IRA Taxable at Full Value for Estate Tax Purposes

When an individual dies, his assets are subject to federal estate taxes based on the value of those assets (subject to reduction for applicable deductions and credits). For this purpose, value is the price that the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

There is precedent that allows for the reduction in value for taxes that would have to be paid when the successor owner sells the subject property. There is also precedent for taking into consideration costs that would need to be expended to sell the subject property.

The Tax Court recently addressed the issue whether the value of IRA account for estate tax purposes should be reduced by the income taxes that will eventually be paid on distributions from the IRA. The logic of the estate's argument was that the IRAs that were involved were not transferable and therefore were unmarketable. According to the estate, the only way that the owner of the IRAs could create an asset that a willing seller could sell and a willing buyer could buy is to distribute the underlying assets in the IRAs and to pay the income tax liability resulting from the distribution. Upon distribution, the beneficiary must pay income tax. Therefore, according to the estate, the income tax liability the beneficiary must pay on distribution of the assets in the IRAs is a “cost” necessary to “render the assets marketable” and this cost must be taken into account in the valuation of the IRAs.

Unfortunately for the estate, the Tax Court did not buy into this argument, and held that the IRA was includible at the value of the securities held in the IRA, withour reduction for future income taxes. Kahn v. Comm., 125 T.C. No. 11 (2005).