What are the estate tax results when a decedent has been receiving payments under an optional settlement of endowment maturity proceeds or life insurance cash surrender value?
Life insurance or annuity proceeds payable to a surviving spouse qualify for the marital deduction if certain conditions are met. If 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 usually are includable in the surviving spouse’s estate. If the surviving spouse receives a straight life annuity, there is no property interest remaining at his or her death to be included in his or her gross estate.
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 or her estate?
The amount payable on death before maturity is not life insurance and, therefore, 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.
For example, an employer purchases a contract from an insurance company to provide an employee, upon retirement at age sixty-five, with an annuity of $100 per month for life, and continues to pay a similar annuity to his beneficiary upon the employee’s death after retirement. The contract provides that if the employee dies before reaching retirement age, a lump sum payment of $20,000 will be paid to his beneficiary instead of the annuity. Assume that the reserve value of the contract at the retirement age is $20,000. If the employee dies after reaching retirement age, the death benefit to the beneficiary would be an annuity, which would be includable in the employee’s gross estate under Section 2039 (a) and (b). If, on the other hand, the employee dies before reaching his retirement age, the death benefit to the beneficiary would be insurance under a policy on the life of the decedent since the reserve value would be less than the death benefit.
If a death benefit is payable to an annuitant’s estate, its value is includable in his or her gross estate under IRC Section 2033, and it is considered to be a property interest owned by the annuitant at the time of his or her death.
If a death benefit is payable to a named beneficiary and an annuitant purchased the contract after March 3, 1931, the value of the death benefit generally is includable in his or her gross estate under IRC Section 2039, whether or not the right was reserved to change the beneficiary. 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 ordinarily will not be includable in the individual’s gross estate.
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 a survivor’s annuity is includable in the deceased annuitant’s gross estate in proportion to his or her contribution to the purchase price of the contract. (This rule applies only to contracts purchased after March 3, 1931.)
Thus, if a deceased annuitant purchased the contract, the full value of the survivor’s annuity is includable in his or her gross estate. 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 the deceased’s estate.
For example, suppose that the 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 the 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.
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.
Where a joint and survivor annuity between spouses is treated as qualifying terminable interest property for gift tax purposes and the donee spouse dies before the donor spouse, nothing is included in the donee spouse’s estate by reason of the qualifying interest. 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 applicable conditions.
 .Est. of Mearkle v. Comm., 129 F.2d 386 (3d Cir. 1942); Comm. v. Est. of Wilder, 118 F.2d 281 (5th Cir. 1941).
What is the estate tax value of a survivor’s annuity under a joint and survivor annuity contract?
The value is 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.Where it can be proven that the survivor’s life expectancy is below average, it may be possible to obtain a valuation based on the survivor’s actual life expectancy at the date of the decedent’s death. For example, lower valuation has been obtained on proof that the surviving annuitant’s life expectancy was short because of an incurable disease.
Even if an executor elects to value estate assets as of six months after death (alternate valuation), a survivor’s annuity is valued at the date of death. The date of death value is used, despite the election of an alternate valuation, where any change in value after death is due only to lapse of time.
If a 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 the 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.
 .Treas. Reg. §20.2031-8(a)(3) (Ex.1); Est. of Mearkle v. Comm., 129 F.2d 386 (3d Cir. 1942); Est. of Welliver v. Comm., 8 TC 165 (1947); Est. of Pruyn v. Comm., 12 TC 754 (1949), rev’d, 184 F.2d 971 (2d Cir. 1950); Christiernin v. Manning, 138 F. Supp. 923 (D.N.J. 1956).
 .Est. of Halliday by Denbigh v. Comm., 7 TC 387 (1946), acq., 1953-1 CB 4; Est. of Hoelzel v. Comm., 28 TC 384 (1957), acq., 1957-2 CB 3.
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 the annuitant purchased the contract (after March 3, 1931), it is includable in the annuitant’s 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 the charitable organization. But where a decedent has directed his executor to purchase a refund annuity for a personal beneficiary and to name a charitable organization as a refund beneficiary, the decedent’s estate is not entitled to a charitable deduction for the value of the refund.