Code Section 4980a: Additional Estate Tax for the Successful
| Publication year | 1992 |
| Pages | 251 |
| Citation | Vol. 21 No. 2 Pg. 251 |
1992, February, Pg. 251. Code Section 4980A: Additional Estate Tax for the Successful
Internal Revenue Code ("Code") § 4980A has been called the tax on success. A man or woman who successfully has accumulated substantial retirement assets will incur a separate tax ("excess accumulations tax") of 15 percent if too much is distributed in any one year or if too much remains in the retirement fund at death.
Many law firm clients---particularly those who are self-employed and have few or no employees---build substantial retirement assets. Many are unaware of the existence of this tax or the effects it may have on their retirement and estate planning. This article focuses on the estate tax portion of Code § 4980A. It discusses calculation of the excess accumulations tax, its payment and the elections available to a surviving spouse.
The excess accumulations tax is levied on retirement funds that exceed the present value of a hypothetical life annuity as of the date of death.(fn1) The value of a hypothetical life annuity for individuals dying after April 30, 1989, includes a number of variables that make it difficult to predict accurately the amount which will escape the excess accumulations tax:
1. The current annual payment used to compute the annuity is $150,000. If a grandfather election has been made, the amount for 1991 is $136,204.(fn2)
2. The interest rate used is 120 percent of the current monthly federal midterm interest rate.(fn3)
3. Tables based on life expectancy as determined by the 1980 census figures are used to calculate the annuity.(fn4)
The following calculation is based on a hypothetical individual who died in April 1991 at age seventy-five. At death, the decedent had a retirement fund accumulation of $1 million without a grandfather election. Determination of whether the excess accumulations tax may be imposed is calculated as follows:
1. 120 percent of the federal midterm rate for April 1991 is 9.6 percent.
2. Table R(1) of Notice 89-60 gives the remainder interest for a seventy-five-year-old. To calculate the annuity interest, the following formula is used:
= 1 --- remainder interest/applicable interest ratea) Annuity interest
b) Value of the hypothetical annuity
= total retirement funds --- hypothetical annuityc) Excess retirement accumulation
= 15% x excess retirement accumulationd) Code § 4980A excise tax
The excess accumulations tax is separate from the estate tax imposed under Chapter 11 of the Code. Nevertheless, it is reported on the estate tax return, Form 706, Schedule S.
There are no credits available to offset the...
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