part of their respective shares. For example, Beneficiary A might take the stocks, B might take the bonds, and C might take the cash. This “swap” would not be an income- taxable event, provided each beneficiary received the correct total value he was entitled to, because all the assets are still inside the tax-deferred IRA account. However, if the beneficiaries did not take proportionate shares of each and every security in the account, query whether they have engaged in an “exchange” of inherited assets, triggering closing of the AVM period. E. Spouse’s election to treat account as spouse’s own account. When the surviving spouse is the sole beneficiary of the decedent’s IRA, the surviving spouse can elect to treat the inherited IRA as her own IRA. ¶ 3.2.04 . Following such election (which can occur by default in some cases, without any overt act by the surviving spouse) the required minimum distributions for the account are determined based on the surviving spouse as “owner” rather than as “beneficiary.” The fact that this transformation is not a taxable event suggests that the spousal election is a mere change of form that does not close the AVM period. On the other hand, since the assets are no longer in the “decedent’s IRA,” they are now in the “surviving spouse’s IRA,” they have arguably ceased to be “part of the gross estate,” which would suggest the AVM period has closed. F. Distribution from the account. IRA distributions that are reportable as such to the IRS and recipient by the IRA provider on Form 1099-R are generally taxable (though a particular distribution might not be taxable, for example, to the extent it represents return of the participant’s “basis” in the IRA, or if it is “rolled over” within 60 days by the surviving spouse as beneficiary, or if it is a qualified distribution from a Roth IRA). Although any withdrawal from the IRA would be considered a “distribution” for income tax purposes ( ¶ 2.1.01 ), it would not necessarily be so considered for AVM purposes. Under the regulations, only an executor or trustee can “distribute” property for AVM purposes. Reg. § 20.2032-1(c)(2) . Accordingly, distributing assets out of an IRA within six months after the date of death would not “freeze” the value of such assets for alternate valuation purposes unless either the IRA is in the form of a trust under § 408(a)(8) ( ¶ 6.1.07 ) or such distribution is considered an “other disposition.” Though property can be “distributed” for AVM purposes only by an executor or trustee, “Property may be ‘sold, exchanged, or otherwise disposed of’ by” a much broader group of recipients, including the executor, trustee, donee, heir, devisee, surviving joint tenant or “any other person,” presumably including an IRA beneficiary. See Reg. § 20.2032-1(c)(3) . When a security is distributed out of an IRA to the beneficiary, it is a mere change of the form of ownership: The same individual beneficiary owns the same asset (the security inherited from the decedent) both before and after the distribution. The asset now has changed income tax