Tax consequences of death benefits paid under NQDC plans

• Author: Marla J. Aspinwall - Michael G. Goldstein
• Pages: 171-186

131

CHAPTER V

TAX CONSEQUENCES OF DEATH BENEFITS

PAID UNDER NQDC PLANS

TABLE OF CONTENTS

Page

I. INTRODUCTION ...........................................................................................................133

II. ESTATE AND GIFT TAXES .........................................................................................133

III. NQDC ARRANGEMENTS AND DEATH BENEFITS ................................................133

IV. WILL THE DEATH BENEFIT BE INCLUDED IN THE DECEASED

EMPLOYEE’S GROSS ESTATE? .................................................................................134

A. Section 2039 in General.......................................................................................134

B. Section 2039 and NQDC Plans with a Risk of Forfeiture ...................................135

C. The Amount Included in the Decedent’s Gross Estate Under Section

2039......................................................................................................................136

D. Inclusion in the Employee’s Gross Estate Under Other Provisions ....................136

V. ATTEMPTS TO EXCLUDE A DEATH BENEFIT FROM THE

DECEDENT’S GROSS ESTATE ...................................................................................137

A. Life Insurance Exclusion .....................................................................................137

B. Death Benefit Only Plans.....................................................................................137

C. A Split-Dollar Plan in Connection with a NQDC Plan........................................138

VI. DEDUCTING THE VALUE OF THE DEATH BENEFIT FROM THE

DECEASED EMPLOYEE’S GROSS ESTATE.............................................................139

A. The Marital Deduction.........................................................................................139

1. The Marital Deduction in General ...........................................................139

2. Marital Deduction and Death Benefits Under a NQDC Plan ..................139

B. Charitable Deduction ...........................................................................................140

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TABLE OF CONTENTS CONTINUED

Page

VII. WILL THE DEATH BENEFIT RECEIVED BY THE EMPLOYEE’S

DESIGNATED BENEFICIARY BE SUBJECT TO INCOME TAX ............................141

A. Income in Respect of a Decedent in General.......................................................141

B. The $5,000 Death Benefit Exclusion Before the 1996 Tax Act ..........................141

C. Income Tax Deduction for Estate Tax Paid on IRD............................................142

VIII. PLANNING FOR THE DEATH BENEFITS UNDER A NQDC PLAN.......................144

A. Pecuniary Bequest................................................................................................144

B. Marital Deduction Planning.................................................................................144

C. Death Benefit Only Plans.....................................................................................144

D. Providing the Death Benefits Under a Split-Dollar Plan.....................................145

1. Roll-In Split-Dollar Arrangement............................................................145

2. Roll-Out Split-Dollar Arrangement .........................................................146