J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

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 ...