Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Here is the reasoning behind this approach. Retirement plan death benefits, when paid to a beneficiary, are taxable to the beneficiary as income in respect of a decedent (IRD) under § 691 (except to the extent such benefits are nontaxable as return of basis or under some special provision of the Tax Code, such as that for net unrealized appreciation of employer securities). Rev. Rul. 92- 47,1992-1 CB 198; Reg. § 1.663(c)-5 , Example 9. The retirement plan itself (i.e., once inherited by the beneficiary, but prior to distribution of the benefits out of the plan) is a “right to receive IRD.” PLRs 2002-34019, 2005-20004, 2005- 26010, 2006-17020, 2006-20025, 2006-44020, 2006-52028, and 2013-30011. Generally, the transfer of a right to receive IRD, whether by gift or by sale, triggers immediate taxation of the IRD to the transferor. § 691(a)(2) . However, this general rule does not apply to a “transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.” § 691(a)(2) . Instead, in the case of such a transfer, the transferee is taxable on the IRD as and when it is paid to such transferee (or upon a further transfer of the right to receive the IRD by such transferee, if such further transfer is not itself excepted). § 691(a)(1)(C) . Thus, for example, when an estate transfers, to a residuary beneficiary of the estate, an IRA that is payable to the estate, the transfer is not a taxable assignment because it qualifies for the exception under §691(a)(2) . In PLR 2002-34019, IRAs were payable to a deceased participant’s estate. The residuary beneficiaries of the estate were charities and individuals. The executor (pursuant to power granted in the will to make disproportionate distributions in kind) distributed cash to the individual beneficiaries in satisfaction of their shares, and proposed to transfer the IRA to the charities in payment of their shares. The IRS ruled that transfer of the IRAs to the charities would not be a taxable assignment of IRD under § 691 , or create taxable income to the estate or the individual beneficiaries. For other similar rulings, see PLRs 2004-52004 [which, however, does not mention §691], 2005-20004, 2006-17020, 2006-18023, 2006-33009, 2008-26028, 2008- 50004, 2010-13033, 2011-28036, 2012-10047, 2012-10045, 2012-08039, and 2013-30011. For an IRS-blessed transfer of an IRA to a charity from an estate where the will was reformed after the decedent’s death to specify that the IRAs would be the source of funding the charitable gifts, see PLR 2008-50004.  Plan administrator problems: Not all retirement plan administrators and IRA providers permit such post-death transfers by the trustee or executor of a trust or estate that is named as beneficiary of the plan or IRA. If possible, ascertain the policy of your client’s plan administrator or IRA provider in advance. If confronted post-death with a refusal on this point, determine whether the problem can be solved by providing a legal opinion or (less attractive in view of the expense and delay) a private letter ruling from the IRS. If the benefits are in an IRA, an IRA provider’s refusal can often be dealt with by moving the account, via plan-to-plan transfer, to a different IRA provider that will allow the transfer. See ¶ 2.6.01 (E) for discussion of plan-to-plan transfers. If the benefits are in a qualified plan, the option to have the benefits transferred to a cooperative IRA provider is not There are two limitations in connection with this type of transfer: