Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

4.3 Federal Estate Tax Issues

Thi

s ¶ 4.3 d

iscusses how retirement benefits are treated for federal estate tax purposes. This

section applies only if the participant dies at a time when the federal estate tax is in effect, meaning

(as of this writing) either before or after 2010; see

¶ 4.3.08

for 2010 deaths.

4.3.01

Retirement benefits on the estate tax return

All retirement plan death benefits, including IRAs, 403(b) plans, and nonqualified deferred

compensation plans, as well as qualified retirement plans (QRPs) and annuity contracts (except for

proceeds of life insurance) that are includible in the estate are included as “annuities” under

§ 2039 ,

to be reported on Schedule I of the estate tax return, regardless of whether the benefits are

payable in the form of an annuity.

§ 2039 ;

Reg.

§ 20.2039-1(b) ;

Instructions for IRS Form 706

(Sept. 2009), Schedule I.

To complete a 706, it is necessary to determine the value of the decedent’s retirement

benefits as of the date of death. If a plan administrator refuses to provide information to the

executor of the estate of a deceased employee, on the grounds that the estate was not the named

beneficiary of the plan benefits, the executor might remind the plan administrator of the

administrator’s obligation under federal law to file an estate tax return for assets it holds if the

executor is unable to file such a return due to the plan administrator’s refusal to supply information.

§ 6018(b) ;

see Form 5.5,

Appendix B .

4.3.02

Problems paying the estate tax

How to pay the estate tax is always a problem when a major portion of the estate consists

of nonprobate assets, because such assets pass directly to the beneficiaries. The executor (who

controls only the probate estate) may not have enough assets under his control to enable him to

pay the estate taxes, or the assets he controls may not be the assets that are supposed to be burdened

with the tax. He is left chasing the recipients of the nonprobate assets to recover their shares of the

tax.

Retirement benefits that pass directly to a beneficiary other than the estate are nonprobate

assets and thus can put the executor into this difficult position. Compounding the problem,

retirement benefits are often nonattachable, making the executor’s job of recovering taxes owed

to the estate by the beneficiaries of the plans even more difficult or impossible. In the planning

stage, consider who will pay the estate taxes on the retirement benefits and with what funds. The

key is to make sure that the fiduciary who will be responsible for paying the tax will have control

of the money.

Here are examples of how executors have dealt with this problem:



A decedent left his IRA to beneficiaries who were not U.S. citizens or residents. The will

required these beneficiaries to pay their proportionate share of the estate taxes, but the

executor had no way to even find let alone demand payment from these beneficiaries. The

executor obtained a court order barring the IRA provider (a U.S. bank) from distributing

anything from the IRA to the foreign beneficiaries until they had settled with the executor

regarding the estate taxes.