Both estate tax and income tax results should be considered in planning qualified retirement plan benefits and IRAs. Both IRAs and qualified retirement plan benefits are includible in a plan participant’s or IRA owner’s gross estate; however, if those benefits are willed to the participant’s/owner’s spouse, the marital deduction will eliminate estate tax on such amounts at the time of the participant’s/owner’s death. Accordingly, estate planning for qualified retirement plan benefits and IRAs centers around the designation of beneficiaries. Because large amounts of money are sometimes transferred from tax-qualified retirement plans and IRAs, the choice of beneficiary can be very important.
EXAMPLE 27-1 A participant in a tax-qualified plan dies. Her husband is the beneficiary of the plan benefits, which equal $1.5 million. That amount is not includible in the participant’s gross estate due to the operation of the marital deduction. If the plan benefits are paid to the participant’s estate, however, the $1.5 million is includible in the participant’s gross estate and potentially subject to estate tax (unless the participant’s entire estate is bequeathed to her spouse).
REFERENCE: Estate and Retirement Planning Answer Book by William D. Mitchell ©2013 Wolters Kluwer. All rights reserved