Estate and Gift Tax Issues for Employee Benefit Plans (Portfolio 814)

Tax Management Portfolio, Estate and Gift Tax Issues for Employee Benefit Plans, No. 814-4th, discusses estate planning considerations relating to distributions from qualified retirement plans and individual retirement accounts (IRAs).

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Tax Management Portfolio, Estate and Gift Tax Issues for Employee Benefit Plans, No. 814-4th, discusses estate planning considerations relating to distributions from qualified retirement plans and individual retirement accounts (IRAs). The portfolio includes a general discussion of qualified retirement plans, traditional IRAs, Roth IRAs, and nonqualified deferred compensation plans. In addition, spousal rights, provided under the Retirement Equity Act of 1984, are discussed in detail.
The portfolio explores the gift, estate, and generation–skipping transfer tax issues that arise with respect to qualified retirement plan benefits and IRAs. It also discusses income tax considerations, including the income taxation of distributions, the special income tax treatment of employer securities received as part of a distribution, income in respect of a decedent issues that arise when plan benefits and IRAs are paid to the beneficiaries of a deceased participant or account holder, rolling over inherited IRAs, and the ability to roll over distributions from qualified retirement plans into IRAs and other qualified retirement plans.
The portfolio examines the various penalty taxes that may apply to a distribution from a qualified retirement plan or IRA, including the 10% additional income tax on premature distributions and the 50% excise tax on the amount of a minimum required distribution that is not made to a participant.
The portfolio covers in detail planning for the receipt of qualified retirement plan benefits and IRAs, including the naming of a beneficiary while the participant is still active, the optimum method of receiving distributions from a qualified retirement plan or IRA once the participant reaches his or her required beginning date, and the various options available to the executor or beneficiary of a deceased participant or account holder's estate to reduce or defer taxes. The portfolio concludes with a discussion of estate planning for nonqualified plan benefits.
The Worksheets include tables to be used with the final regulations on required minimum distributions, sample language for beneficiary designations and trust agreements for trusts intended to be recipients of qualified retirement plan benefits and IRAs, and a workshop problem designed to answer the most frequently asked questions in this area
This portfolio may be cited as Mezzullo, 814-4th T.M., Estate and Gift Tax Issues for Employee Benefit Plans.


Louis A. Mezzullo, Esq.

Louis A. Mezzullo, University of Maryland (B.A. 1967, M.A. 1976), University of Richmond (J.D. 1976); Member, Luce, Forward, Hamilton & Scripps LLP, 2006 to present; Member, McGuireWoods LLP, 2003 to 2006; Member, Mezzullo & Guare, PLC, Richmond, Virginia, 2000 to 2003; Founding Member, Mezzullo & McCandlish, Richmond, Virginia, 1982 to 2000; Adjunct Professor, University of Richmond Law School; author, 803 T.M., The Mobile Client: Tax, Community Property, and Other Considerations; 831 T.M., Valuation of Corporate Stock; 809 T.M., Estate Planning for Owners of Closely Held Business Interests; 722 and 812 T.M., Family Limited Partnerships and Limited Liability Companies; 835 T.M., Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704; An Estate Planner's Guide to Buy-Sell Agreements (ABA); An Estate Planner's Guide to Life Insurance (ABA); An Estate Planner's Guide to Qualified Retirement Plan Benefits (ABA); An Estate Planner's Guide to Family Business Entities (ABA); Valuation Rules Under Chapter 14 (ABA); Limited Liability Companies in Virginia (Virginia Law Foundation); co-author, Advising the Elderly Client (Clark, Boardman, Callaghan); Fellow and former Chair, American College of Tax Counsel; Fellow and President (2012-2013), American College of Trust and Estate Counsel; Charter Fellow, American College of Employee Benefits Counsel; Chair, ABA Section of Real Property Trust and Estate Law (2000-01); former Vice Chair of Publications and Chair of the Chapter 14 Subcommittee of the Estate and Gift Taxes Committee of the ABA Section of Taxation; and Academician and Vice President, International Academy of Estate and Trust Law, and member of the Advisory Council of the Heckerling Estate Planning Institute.

Table of Contents

Detailed Analysis

I. Background

A. Qualified Retirement Plans and Individual Retirement Accounts (IRAs)

1. Advantages of Qualified Plans

2. Types of Qualified Plans

a. In General

b. Types of Defined Contribution Plans

(1) Profit-Sharing Plans

(2) Money Purchase Pension Plans

(3) Target Benefit Pension Plans

(4) Stock Bonus Plans

(5) Employee Stock Ownership Plans

(6) Section 401(k) Plans

c. Types of Defined Benefit Pension Plans

d. Other Categories

3. Requirements for Favorable Tax Treatment

a. Basic Requirements

b. Nondiscrimination and Coverage

c. Minimum Participation and Age and Service Requirements

d. Accrued Benefit and Vesting

e. Benefit and Contribution Limits

f. Integration with Social Security (Permitted Disparity)

g. Distribution Rules

h. Top-Heavy Requirements

i. Plan Loans

4. IRAs

B. Nonqualified Deferred Compensation Plans

1. In General

a. Definitions

b. Reasons for Using NDC Plans

c. Types of NDC Plans

d. Goals

2. Tax Considerations

a. In General

b. Constructive Receipt

c. Selecting the Method of Payment

d. Economic Benefit Doctrine

e. Other Tax Issues

3. Rabbi Trusts and Surety Bonds

a. Introduction

b. Rabbi Trusts

c. Surety Bonds

d. Other Third-Party Guarantees

4. Secular Trusts


6. American Jobs Creation Act of 2004 and § 409A

C. Spousal Rights

1. Survivor Annuities

2. Consent

3. Plans and Distributions Not Subject to Qualified Survivor Annuity or Consent Rules

4. Planning with Respect to Spousal Rights

5. Community Property Law Considerations

a. Introduction

b. Qualified Retirement Plans

c. IRAs

d. Gift and Estate Taxes

II. Transfer and Income Taxes; Penalty Taxes

A. Transfer Taxes

1. Gift Taxation

2. Estate Taxation

a. Includibility and Transition Rules

b. Qualifying for the Marital Deduction

c. Other Considerations

(1) Credit Shelter Trust

(2) Distributions to Charitable Organizations

(3) Payment of Estate Taxes

3. Generation-Skipping Transfer Tax

B. Income Tax

1. In General

2. Qualifying for Lump-Sum Treatment

3. Former Special Averaging and Capital Gain Treatment

4. Employer Securities

5. Income in Respect of a Decedent

6. Rollovers

a. In General

b. Eligibility for Rollover


c. Spousal Rollovers

d. Conduit IRAs

e. Nonspousal Rollovers

f. Other Rules

C. Penalty Taxes

1. Introduction

2. Premature Distributions

3. Minimum Distribution Requirements

a. Introduction

b. Required Beginning Date

c. Distributions During Participant's Lifetime

d. Distributions Upon Participant's Death Before RBD

e. Distributions upon Participant's Death After RBD

f. Spousal Rollovers and Inherited IRAs

g. Designated Beneficiary

h. Trustee as Beneficiary

i. Effective Dates

j. Conclusion

4. Excess Retirement Distributions

5. Excess Retirement Accumulations

III. Planning

A. Before Retirement

1. Introduction

2. Spouse as Beneficiary

3. Marital Trust as Beneficiary

4. Credit Shelter Trust as Beneficiary

5. Other Issues in Naming Beneficiaries

B. Planning at Retirement

1. Introduction

2. Deferral of Benefits

3. Minimum Distribution Rules

4. Rollovers

5. Special Income Tax Treatment

C. Planning After Death of the Participant

1. Use of Disclaimers

2. Dealing with IRD Issues

D. Estate Planning for Nonqualified Plan Benefits

1. Death Benefit Only Plans

2. Income in Respect of a Decedent

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Uniform Lifetime Table for Required Distributions

Worksheet 2 Single Life Table for Required Distributions

Worksheet 3 Excerpts from Joint and Last Survivor Table

Worksheet 4 Chart for Determining Applicable Distribution Period

Worksheet 5 Illustration of Tax Consequences of Retirement Plan Left to a Generation-Skipping Trust

Worksheet 6 Sample Beneficiary Designations and Trust Language

Worksheet 7 Workshop Problem Illustrating Distribution Options




Treasury Regulations:

Proposed Regulations:

Labor Regulations:

Treasury Rulings: