Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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This theory is wrong. If the beneficiary assigns the benefit to a buyer, the seller’s recognition of income upon sale is mandated by § 691(a)(2) . See CCM 2006-44020 ( ¶ 6.5.08 ). The “willing buyer” then has a basis equal to what he paid for the benefit, so the willing buyer can liquidate the entire benefit immediately with no income tax whatsoever (except to the extent he receives more from the plan than he paid for it). Cases recognizing a discount for future income taxes in the valuation of corporate stock have no relevance to the valuation of a retirement plan benefit, because the buyer of corporate stock does not get a “basis step-up” for appreciated assets held by the corporation (so the company he is buying has an ongoing “built in” liability for income tax on such appreciation). See, e.g. , Estate of Jameson v. Comm’r, 267 F. 3rd 366 (5th Cir., 2001). But taking a valuation discount on retirement benefits for built-in income taxes is not a defensible position. Estate of Smith v. U.S., 93 AFTR 2d 2004-556 (1/16/2004); Est. Of Kahn v. Comm’r, 125 T.C. No. 11 (2005); and PLR 2002-47001 concur. 4.3.08 Deaths in 2010: One-year “repeal” of the federal estate tax Effective January 1, 2010, and until January 1, 2011 (unless the law is changed before the end of 2010), there is no federal estate tax or generation-skipping transfer (GST) tax. The federal estate tax and GST tax ceased to exist for deaths after 2009. The gift tax still is in place, with a lifetime exemption of only $1 million and a tax rate equal to the top income tax rate (35%, as of 2010). The estate and GST taxes are scheduled to re-appear for deaths in 2011 and later, with an exemption of only $1 million. The new-basis-at-death rule died with the estate tax—almost. Generally, for deaths before (and after) 2010, a beneficiary who inherited (or who inherits) property got (or will get) a new income tax basis for that property, equal to its date of death value (even if the decedent’s taxable estate was or is not large enough to be subject to estate tax). See § 1014(a) , as in effect for years before and after 2010. In contrast, the beneficiary of a decedent who dies in the year 2010 will generally inherit the decedent’s income tax basis, instead of getting a new “stepped up basis” equal to the date of death value of the inherited property. § 1022(a). This is called “carryover” basis, because the decedent’s basis in the property “carries over” to the beneficiary. However, the law effective for deaths in 2010 is not “pure” carryover basis; it is carryover basis with several exceptions:  The carryover basis rule applies generally only to appreciated assets. If an asset had declined in value, so the value on the date of death was less than the decedent’s basis, the beneficiary’s basis is the date-of-death value, not the decedent’s original basis.  The survivors are allowed to apply some basis step up, under two separate provisions. First, the decedent’s executor can allocate up to a total of $1.3 million (plus the amount of certain pre-death depreciation and losses) of basis step-up among the decedent’s appreciated assets. § 1022(b). The executor gets to choose which appreciated assets get this step-up.  Second, an additional $3 million of pre-death appreciation can be sheltered with respect to property passing to the surviving spouse. § 1022(c). However, “property which constitutes a right to receive an item of income in respect of a decedent” (IRD; ¶ 4.6 ) has never been entitled to a new basis at death. § 1014(c) . Instead, an individual who inherits IRD takes over the decedent’s basis (carryover basis). This was true under the “old law” (pre- and post-2010) and is also true for deaths in 2010; NONE of that $1.3, $3 million, or other step-up can be allocated to retirement benefits. Retirement benefits (and other