Life and Death Planning for Retirement Benefits

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224 Life and Death Planning for Retirement Benefits
Suppose that, instead of cashing out the IRA, “Jill” keeps it alive until eventually its
investments appreciate back to their original value. Presumably the unused IRD deduction can be
fully applied to distributions from the re-appreciated account despite the fact that the value on
which estate tax was paid was “lost” for some period of time (there is no authority on this point).
4.6.07 IRD deduction: Multiple beneficiaries or plans
If multiple beneficiaries inherit IRD items from the same decedent, the IRD deduction is
apportioned among them in proportion to the amount of IRD each receives.
It is not clear whether the deduction must be apportioned among multiple plans inherited
by a single beneficiary. Suppose a beneficiary inherits an IRA and a 403(b) plan, each worth
$100,000, and she is entitled to a deduction of $80,000 for this $200,000 of IRD. The
IRA experiences investment losses and becomes worthless, while the 403(b) plan doubles in value
to $200,000. She cashes out the 403(b) plan. Can she use the entir deduction against the
$200,000 403(b) distribution? Or is she required to apportion half the deduction to the now-
vanished IRA, so she can never use it?
4.6.08 IRD deduction on the income tax return
On the bright side: Certain miscellaneous itemized deductions are deductible only to the
extent the total of such deductions exceeds two percent of the individual’s adjusted gross income
(AGI). The deduction is not one of those, so it may be deducted without regard
to the two percent floor Because it is not subject to the two percent floor, this deduction
is allowed in computing the alternative minimum tax (AMT).
On the negative side, the deduction is subject to under which an individual’s
itemized deductions are reduced (in years before and after 2010) by an amount equal to as much
as three percent of the individual’s AGI in excess of an annually-adjusted threshold amount, or (if
less) 80 percent of total itemized deductions. EGTRRA repealed effective in
2010, but EGTRRA’s sunset provision reinstates it in 2011 at 2001 levels. The reduction of
itemized deductions does not apply to trusts or estates; see
4.7 Road Map: Advising the Beneficiary
Here are matters the advisor needs to review with a client who has inherited a retirement
plan. If the client is the deceased participant’s surviving spouse, see also “Road Map:
Advising the Surviving Spouse.”
 Go through the post-mortem disclaimer checklist at If the benefits are not to be
disclaimed, consider:
 Other ways to “clean up” the estate plan after the participant’s death, if he named the
“wrong” (or no) beneficiary for his retirement plan. If benefits are payable to the
“right” beneficiary, move on to:
 How to correctly title an inherited IRA.
 Advise the beneficiary regarding the option for Roth conversion of the inherited plan if that
option is available; see