Estate Tax Exclusion for Retirement Plan Benefits After Tefra
| Publication year | 1983 |
| Pages | 761 |
1983, May, Pg. 761. Estate Tax Exclusion for Retirement Plan Benefits After TEFRA
Prior to TEFRA,(fn1) IRC § 2039(c) provided an exclusion from the decedent's gross estate (except for payments to the executor) for the entire amount of qualified plan proceeds attributable to the employer contributions, provided the beneficiary made the election to forego the favorable lump-sum income tax treatment. Section 2039(e) provided a similar exclusion for an individual retirement account ("IRA") provided the beneficiary received substantially equal payments over at least thirty-six months and did not have an unrestricted right to accelerate the payments.
After December 31, 1982, TEFRA limits the estate tax exclusion to $100,000 for these plan benefits, provided the non-lump sum and special IRA rules are satisfied. More significantly perhaps, TEFRA also requires that for plan years after December 31, 1983, a qualified plan must provide that, upon death, a participant's benefit will be distributed within five years unless payments have already commenced.(fn2) Similar payout rules are also applicable to IRAs.(fn3) Estate planners may struggle with the implication of these changes long after the other TEFRA rules for qualified plans and IRAs are implemented in those plans.
The estate and income tax changes for retirement plan proceeds require the estate planner to balance the estate tax implications of retirement plan benefits with perhaps the more formidable income tax rules. A preoccupation with the estate tax implications while ignoring the income tax problem could leave the beneficiaries with considerably less money after taxes. Five years may be an insufficient period of time within which to spread a large plan benefit without income tax at the highest marginal rate. The use of ten-year averaging for a lump-sum distribution is helpful, though it nevertheless produces a high income tax for a large plan distribution.
TEFRA Act § 242(b)(2) may provide some transitional relief to the five-year payout requirement if the qualified plan participant has elected an acceptable method of distribution before January 1, 1984. The election must be a method of distribution that would not have disqualified the plan under IRC § 401(a)(9) before the TEFRA amendment. Presumably, this election is not irrevocable. Whether the election should be made now will depend on all the facts and circumstances of the total estate plan and the applicable provisions of the qualified plan.
At this time, there is also uncertainty as to whether the participant may direct the allocation of the...
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