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Individual retirement plans.

648. Is the value of a survivor benefit payable under an individual retirement plan (IRA) includable in the decedent's gross estate?

Yes, generally, in the case of decedents dying after 1984. For details, see below. Benefits payable to a surviving spouse will generally qualify for the marital deduction, see Q 649.

The value of an IRA account is not discounted for income tax payable by beneficiaries or for lack of marketability. However, an income tax deduction may be available for estate tax attributable to the IRA (see Q 827). (4)

Estates of Decedents Dying After 1984

The value of an annuity or other payment receivable under an individual retirement plan or arrangement (IRA) by the beneficiary of a deceased individual is includable in the decedent's gross estate under the rules discussed in Q 600 to Q 607. In reading those rules, be aware that any contribution to the purchase of an annuity made by the decedent's employer or former employer (as under a SEP-see Q 241) is considered to be contributed by the decedent if made by reason of his employment. (5)

The Tax Reform Act of 1984 repealed the estate tax exclusion discussed below generally for estates of decedents dying after 1984. However, the repeal does not apply to the estate of any decedent who (a) was a plan participant in pay status on December 31, 1984, and (b) irrevocably elected the form of benefit before July 18, 1984. For the meaning of "in pay status" and the requirements for an irrevocable election of the form of benefit, see Temp. Treas. Reg. [section] 20.2039-IT. Qualified plan benefits rolled over to an IRA are treated as subject to the transitional rules for IRAs rather than those for qualified plans (see Q 673). (6)

Estates of Decedents Dying After 1976 and Before 1985

With respect to the estate of a decedent dying after 1982 and before 1985, the aggregate estate tax exclusion applicable to survivor benefits payable under a qualified plan (see Q 324 to Q 425), a tax sheltered annuity (see Q 473 to Q 503), an individual retirement plan, a Retired Serviceman's Family Protection Plan, or a Survivor Benefit Plan cannot exceed $100,000. (1) The Tax Reform Act of 1984 also 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 irrevocably elected, before January 1, 1983, the form of benefit. For estates of decedents dying after 1976 and before 1983, the exclusion (as described below) is unlimited.

Subject to the limitation just described and to the following three conditions, the value of a survivor benefit payable under an individual retirement plan is excludable from the individual's gross estate.

First, the benefit must be payable other than to or for the benefit of the estate (see Q 627 to Q 629). (2) Second, the exclusion applies only to amounts attributable to (1) payments that were allowable as a deduction under IRC Section 219 (see Q 221), and (2), subject to the following exceptions and qualifications, rollover contributions (see Q 456). Amounts attributable to rollover contributions from a tax sheltered annuity are not excludable unless the employer is a so-called REC organization, as described in Q 686. Amounts attributable to a rollover contribution from a surviving spouse are not excludable from the surviving spouse's estate (though the rollover secures the exclusion in the first spouse's estate (see Q 673)). Amounts attributable to rollover contributions from another individual retirement plan are not excludable to the extent those contributions are in turn attributable to rollover contributions described in the preceding two sentences which the decedent made to the transferor plan. (3) An individual has 60 days from his receipt of a qualifying distribution to make his rollover contribution (see Q 460). It has been held that where an employee receives a qualifying rollover distribution but then dies before the end of the 60-day period without having made a rollover into an IRA, his estate may make the rollover for him. (4)

Third, the benefit must be in the form of a "qualifying annuity." The term "qualifying annuity" means an annuity contract or other arrangement providing for a series of substantially equal periodic payments to be made to a beneficiary for the beneficiary's life or over a period ending at least 36 months after the decedent's death. The term "annuity contract" includes an annuity purchased for a beneficiary and distributed to the beneficiary, if the contract is not included in the gross income of the beneficiary upon distribution (see Q 215). The term "other arrangement" includes any arrangement arising by reason of the decedent's participation in the program providing the individual retirement plan. Payments are considered "periodic" if under the arrangement or contract (including a distributed contract) payments are to be made to the beneficiary at regular intervals. If the contract or arrangement provides optional payment provisions, not all of which provide for periodic payments, payments are considered periodic only if an option providing periodic payments is elected not later than the date the estate tax return is filed. For this purpose, the right to surrender a contract (including a distributed contract) for a cash surrender value will not be considered an optional payment provision. Payments are considered "substantially equal" even though the amounts receivable by the beneficiary may vary. Payments are not considered substantially equal, however, if more than 40% of the total amount payable to the beneficiary under the individual retirement plan, determined as of the date of the decedent's death and excluding any postmortem increase, is payable to the beneficiary in any 12-month period. (5)

The exclusion applies only with respect to the gross estate of a decedent on whose behalf the plan was established; it does not apply to the estate of a decedent who was only a beneficiary under the plan. (6) Under circumstances described in Q 234, a beneficiary who is receiving benefits under an IRA following the death of the one on whose behalf the plan was established (or death of his surviving spouse) may, however, elect to have the plan treated as his own plan. He can do this in one of two ways: (1) by failing to meet the distribution requirements applicable to a beneficiary under the plan and by meeting instead the distribution requirements applicable to the one on whose behalf the plan was established (see Q 234), or (2) by contributing an amount (or amounts) which is subject to the distribution requirements applicable to the one on whose behalf the plan was established. If the election is made, the estate tax exclusion will not apply in the estate of the electing beneficiary to the amounts as to which the election was made. (1)

649. Is a marital deduction available for the value of a survivor benefit payable under an individual retirement plan (IRA) that is includable in the decedent's gross estate?

Yes, if benefits pass to the surviving spouse in a form that qualifies for the marital deduction (see Q 863). (2) Thus, an outright transfer of the IRA account balance to the surviving spouse should qualify for the marital deduction. Also, a marital deduction should be available if any income or principal distributed while the surviving spouse is alive is distributed to such spouse and principal and income, if any, is distributed to such spouse's estate at death. A marital deduction should also be available if all income from the IRA is distributed at least annually to the surviving spouse and such spouse is given a general power to appoint the IRA to himself or his estate. (3) Additionally, a marital deduction should be available if all income from the IRA is distributed at least annually to the surviving spouse, no one has the power to distribute any part of the IRA to anyone other than the surviving spouse, and the executor makes a qualified terminable interest property (QTIP) election. (4) If the surviving spouse is given a survivor annuity where only the spouse has the right to receive payments during such spouse's lifetime, such interest would qualify for the QTIP marital deduction. (5) In the case of a surviving spouse who is not a U.S. citizen, a qualified domestic trust would generally be required to obtain the marital deduction. (6)

An executor can elect to treat an IRA and a trust as QTIP if (1) the trustee of the trust is the beneficiary of the IRA, (2) the surviving spouse can compel the trustee to withdraw all income earned by the IRA at least annually and distribute that amount to the spouse, and (3) no person has the power to appoint any part of the trust to any person other than the spouse. (7) Prior to Revenue Ruling 2000-2, where IRA proceeds were to be distributed to a trust benefiting the survivor spouse, marital deduction requirements had to be generally met at both the IRA and the trust level. Thus, in Revenue Ruling 89-89, (8) a decedent's executor was permitted to elect to treat a decedent's IRA as eligible for the QTIP marital deduction where (1) the distribution option elected by the decedent for the IRA required the principal balance of the IRA be distributed in annual installments to a testamentary QTIP trust and the income earned on the undistributed balance of the IRA be distributed annually to the trust, and (2) all trust income was payable annually to decedent's spouse. However, a QTIP marital deduction was not available for an IRA with distributions payable to a marital trust where none of the IRA options provided that all income would be distributed at least annually to the marital trust. (9)

In determining if a spouse has been given an income interest, allocations between income and principal will be respected if state law provides that reasonable apportionments can be made between income and remainder beneficiaries of the total return of the trust (e.g., a unitrust interest in the range of 3% to 5% could be treated as an income interest). (1) Revenue Ruling 2006-26 (2) provides that various means of determining income under state law are permitted under the QTIP marital deduction. Thus, income can generally be determined under state laws based on the Uniform Principal and Income Act (UPIA) or under general traditional statutory or common law rules that provide for allocations between income and principal.

A marital deduction may also be available if IRA proceeds are paid to a charitable remainder annuity trust or unitrust (see Q 825) and the surviving spouse is the only noncharitable beneficiary (other than certain ESOP remainder beneficiaries). (3) Presumably, the IRA would have to incorporate all the charitable deduction requirements for such a trust.

For the income tax implications of distributions from a traditional IRA, see Q 228, from a Roth IRA, see Q 229.

(4.) Est. of Smith v. U.S., 2004-2 USTC [paragraph] 60,493 (5th Cir. 2004), aff'g 2004-1 USTC [paragraph] 60,476 (S.D. Tex. 2004); Est. of Kahn v. Comm., 125 TC 227 (2005); TAM 200247001.

(5.) IRC Sec. 2039(b).

(6.) Rev. Rul. 92-22, 1992-1 CB 313; Sherrill v. U.S., 2006-1 USTC [paragraph] 60,519 (N.D. Ind. 2006).

(1.) IRC Sec. 2039(c), (e), (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.

(2.) Treas. Reg. [section] 20.2039-5(a)(2)(ii).

(3.) Treas. Reg. [section] 20.2039-5(c).

(4.) Gunther v. U.S., 82-2 USTC [paragraph] 13,498 (W.D. Mich. 1982). See also Let. Rul. 8351119.

(5.) Treas. Reg. [section] 20.2039-5(b). See also Let. Rul. 8318015.

(6.) Treas. Reg. [section] 20.2039-5(a)(2)(i); Let. Rul. 8141082 (same as Let. Rul. 8410182).

(1.) Treas. Reg. [section] 20.2039-5(c).

(2.) IRC Sec. 2056.

(3.) IRC Sec. 2056(b)(5).

(4.) IRC Sec. 2056(b)(7).

(5.) IRC Sec. 2056(b)(7)(C).

(6.) IRC Secs. 2056(d), 2056A; Let. Ruls. 9544038, 9322005.

(7.) Rev. Rul. 2000-2, 2000-1 CB 305.

(8.) 1989-2 CB 231, obsoleted by Revenue Ruling 2000-2.

(9.) TAM 9220007.

(1.) Treas. Reg. [section] 1.643(b)-1.

(2.) 2006-22 IRB 939.

(3.) IRC Sec. 2056(b)(8).
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Publication:Tax Facts on Insurance and Employee Benefits
Date:Jan 1, 2010
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