Why Shouldn’t Employers Make Death Benefit Only Payments Voluntarily to Avoid Estate Tax?

It is true that if the death benefit payments are not made under a contract or plan and are completely voluntary on the employer’s part, there should be no inclusion in the covered employee’s estate for federal estate tax purposes. Such voluntary payments are not includable in the employee’s estate, because neither the employee nor the employee’s beneficiary ever possessed the right to compel the employer to pay the benefit and the employee made no transfer of property or an interest in property.

But a plan that is completely voluntary on the employer’s part fails to achieve the “golden handcuffs” effect that is the goal of many employers (i.e., the employee who is not sure of a benefit is given no incentive to come to a business or stay with the business). Such an employee does not feel rewarded by the firm for his efforts in a way that builds loyalty toward the employer. From the employee’s viewpoint, a benefit provided at the whim of the employer provides neither peace of mind nor financial security. The mere possibility of such a benefit does not free up other dollars that the employee has discretion to use during lifetime.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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