Qualified Plans And The Estate Tax

March 13, 2024

3993 / Is the value of a death benefit payable from a qualified plan includable in the employee's gross estate?

<div class="Section1"> In general, yes, if the employee dies after 1984. Estates of Decedents Dying After 1984 The present value (at the date of the decedent’s death or at an alternate valuation date) of an annuity or any other benefit payable to any surviving beneficiary under a qualified plan on the death of a participant, other than death proceeds of insurance on the participant’s life, is includable in the decedent’s estate.<a href="#_ftn1" name="_ftnref1">1</a> The Tax Reform Act of 1984 generally repealed the estate tax exclusion discussed below for estates of decedents dying after 1984. The repeal does not apply to the estate of any decedent who was a plan participant in pay status on December 31, 1984, and who irrevocably elected the form of the benefit before July 18, 1984.<a href="#_ftn2" name="_ftnref2">2</a> The Tax Reform Act of 1986 provided that these conditions are considered met if the decedent separated from service before January 1, 1985, and does not change the form of benefit before death.<a href="#_ftn3" name="_ftnref3">3</a> Qualified plan benefits rolled over to an IRA are treated as IRA benefits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3712">3712</a>) that are not eligible for the TRA ’86 separation from service rule.<a href="#_ftn4" name="_ftnref4">4</a> For the meaning of the term “in pay status” and the requirements of an irrevocable election of the form of benefit, see Temporary Treasury Regulation Section 20.2039-1T. Life insurance proceeds are includable under IRC Section 2042, assuming the participant held an incident of ownership in the insurance at his or her death or the proceeds are payable to or for the participant’s estate. The right to name the beneficiary of the death proceeds is an incident of ownership ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="86">86</a>). Estates of Decedents Dying After 1982 and Before 1985 Up to $100,000 in value of an annuity or other benefit payable to any surviving beneficiary under a qualified plan on the death of a participant, to the extent such value is attributable to employer contributions and to deductible employee contributions, is excludable from the gross estate, although special rules apply to a lump sum distribution.<a href="#_ftn5" name="_ftnref5">5</a> The $100,000 limitation is an aggregate limitation applicable to survivor benefits payable under a qualified plan, a tax sheltered annuity ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="633">633</a>), an individual retirement plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3712">3712</a>), a Retired Serviceman’s Family Protection Plan, or a Survivor Benefit Plan. The Tax Reform Act of 1984 amended TEFRA to provide that the $100,000 limit shall not apply to the estate of any decedent who was a plan participant in pay status on December 31, 1982, and who irrevocably elected the form of benefit before January 1, 1983.<a href="#_ftn6" name="_ftnref6">6</a> The Tax Reform Act of 1986 provided that these conditions are considered met if the decedent separated from service before January 1, 1983, and does not change the form of benefit before death.<a href="#_ftn7" name="_ftnref7">7</a> Estates of Decedents Dying After 1953 and Before 1983 The value of an annuity or other benefit payable to any surviving beneficiary under a qualified plan on the death of a participant, to the extent such value is attributable to employer contributions and to deductible employee contributions, is excludable from the gross estate, although special rules apply to a lump sum distribution.<a href="#_ftn8" name="_ftnref8">8</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 2039(a), 2039(b). <a href="#_ftnref2" name="_ftn2">2</a>.  TRA ’84, § 525. <a href="#_ftnref3" name="_ftn3">3</a>.  TRA ’86, § 1852(e)(3). <a href="#_ftnref4" name="_ftn4">4</a>.  Rev. Rul. 92-22, 1992-1 CB 313; Sherrill v. U.S., 415 F. Supp. 2d 953 (N.D. Ind. 2006). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC §§ 2039(c), 2039(g), as amended and added by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), and before repeal by the Tax Reform Act of 1984. <a href="#_ftnref6" name="_ftn6">6</a>.  TRA ’84, § 525. <a href="#_ftnref7" name="_ftn7">7</a>.  TRA ’86, § 1852(e)(3). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 2039(c), before amendment by TEFRA. </div></div>

March 13, 2024

3995 / How does community property law affect the estate taxation of qualified plan benefits?

<div class="Section1"> If an employee’s interest in the employer’s qualified plan is community property, then the interest is considered to be owned one-half by the employee and one-half by the employee’s spouse. Accordingly, if the employee were to predecease the spouse, only the employee’s community interest in any death benefit would be includable in the employee’s estate ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3993">3993</a>). Likewise, if the employee’s spouse were to die first, only the employee’s spouse’s community interest in the plan would be includable in the gross estate.<a href="#_ftn1" name="_ftnref1">1</a> The extent to which employee interests in qualified plans are community property is a matter of local law. There appears to be little doubt that an employee’s vested interest in a qualified plan, to the extent it is attributable to contributions made while the employee was married and living in a community property state, is community property.<a href="#_ftn2" name="_ftnref2">2</a> Moreover, there appears to be increasing support for the view that nonvested benefits in a retirement plan are not mere expectancies but are property, and thus can be community property.<a href="#_ftn3" name="_ftnref3">3</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 2033. <a href="#_ftnref2" name="_ftn2">2</a>.  Herring v. Blakeley, 385 S.W. 2d 843 (Tex. 1965); Lynch v. Lawrence, 293 So. 2d 598 (La. App. 1974, writs ref’d.); T.L. James & Co. v. Montgomery, 332 So. 2d 834 (La. 1976); Everson v. Everson, 537 P.2d 624 (Ariz. App. 1975), aff’d and mod’d, 494 Pa. 348, 431 A.2d 889 (1981); Marriage of Ward, 50 Cal. App. 3d 150, 123 Cal. Rptr. 234 (1975); Fox v. Smith, 531 S.W. 2d 654 (Tex. Civ. App. 1975); 50 Texas L. Rev. 334 (1972); 17 Loyola L. Rev. 162 (1970-71); 24 So. Calif. Tax Inst. 469 (1972); 94 ALR3d 176. <a href="#_ftnref3" name="_ftn3">3</a>.  Johnson v. Johnson, 638 P.2d 705 (Ariz. 1981); Re Marriage of Brown, 544 P.2d 561 (Cal. 1976); Cearley v. Cearley, 544 S.W. 2d 661 (Tex. 1976). </div></div>

March 13, 2024

3994 / Is a death benefit payable under a Keogh plan includable in a self-employed individual's gross estate?

<div class="Section1"> Yes, generally, as to decedents dying after 1984. Estates of Decedents Dying After 1984 The federal estate taxation of survivor benefits payable under a Keogh plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3827">3827</a>) is the same in the estate of a self-employed individual/participant as in the estate of a participant covered under a corporate plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3993">3993</a>). Estates of Decedents Dying After 1953 and Before 1985 The federal estate tax exclusion ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3993">3993</a>) is available to the estates of self-employed individuals covered under qualified plans. For purposes of the exclusion, contributions or payments on behalf of the decedent participant while he or she was covered as a self-employed individual ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3932">3932</a>) are treated as employer contributions to the extent they were deductible as contributions to a qualified plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3940">3940</a>); to the extent they were not so deductible, such contributions or payments are treated as employee contributions.<a href="#_ftn1" name="_ftnref1">1</a> The exclusion applies only to amounts that are attributable to employer contributions<a href="#_ftn2" name="_ftnref2">2</a> and to deductible employee contributions. In an insured plan, for example, the cost of current life insurance protection for self-employed participants is not deductible ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3952">3952</a>H); therefore, the at risk portion of the death proceeds of life insurance payable under the plan is not eligible for the estate tax exclusion. As to common law employees, on the other hand, the entire proceeds are eligible for the exclusion where the employer pays the cost. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 2039(c); Treas. Reg. § 20.2039-2(c)(iii). <a href="#_ftnref2" name="_ftn2">2</a>.  Let. Rul. 8122024. </div></div>