7.6 Lump-Sum Payments Received by Beneficiary

A beneficiary of a deceased employee or self-employed plan participant may elect 10-year averaging on Form 4972 for a qualifying lump-sum distribution (7.2) because of the participant’s death, provided the participant was born before January 2, 1936. The age of the beneficiary is irrelevant. A beneficiary may elect averaging even though the deceased employee was in the plan for less than five years. If the participant was born before January 2, 1936, and had participated in the plan before 1974, a 20% capital gain election may be made for that portion of the distribution (7.5), and the averaging method applied to the balance.

Form 4972 is used to compute tax under the averaging method or to make the 20% capital gain election (7.5). Follow the Form 4972 instructions to claim the up-to-$5,000 death benefit exclusion where the plan participant died before August 21, 1996. Any federal estate tax attributable to the distribution reduces the taxable amount on Form 4972. Any election that you make as a beneficiary does not affect your right to elect lump-sum treatment for a distribution from your own plan.

A lump sum paid because of an employee’s death may qualify for capital gain and averaging treatment, although the employee received annuity payments before death.

An election may be made on Form 4972 only once as the beneficiary of a particular plan participant. A beneficiary who receives more than one lump-sum distribution for the same participant in the same year must treat them all the same way. Averaging must be elected for all of the distributions on a single Form 4972 or for none of them.

Payment received by a second beneficiary (after the death of the first beneficiary) is not entitled to lump-sum treatment or the death benefit exclusion.

Beneficiaries of plan participants born after January 1, 1936.

A beneficiary may not claim averaging or capital gain treatment for a lump-sum distribution if the plan participant was born after January 1, 1936.

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image Filing Tip
Lump Sums to Multiple Beneficiaries
A lump-sum distribution to two or more beneficiaries may qualify for averaging and capital gain treatment, so long as the plan participant was born before January 2, 1936. Each beneficiary may separately elect the averaging method for the ordinary income portion, even though other beneficiaries do not so elect. Follow the Form 4972 instructions for multiple recipients.
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Distribution to trust or estate.

If a qualifying lump sum is paid to a trust or an estate, the employee, or, if deceased, his or her personal representative, may elect averaging.

EXAMPLE
Gunnison’s father was covered by a company benefit plan. The father died, as did Gunnison’s mother, before benefits were fully paid out. Gunnison received a substantial lump sum. He argued that he collected on account of his father’s death. The IRS disagreed.
The Tax Court and an appeals court sided with the IRS. Gunnison was entitled to the payment following his mother’s death, not his father’s death. For special lump-sum treatment, the payout must arise solely on account of the death of the covered employee.
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