Annuities and living proceeds.
If the decedent was receiving a straight life annuity, there is no property interest remaining at his death to be included in his gross estate. But if the contract provides a survivor benefit (as under a refund life annuity, joint and survivor annuity, or installment option), tax results depend upon whether the survivor benefit is payable to decedent's estate or to a named beneficiary and, if payable to a named beneficiary, upon who paid for the contract. If payable to decedent's estate, the value of the post-death payment or payments is includable in his gross estate under IRC Section 2033, as a property interest owned by him at the time of his death. If payable to a named beneficiary, generally the provisions of IRC Section 2039(a) and IRC Section 2039(b) apply, and inclusion in the gross estate is determined by a "premium payment" test. Thus, if the decedent purchased the contract (after March 3, 1931), the value of the refund or survivor benefit is includable in his gross estate. But in the event the decedent furnished only part of the purchase price, his gross estate includes only a proportional share of this value. (See Q 601 to Q 605.) The foregoing rules do not apply to death proceeds of life insurance on the life of the decedent (see Q 626). And special statutory provisions apply to employee annuities under qualified pension and profit-sharing plans (see Q 673, Q 674), to certain other employee annuities (see Q 672, Q 686), and to individual retirement plans (see Q 648).
Life insurance or annuity proceeds payable to a surviving spouse qualify for the marital deduction if certain conditions are met (see Q 663). If the proceeds used the marital deduction in the first spouse's estate and the contract provides a survivor benefit to the surviving spouse's estate or to a person surviving the surviving spouse, then the proceeds are usually includable in the surviving spouse's estate. However, if the surviving spouse receives a straight life annuity, there is no property interest remaining at his death to be included in his gross estate.
601. If an individual purchases a deferred or retirement annuity and dies before the contract matures, is the death value of the contract includable in his estate?
Generally, yes; the amount payable upon death before maturity is not life insurance; the estate tax rules for annuities apply. The same rules apply to the proceeds of a retirement income endowment if the insured dies after the terminal reserve value equals or exceeds the face value. (1) If the death benefit is payable to annuitant's estate, its value is includable in his gross estate, under IRC Section 2033, as a property interest owned by him at the time of his death. If the death benefit is payable to a named beneficiary and annuitant purchased the contract (after March 3, 1931), the value of the death benefit is generally includable in his gross estate under IRC Section 2039--whether or not the right was reserved to change the beneficiary. However, if the individual purchased the annuity as a gift for another person, and retained no interest in the annuity payments, incidents of ownership, or refunds, the value of the annuity will ordinarily not be includable in the individual's gross estate (see Q 606).
602. In the case of a joint and survivor annuity, what value is includable in the gross estate of the annuitant who dies first?
The value of the survivor's annuity is includable in the deceased annuitant's gross estate in proportion to his contribution toward the purchase price of the contract. (1) (But this rule applies only to contracts purchased after March 3, 1931.) Thus, if the deceased annuitant purchased the contract, the full value of the survivor's annuity is includable in his gross estate. But if the survivor purchased the contract, no part of the value is includable in the deceased annuitant's estate. If both contributed to the purchase price, only a proportionate part of the value is includable in deceased's estate. For example, suppose that decedent and his wife each contributed $15,000 to the purchase price of a joint and survivor annuity payable for their joint lives and the life of the survivor. If the value of the survivor's annuity is $20,000 at decedent's death, the amount to be included in his gross estate is one-half of $20,000 ($10,000) since he contributed one-half of the cost of the contract. (2) In accord with this rule, if a joint and survivor annuity is purchased with community funds, only one-half of the value of the survivor's annuity is includable in the gross estate of the spouse who dies first. (3) (For estate tax value of survivor's annuity, see Q 603.)Where a joint and survivor annuity between spouses is treated as qualifying terminable interest property for gift tax purposes (see Q 732) and the donee spouse dies before the donor spouse, nothing is included in the donee spouse's estate by reason of the qualifying interest. (4) Where decedent has paid a gift tax in connection with the irrevocable designation of a survivor annuitant, see Q 869. Where the survivor is the deceased annuitant's spouse, the value of the survivor's annuity will qualify for the marital deduction if the contract satisfies the conditions discussed at Q 663.
603. What is the estate tax value of a survivor's annuity under a joint and survivor annuity contract?
The amount the same insurance company would charge the survivor for a single life annuity as of the date of the first annuitant's death. (5) However, where it can be proved that the survivor's life expectancy is below average, it may be possible to obtain a valuation based upon the survivor's actual life expectancy at date of decedent's death. (6) For example, lower valuation has been obtained upon proof that the surviving annuitant's life expectancy was short because of an incurable disease. (7)
Even if the executor elects to value estate assets as of six months after death (alternate valuation), the survivor's annuity is valued at date of death. (Date of death value is used, despite election of alternate valuation, where any change in value after death is due only to lapse of time.) But if the surviving annuitant dies during the six months following the first annuitant's death, a lower valuation may be obtained by electing alternate valuation. Thus, in one case, where the survivor died before the optional valuation date, the value at optional valuation date was determined by subtracting the cost of an annuity as of the survivor's date of death from the cost of an annuity as of the first annuitant's date of death. (8)
604. In the case of a refund or period certain annuity, is the balance of the guaranteed amount, payable after annuitant's death, includable in the annuitant's gross estate?
If payable to the annuitant's estate, it is includable in his gross estate under IRC Section 2033, as a property interest owned by him at death. If payable to a named beneficiary, and annuitant purchased the contract (after March 3, 1931), it is includable in his gross estate under IRC Section 2039(a); it is immaterial whether the beneficiary designation was revocable or irrevocable. If the refund beneficiary is a charitable organization, the estate is entitled to a deduction for the value of the transfer to a charitable organization. (1) But where a decedent has directed his executor to purchase a refund annuity for a personal beneficiary and to name a charitable organization as refund beneficiary, decedent's estate is not entitled to a charitable deduction for the value of the refund. (2)
605. Are the death proceeds payable under a single premium annuity and life insurance combination includable in the annuitant's gross estate?
It has been held that even though the insured-annuitant holds no incidents of ownership in the life insurance policy at death, the proceeds of the policy are nevertheless includable in his gross estate, under IRC Section 2039, as a payment under an annuity contract purchased by him. (3) In a case decided before IRC Section 2039 was enacted, the U.S. Supreme Court held that the proceeds were not includable in the insured-annuitant's gross estate, under IRC Section 2036, as property transferred by him in which he retained a right to income for life. (4) If the insured-annuitant transfers the life insurance policy within three years before his death, the proceeds may be includable in his gross estate, under IRC Section 2035 (see Q 642). (5) If the insured-annuitant owns the life insurance policy at death, the proceeds are includable in his gross estate either as property owned by him at time of death, (6) or as a payment under an annuity contract purchased by him. (7)
606. If the decedent purchased an annuity on the life of another person, will the value of the contract be includable in his gross estate?
If the decedent purchased the annuity as a gift for the other person, and retained no interest in the annuity payments, incidents of ownership, or refunds, the value of the annuity will ordinarily not be includable in his gross estate. (8) See Q 859 for the rules pertaining to gifts of property (including annuities) made within 3 years of death. But if the decedent has named himself as refund beneficiary, the value of the refund may be taxable in his estate as a transfer intended to take effect at death. (9) This rule is not applicable, however, unless the value of the refund exceeds 5% of the value of the annuity immediately before the donor's death. Moreover, if the donee-annuitant has the power to surrender the contract or to change the refund beneficiary, it would appear that such a power would preclude taxation in the donor's estate as a transfer to take effect at death (see Q 852(5)). (10) Where the decedent retains ownership of the contract until his death, the value in the gross estate would apparently be the cost of a comparable contract at the time of his death. In one case, however, where decedent and his wife paid one-half the cost of an annuity for their son, reserving to themselves the right to surrender the contract, only one-half the surrender value was included in the decedent's gross estate. (11)
607. If a person makes a gift of an annuity, will the value of any refund be includable in the donee-annuitant's estate?
If the donor irrevocably names one person to receive the income for life, and irrevocably names another to receive the refund, the value of the refund at the donee-annuitant's death should not be includable in the donee-annuitant's gross estate. IRC Section 2039 is not applicable because the donee-annuitant is not the purchaser of the contract (see Q 600).
608. If decedent has been receiving payments under a private annuity, what is includable in his estate?
In the usual private annuity transaction (see Q 41), where the decedent is the sole annuitant, the annuity ceases at the decedent's death and there is nothing to be taxed in his estate. If, however, under the terms of the private annuity agreement, benefits are payable to a survivor, the value of such benefits is includable in decedent's estate. (See Q 909, for valuation of private annuities.) Survivor benefits paid to a surviving spouse under a joint and survivor annuity should qualify for the marital deduction.
If the transaction resulted in a gift from the annuitant to the obligor (see Q 705), annuitant's death within three years of the transaction may result in the value of the gift (plus gift tax paid) being included in the deceased annuitant's gross estate (see Q 859). If annuitant's death does not occur within three years, but the gift was a taxable gift, the gift will be an adjusted taxable gift for purposes of the estate tax computation in the annuitant's estate (see Q 850).
In the usual private annuity transaction, the annuitant's transfer of the property given in exchange for the annuity is complete and absolute. Under such circumstances, no part of the transferred property is includable in the annuitant's estate. If, however, the annuitant retains at his death an interest in the property transferred, the value of the property could be includable in his gross estate under such of IRC Sections 2033, 2036, 2037 or 2038 as may be appropriate under the circumstances (see Q 852(1), (4), (5), (6)).
Planning Point: A joint and survivor annuity between spouses will usually escape estate tax in both spouse's estates because of the marital deduction and because the annuity ends at the survivor's death.
(1.) Treas. Reg. [section] 20.2039-1(d).
(1.) IRC Secs. 2039(a), 2039(b).
(2.) Treas. Reg. [section] 20.2039-1(c)(Ex. 1).
(3.) Est. of Mearkle v. Comm., 129 F.2d 386 (3rd Cir. 1942); Comm. v. Est. of Wilder, 118 F.2d 281 (5th Cir. 1941).
(4.) IRC Sec. 2523(f)(6).
(5.) Treas. Reg. [section] 20.2031-8; Est. of Mearkle v. Comm., 129 F.2d 386 (3rd Cir. 1942); Christiernin v. Manning, 138 F. Supp. 923 (D.N.J. 1956); Est. of Pruyn v. Comm., 12 TC 754 (1949); Est. of Welliver v. Comm., 8 TC 165 (1947).
(6.) Est. of Jennings v. Comm., 10 TC 323 (1948); Est. of Dalton v. Comm., 52 AFTR 1919 (S.D. Ind. 1956).
(7.) Est. oof Denbigh v. Comm., 7 TC 387 (1946), acq., 1953-1 CB 4; Est. ofHoelzel v. Comm., 28 TC 384 (1957), acq., 1957-2 CB 5.
(8.) Est. of Hance v. Comm., 18 TC 499 (1952).
(1.) IRC Sec. 2055.
(2.) Treas. Reg. [section] 20.2055-2(b); Choffin's Est. v. U.S., 222 F. Supp. 34 (S.D. Fla. 1963).
(3.) Est. of Montgomery v. Comm., 56 TC 489 (1971), aff'd 458 F.2d 616 (5th Cir. 1972), cert. den., 409 U.S. 849 (1972); Sussman v. U.S., 76-1 USTC [paragraph] 13,126 (E.D. N.Y. 1975).
(4.) Fidelity-Philadelphia Trust Co. v. Smith, 356 U.S. 274 (1958).
(5.) U.S. v. Tonkin, 150 F.2d 531 (3rd Cir. 1945).
(6.) IRC Sec. 2033.
(7.) IRC Sec. 2039.
(8.) See Wishardv. U.S., 143 F.2d 704 (7th Cir. 1944).
(9.) IRC Sec. 2037(a).
(10.) IRC Sec. 2037(b); see Est. of Hofford v. Comm., 4 TC 542 (1945).
(11.) Wishard v. U.S., supra.
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|Title Annotation:||PART II: FEDERAL ESTATE TAX ON INSURANCE AND EMPLOYEE BENEFITS|
|Publication:||Tax Facts on Insurance and Employee Benefits|
|Date:||Jan 1, 2010|
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