IRD Planning Remains As Critical As It Was Before The New Tax Act
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While the new tax law certainly changed the playing field in terms of estate tax planning, the need for income in respect of a decedent (IRD) planning remains just as critical as it always was.
As a matter of fact, since it directly impacts how much net income the survivors will receive, it may be viewed by some as even more important than providing liquidity for capital gains taxes due when other inherited assets are eventually sold.
Income in respect of a decedent refers to those amounts to which a decedent was entitled as gross income, but which were not includable in his taxable income for the year of his death (IRC Sec. 691[a]). IRD items can come in many different forms (see figure 1).
If it was to be income when paid to the decedent during life, its income to the beneficiary after the participant/owners death.
It is important to recognize that, unlike most other assets included in the estate, the recipient of IRD does not receive a step-up in basis on IRD assets for the purpose of computing any gain or loss. Thus, the beneficiary who receives IRD will pay tax, at the beneficiarys tax rate, on that income in the same manner as the decedent would have.
Therefore, IRD income may be more valuable to a beneficiary in a lower tax bracket, and less valuable to a beneficiary in a higher tax bracket. If the income would have been capital gains to the decedent, it is capital gains to the beneficiary.
As you know, many Americans have significant values in their qualified plan or 401(k), so this is a frequent and significant tax problem. Funding for the income tax due is yet another need that survives the recent tax reform.
