Estate taxes and retirement plans.

• Author: Burns, Diana T.

One of the more important aspects of estate tax planning involves the treatment of retirement plans. In many cases, funds accumulated in the form of retirement benefits can make up a significant portion of an estate and should be an integral part of estate planning.

When dealing with estate planning and taxes involving retirement plans, there are several elections to remember.

The Tax Reform Act of 1984 repealed the exclusion from gross estates of qualified retirement plan benefits attributable to employer contributions. This applied to individuals who died on or after Jan. 1, 1985. However, it is still possible to exclude part or all of the value from the gross estate if certain requirements are met and elections were made.

In order to gain such exclusion for annuities, the decedent must have been a participant in the retirement plan and have received at least one benefit payment on or before Dec. 31, 1984, or must have separated from service before Jan. 1, 1985 without changing the form of benefit before dying. If either of these conditions is met, an exclusion of up to $100,000 is allowed.

There is also an opportunity to gain an unlimited exclusion, if the decedent was a participant in the retirement plan and had received at least one benefit payment on or before Dec. 31, 1992 and irrevocably elected the form of benefit before Jan. 1, 1983, or if he separated from service before Jan. 1, 1983 and did not change the form of benefit before death. If either of these conditions applies, the $100,000 limit to the exclusion does not apply.

A few years later, the Tax Reform Act of 1986 liberalized the grandfathering provisions by providing that the participant no longer needs to be in pay status as of the applicable date.

Sec. 4980A imposes an excise tax of 15% on excess distributions from qualified employer plans and individual retirement plans (defined in Sec. 4980A(c)(1)) and excess accumulations (defined in Sec. 4980A(d)(3)). This excise tax generally applies to excess distributions made after Dec. 31, 1986, and the excise tax on excess accumulations applies to estates of decedents dying after Dec. 31, 1986.

An "excess retirement accumulation" is the excess of the aggregate value of the decedent's interests in all qualified retirement plans and individual retirement accounts (IRAs) as of the date of the decedent's death (decedent's aggregate interest), over an amount equal to the present day value of a life annuity.

An eligible individual...