What is the basic tax treatment of benefits payable on death from tax-qualified retirement plans?

Death benefits payable from tax-qualified retirement plans are subject to two types of taxation: (1) estate tax as a part of the deceased participant’s gross estate and (2) income tax to the recipient/beneficiary. Death benefits from tax-qualified retirement plans are income with respect to a decedent. [IRC §691] The impact upon the recipient is softened, however, by the recipient’s ability to deduct against income the portion of the estate tax attributable to the income item. [IRC §691(c)]

EXAMPLE: A physician who previously used up his unified credit dies on September 19, 2009. His son receives a check for $1 million from the physician’s profit sharing plan on November 5, 2009. The $1 million is includible in the physician’s gross estate, and the estate tax attributed to it is $450,000. The son incurs income tax on $550,000 of the amount distributed ($1,000,000 − $450,000 = $550,000).

REFERENCE: Estate and Retirement Planning Answer Book by William D. Mitchell ©2013 Wolters Kluwer. All rights reserved


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