Should Pension be Included in Decedent’s Taxable Estate?
I inherited my mom’s estate when she passed away in 2014. She worked for the state of Massachusetts (UMass) and retired with me as her beneficiary a few months before her death. The estate was valued at about $1.9 million, but close to $1 million of that was the estimated future value of the pension I would receive. So, at the time the estate was taxed, much of the funds that were taxed had not yet been paid — the pension gives the beneficiary a payment every month for life. I’m curious if that approach is correct and standard, or if the accountant who estimated the value of the pension should have estimated it differently. The total value of the estate would have been really close to the $1 million threshold without the pension added in – with the pension included, I paid close to $100,000 in tax.
That is a dilemma. You’re taxed on assets you don’t have since the funds will come to you over time and the tax is due within nine months of the decedent’s death. In addition, you might be taxed on these payments twice since they’re likely to be subject to income taxes when they’re paid out. This, of course, is also true of IRAs and other retirement plans since their full value is includible in the decedent’s taxable estate even though they’ll also be subject to income tax when withdrawn. The only saving grace with respect to pensions is that their value should be discounted based on two factors. First, dollars received in the future are not worth as much as dollars received now. Second, if they’re payable for your life, then their value should be based on your actuarial life expectancy even though if you’re lucky you’ll far outlive the average and receive a lot more from the state. It sounds like both of the factors were used in calculating the future value in your case, so probably the estate tax was accurate even if it seems a bit premature.