IRA Estate Tax Discounts – An Update

Your heirs will enjoy only the after-tax value of your IRAs and other retirement accounts. Can this difference be reflected in the estate tax value of the accounts?

An IRA is included in the owner’s estate. If the estate is valuable enough, it is subject to the estate tax. After heirs inherit an IRA, the distributions they take are taxed as ordinary income.

For other assets, various costs reduce their value before computing gift and estate taxes. For example, the costs of cleaning up contaminated property can be subtracted from the value, as can the costs of getting zoning status changed to make the property more valuable. In addition, shares of private companies receive a lack of marketability discount.

Taxpayers recently argued that since the heirs never will benefit from the full value of the IRAs, the estate tax should be imposed only on the after-tax value.

The Tax Court disagreed. It reasoned that the IRA is an account, and the account does not affect the value placed on the assets in the account. A tax liability discount applies only when the buyer would incur the tax and therefore would subtract the tax from the price he is willing to pay. With an IRA, the assets owned by the account can be sold without the buyer incurring taxes. The taxes are incurred when the owner of the account takes distributions of either the assets or cash. Estate of Doris F. Kahn v. Comm’r., 125 T.C No. 11 (2005).