Life and Death Planning for Retirement Benefits

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characteristics, but the beneficiary has not parted with the risk of ownership of the asset. This

analysis suggests that a distribution should be treated as a mere change of form.

On the other hand, this particular change of form is a potentially income-taxable event,

which the IRA provider must report to the IRS on Form 1099-R (even if the distribution is

nontaxable; see Instructions for IRS Form 1099-R (2010), p. 3). By analogy to the regulations’

position on corporate reorganizations, an income tax-triggering distribution would be an “other

disposition.”

4.3.05

AVM, cont.: Sale of assets inside the IRA

The next question is whether the IRA is treated for AVM purposes as an asset itself (so all

the executor needs to do is use the value of the IRA six months after the date of death as the AVM

method value), or whether the IRA is treated as a collection of individual securities, so that the

beneficiary’s sale of a security inside the IRA within six months after the date of death would

cause the AVM period to end for that security (with the results of reinvestment of the proceeds of

the sale being irrelevant for estate tax valuation purposes). There is no authority or guidance on

this point. Sometimes the collection-of-securities approach would favor the taxpayer; in other

cases it would favor the IRS.

Since IRAs are usually reported and valued on the estate tax return as a collection of

individually-valued securities, and the beneficiary who owns the IRA controls whether and when

such securities are sold, this author believes the “security by security” approach is most

appropriate. The gist of the alternate valuation rules is that the person who inherits the estate-

taxable asset gets tax relief if the inherited asset declines in value within a limited period of time

after the decedent’s death. The maximum relief period is six months, and the period is shortened

if the person voluntarily removes from himself the risk of further decline in value by (for example)

selling the asset. If the IRA beneficiary sells a security inside the IRA, he has ended the risk of

decline in value of the asset he inherited. If he then chooses to reinvest the proceeds, the U.S.

Treasury should not have to bear the risk of decline in value of the new investment chosen by the

beneficiary.

4.3.06

Federal estate tax exclusion for retirement benefits

At one time, retirement benefits were not subject to the federal estate tax. Though the estate

tax exclusion for benefits was diminished and then repealed in the early 1980s, there are some

“grandfathered” individuals: If the decedent died holding benefits in a qualified retirement plan

and had separated from the service of the employer that sponsored the plan prior to 1985; or at his

death held benefits in an IRA as to which he had irrevocably elected a form of benefit prior to

1984; then the estate may be entitled to a partial or full exclusion of the benefits from the federal

estate. For details, see Instructions to IRS Form 706 (Estate Tax Return; Sept. 2009), Schedule I,

p. 18, and the

Special Report: Ancient History

4.3.07

Valuation discount for unpaid income taxes

It has been suggested that the value of a retirement benefit should be discounted because

the asset is subject to unpaid income taxes. The proponents of this theory assert that a “willing

buyer” would pay less for a retirement plan benefit because subsequent distributions from the

retirement plan or IRA to the willing buyer would be taxable.