Overview

Main Menu Name: Confiscate

Illustrates the potential impact of three taxes on a distribution from a retirement plan to a grandchild. It shows how little remains after:

• The federal estate and state death tax,
• The generation skipping transfer tax, and
• The lump sum income tax on retirement distributions after a participant's death.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

This calculation determines the potential impact of three federal taxes (and in some cases state death tax) on a distribution from a retirement plan to a grandchild. It shows how little remains after:

• federal estate and state death tax,
• The generation skipping transfer tax, and
• The lump sum income tax on retirement distributions after a participant's death.

Before a grandchild receives a retirement distribution at the participant's death, the sum is subject to the federal estate tax, the generation skipping transfer tax, and the lump sum income tax. These taxes have a significant impact on the distribution amount actually received by the grandchild.

A description of each tax follows:

• The first set of taxes is death taxes, the federal estate tax and state death tax. The death taxes attributable to the plan are calculated to be the increase in taxes caused by the plan.
  
  
• The second tax is the generation-skipping transfer tax (GSTT). When the distribution is to a grandchild or another beneficiary who is two or more generations younger than the transferor is, the distribution may be subject to the GSTT tax. This GSTT tax is applied at a rate equal to the highest federal estate tax rate on every taxable dollar. A GST exemption will shelter the smaller estates, and if used to buy life insurance owned by a third party, can be leveraged to provide protection from this high tax.
  
  
• The third tax is the federal income tax. The federal estate tax and the generation-skipping tax may be deducted before the income tax liability is imposed. The program performs a precise calculation of the §691(c) deduction for the increase in the net federal estate tax caused by the plan.

Getting Started

Before a grandchild receives a retirement distribution at the participant's death, the sum is subject to the federal estate tax, the generation skipping transfer tax, and the lump sum income tax. These taxes have a significant impact on the distribution amount actually received by the grandchild.

A description of each tax follows:

• The first set of taxes is death taxes, the federal estate tax and state death tax. The death taxes attributable to the plan are calculated to be the increase in taxes caused by the plan.
  
  
• The second tax is the generation-skipping transfer tax (GSTT). When the distribution is to a grandchild or another beneficiary who is two or more generations younger than the transferoris, the distribution may be subject to the GSTT tax. This GSTT tax is applied at a rate equal to the highest federal estate tax rate on every taxable dollar. A GST Exemption will shelter the smaller estates, and if used to buy life insurance owned by a third party, can be leveraged to provide protection from this high tax.
  
  
• The third tax is the federal income tax. The federal estate tax and the generation-skipping tax may be deducted before the income tax liability is imposed. The program performs a precise calculation of the §691(c) deduction for the increase in the net federal estate tax caused by the plan.

In applying taxes to a distribution, this calculation is designed to illustrate the "worst-case" scenario. Consequently, the results may be extreme, but they are also possible.

The estate tax calculations take into account the changes in rates and credits provided by the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, the American Taxpayer Relief Act of 2012, and Tax Cuts & Jobs Act of 2017.

Entering Data

1. Year of Death:  Enter the year of the participant's death.
   
   
2. Value of Participant's Interest in Plan:  Enter the value of the participant's interest in the retirement plan.
   
   
3. Participant's Taxable Estate:  Enter the participant's taxable estate for federal estate tax purposes, including the value of the Participant's Interest in Plan (the previous input value). This input now provides a precise §691(c) estate tax deduction.
   
   
4. GSTT Tax Rate if Applicable: Enter the applicable generation-skipping transfer tax rate. If applicable, the GSTT will be 55% before 2002, 50% in 2002, 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006, 45% in 2007 through 2009, 0% in 2010, and 35% beginning in 2011. If the GSTT does not apply, enter 0.
   
   
5. Remaining Amount of GSTT Exemption:  Enter the remaining amount of GSTT exemption. When you enter the Year of Assumed Death, the Amount of GSTT Exemption is automatically filled in to be the maximum available for that year. If the maximum GSTT exemption is not entered, or if an amount that is less than the maximum amount allowed is entered, a computer icon will appear next to this input field. Click the button to use the maximum allowed exemption.
   
   
6. Lump Sum Income Tax Rate:  Enter the estimated income tax rate at the time of death.
   
   
7. Estate Tax Calculations:  In 2010, the user can select the 35% rate or No Estate Tax.
   
   
8. Inflation Rate for Exclusion:  Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
   
   
9. Calculate State Death Tax:  When this box is checked, the program will calculate the state death tax and (for years after 2004) deduct that tax from the federal taxable estate. Uncheck this box to enter a different amount of state death tax payable.
   
   
10. State:  Select the state for which the state death tax should be calculated.
    
    
11. Recipient Class: This field will appear if a state has an inheritance tax with different rates for different classes of beneficiaries. Classes are defined differently by each state, so click on the "+" button to see the possible classes for the selected state, and then select the class receiving the estate and click on "Save" to enter the number of the class in the field to the right.
    
    
12. Ret. Plans Excluded:  This input will appear when you select a state that excludes retirement plans from the taxable estate for the inheritance tax calculation.
    
    
13. Insurance Excluded:  This input will appear when you select a state that excludes insurance proceeds from the taxable estate for the inheritance tax calculation.
    
    
14. QTIP Adjustment:  This input will appear when you select a state that can make a qualified terminable interest property ("QTIP") election under I.R.C. Section 2056(b)(7) for the purpose of the state estate tax that is different from the election made for federal estate tax purposes. Enter the value of any trust or property which is included in the decedent's gross estate for state death tax purposes but not federal estate tax purposes because of a state-specific QTIP election. Because the value of the state-specific QTIP property is not included in the federal gross estate, the state death tax attributable to that property is not deductible under IRC section 2058.
    
    
15. Sunset in 2026?:  Selects how future estate tax calculations will be handled

Results

The Inputs/Summary tab displays the amount of federal estate tax and state death tax, GSTT, and federal income tax payable on a distribution from a retirement plan to a grandchild. To calculate these values, the calculation first determines the amount subject to tax, and the tax payable. These values are displayed on the Details tab.

The program then displays the federal estate tax and state death tax and the amount remaining after deducting the tax. Any unused GSTT exemption is then considered and any balance is used in a formula that determines the GSTT tax. At this point, the calculation applies the income tax rate to the taxable amounts (the federal estate tax and GSTT are not part of the base upon which the table rates are applied). The Details tab shows the total amount of taxes deducted from the distribution, the amount which will be received after taxes are deducted, and the percent of the distribution which remains after taxes.